Monday, December 20, 2010

Beware of the Experts

Grant writing season has slowed to its annual wintery slump, allowing more time for some of the other services we offer through Z-A. In addition to several board strategic planning sessions, resource development trainings, and preparing next semester’s grant writing course at WNMU, we completed two applications for tax-exempt status for new organizations this month. I hadn’t done any of these in a while, and so as my clients and I were working our way through IRS Form 1023 (Application for tax-exempt, charitable status, aka 501(c)(3) status), I occasionally checked for online resources, hoping to find some templates or guidance, especially on the narrative portions. I found that pickings are slim. There is one website which gives a few hints, and provides one sample narrative. Then the site urges you to buy the author’s book, which promises more samples and links to narratives.

So, why does nobody want to share his or her insights on tax-exempt applications for free? Why are there not more sample narratives? Even the great new nonprofit sharing site IdeaEncore does not feature IRS application templates yet. What’s the hold-up?

My suspicion is that those “professionals” that assist start-up nonprofits in preparing their IRS applications (and file their articles of incorporation, and write their by-laws, and draft their policies, etc.) are making a good profit of it, and wouldn’t want this little secret to become public: It’s not rocket science. You can do it.

One of the client organizations that I worked with had hired a lawyer to file their articles of incorporation with the New Mexico Public Regulation Commission. This requires completing a one-page form and mailing it to Santa Fe. The price tag: $800. When I took over to help this small organization prepare their 1023, I found that the $800-lawyer had made the one mistake that will inevitably result in your tax-exempt application being turned down: He had failed to include the language required by the IRS into the Articles of Incorporation (relating to tax-exempt purpose and dissolution). He had also not included the charitable mission statement into the articles, but instead entered a sentence that in no way reflected any charitable purpose whatsoever.

During the same week, the CEO of another organization that I work with realized that her board would not have enough time to review the annual IRS Form 990 before it was due to be sent off. The contracted CPA had prepared a draft with numerous errors. Part VI of the form (the part with the questions on governance and disclosure) had all the wrong checks, and some of the numbers were questionable as well. I recommended that the organization apply for an extension with the IRS, so that the board would have enough time for due diligence. The CPAs response: you can’t file for an extension. My question: What is this person getting paid for? It turned out this CPA firm is not using the Internet for anything. (of course you can file an extension, and you should, if you ran out of time: IRS Form 8868 is available on the IRS website, can be mailed or filed electronically, and buys you three months)

These two examples illustrate the capacity gaps in the rural nonprofit sector and with those professionals nonprofits rely on. Often, rural nonprofits are run by people with marginal skills or little knowledge of how to start and run an organization. Nothing wrong with that… it’s the nature of the grassroots. Often these community leaders have even less confidence in their ability to figure things out on their own. So they hire the “expert”: a lawyer, or a CPA.

That’s when the trouble starts, because many of these “experts” have no knowledge of nonprofits either. Someone who is a lawyer or an accountant does not necessarily know nonprofits by virtue of his or her title or degree. In rural areas, CPAs have little access to professional development opportunities, and lawyers take all kinds of work, without specializing in something as marginal as nonprofit law. And apparently, some of them are quick to charge without taking any time to do their homework. (ok, disclaimer: there are of course, excellent firms in rural areas as well, including southwest New Mexico. But you have to look for them, and make sure they have experience with nonprofits.)

My advice: If you are starting a nonprofit*, educate yourself as much as possible, write your own drafts of organizing documents and other policies, with the help of templates, instructions and toolkits available on the internet. Maybe buy the book mentioned above. Call your peers (other nonprofits in the area), and ask for samples and templates. IRS Forms 990 are easy to find on Guidestar. 1023s are also documents open to public inspection, while not as widely available online. But you can request a copy of the 1023 from any organization of your choice, if it received its exempt status after 1987. Or you can request it from the IRS, using Form 4056-A.

If after all this research you are still unsure about your documents, find a vetted consultant and ask them for a cheap or free review of your drafts. Demand up-to-date knowledge and excellence if you do hire “experts”. Always closely review their work. And, once you are successful (as in, the IRS sends you a tax-exempt determination letter), share your templates. I will do that as soon as we get the IRS letters for our two clients. Look for it on IdeaEncore soon.

* the point in time at which people seem to not get enough advice is when the decision is made to start a new nonprofit in the first place. Often, this decision is not based on enough deliberation about purpose, need, market, funding and sustainability. But this would be the subject of a different blog post.