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Business of Giving: The Tax Man Cometh for Non-Profits, Too

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Audits are brutal but assure accountability.

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As the tax season drew to a close last week, I know many of you groaned at the thought of how much money you or your business paid in taxes. And if you've ever been audited, I bet the process made you utter a few harsh words under your breath.

But believe me, you'd be surprised at how intense a nonprofit's audit can be. The level of accounting and accountability required of charities eats up a huge amount of financial and staff resources. We're properly held to a high level of accountability. Let me explain how it works.

The non-profit world operates under "fund accounting" rules, which basically means that we have to track every single dollar that comes through the door to show how it was used. Most of our income comes in the form of restricted donations, which are dedicated to specific uses.

So if, for example, you were to make a donation to The Children's Aid Society and told me that you wanted that money spent only on athletic gear for our East Harlem Center, the accounting department is required to track the documents demonstrating exactly where your money went. The same thing happens when we receive a government grant or foundation donation for a specific program.

Now consider that we have 47 sites and scores of programs. We have over 100 different contracts with government agencies, receive donations from more than 100 foundations and corporations, and have thousands of individual donors. We maintain hundreds of cost centers, each of which has many general-ledger accounts that track all of those dollars.

Dizzy yet? If so, have a seat because we're just getting warmed up. Many of those donors and all government contracts require a separate outside audit. Last year we had 50 unique audits in addition to one agency-wide general audit and the "single audit" - which is a federal audit.

Let me repeat that: 50 different audits by 10 different independent auditors who need to be individually briefed on our systems, on our agency and how we work. Let's just say there's a lot of job security in accounting non-profit revenue and expenses.

These audits are important for one reason: They assure accountability and compliance with the donors' requests and with the contract stipulations. But on the other hand, this system is mindbogglingly inefficient. Government needs to come up with a better way, and if they're open to suggestions, we have some.

This process is most complex when dealing with government contracts. Non-profits need to be given the freedom to partner with government to streamline the process. For example, we have 50 contracts with one city department. Do we really need 50 audits done by separate firms?

Surely we can find a better way. The federal single audit is an effort to simplify this process, but the city and state don't rely on it. If they did, it would save time and money while assuring accountability, transparency and compliance - which we're all in favor of. After all, it's our tax dollars and charitable contributions at work.

And that's what it's really about, folks: saving money. Because the money we'd save, we could spend on running programs that, for example, prevent kids from becoming drains on the health, welfare and justice systems. Yes, I get frustrated about the tax man too. And you thought non-profits and for-profits were so different. I believe this is a cause we can unite on.



In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
No positions in stocks mentioned.

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