The last few years have been ones of significant change in the audit and accounting community. The 990 has been revamped, auditing standards have been revised, and the FASB continues to churn out new accounting standards. As a result, financial professionals in the non-profit world have been spending considerable amounts of time reviewing the operations of their organizations.
Since we're in the middle of a rather tumultuous time anyway, I'd like to suggest one more item to add to the list of things to review. What's the harm in adding one more thing to the already lengthy list?
This item will apply mainly to 501(c)(3) organizations that complete the "joint costs" section of the 990. On the revised Form 990, this section can be found on Part IX, Line 26 of the core form.
Many 501(c)(3)s have "education" as one of their core exempt purposes. As part of their activities, these organizations may distribute mailings that contain both an educational component (advocating the issues of concern to the entity) and a fund raising component. (Since the costs of the mailings serve the joint purpose of advancing program and fund raising functions, they are referred to as "joint" costs.) There is certainly nothing wrong with such conduct, but it does lead to some accounting and tax complications.
Typically, accountants are primarily concerned about the allocation of the joint activity costs between the programmatic and fund raising activities that benefited from the mailing. This is an important consideration that impacts how an entity presents its finances on the 990. Fortunately, the accounting for joint costs is covered quite comprehensively in the AICPA's SOP 98-2.
Setting aside the issue of accounting for the joint costs, there is another, deeper concern - one that accountants typically do not consider. That is to say, one must also weigh whether the IRS would consider the mailings to actually have an "educational" purpose. If the mailings are a significant part of an entity's activities, and the IRS does not consider them to have an educational component, the IRS may question whether the entity has been functioning in accordance with its exempt purpose.
IRS Revenue Procedure 86-43 outlines the criteria the IRS has said it will use when evaluating whether an educational component exists in advocacy-type communications. The Rev. Proc. indicates that the presence of any of the following factors indicates that a communication is NOT "educational":
1. The presentation of viewpoints or positions unsupported by facts is a significant portion of the organization's communications.
2. The facts that purport to support the viewpoints or positions are distorted.
3. The organization's presentations make substantial use of inflammatory and disparaging terms and express conclusions more on the basis of strong emotional feelings than of objective evaluations.
4. The approach used in the organization's presentations is not aimed at developing an understanding on the part of the intended audience or readership because it does not consider their background or training in the subject matter.
Thus, if you are involved with a 501(c)(3) that conducts significant issues advocacy communications, it wouldn't be a bad idea to review the organization's style of communication against the above criteria. Given all the internal financial and governance review that's going on anyway, now might be a good time to do a self-audit related to the guidance in Rev. Proc. 86-43.
Naturally, the area discussed in Rev. Proc. 86-43 quickly gets into the world of law and legal interpretations. (For example, how do you define "inflammatory"?) Thus, if you have any doubts at all as to whether your advocacy communications could withstand IRS scrutiny, a qualified exempt organization attorney should be consulted.
Doug Boedeker
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