Chapters in Crisis: Federal & State Compliance Issues at Chapters
We’re covering all kinds of troublesome scenarios in this series of posts about chapters in crisis. The first two posts shared advice for managing and preventing chapter financial mismanagement and chapter financial fraud.
In this series, we’re assuming your chapters are subsidiaries, a situation that brings more risk to National, but also provides more control. Even if your components are independent, you’ll benefit from the advice we share.
Now, let’s turn to federal and state compliance issues. The more time you spend as an enforcer, the less you can spend as an advisor who helps chapters grow, engage and retain members, and share success stories.
Always consult with legal counsel on critical federal and state compliance issues. Our job here is to make you aware of what you may not know, but we’re not lawyers or accountants.
Chapter Compliance Issues
Your approach to chapter crisis management and prevention, particularly compliance issues, depends on the relationship between National and the chapters—whether they’re separate legal entities or not.
Separately incorporated legal entities are responsible for filing their own reports with state and federal agencies, but it’s prudent for National to make sure they’re doing that. For one, it’s your brand, and, secondly, you may have to help clean up the mess.
Dealing with federal compliance issues
Because a 501(c) nonprofit’s exemption from federal corporate taxes provides financial benefits, the penalties for non-compliance can be serious. The IRS can revoke a nonprofit’s tax exemption and Employer Identification Number (EIN), and impose fines that accrue daily.
Contact the IRS to find out how many years the chapter neglected to file its tax forms. Organizations that do not file a Form 990 for three consecutive years automatically lose their federal tax-exempt status. If the IRS revokes the chapter’s federal tax-exempt status, the chapter will no longer be able to participate in the Group Tax Exemption and must apply to have its status reinstated. Learn more on IRS.gov.
Dealing with state compliance issues
State compliance requirements vary. A chapter may be required to file an annual report, file a corporate registration, maintain state tax exemption, and maintain a registered agent. If a chapter doesn’t comply with state requirements, the state can administratively dissolve the chapter’s nonprofit corporation status and levy onerous financial penalties.
For state compliance issues, contact the Secretary of State office that granted the articles of incorporation for the chapter. You may have to file back reports and pay penalties to become compliant and reinstate their administrative status back to active. Learn more about state reporting requirements in the resources provided by Harbor Compliance and Hurwit & Associates.
How to prevent chapter compliance issues
Find useful information on IRS.gov, for example, tax-exempt basics and other educational resources, and translate it into regular language. Share these resources with your chapters, explaining why they must take it seriously. Use your learning management system (LMS) to provide basic compliance training for chapter leaders.
Get copies of each chapter’s articles of incorporation, bylaws, and IRS and state tax exemption determination letters. Make it easy on chapter leaders by letting them upload these documents to a file library in your chapter leader hub or portal. This file library can also serve as a permanent storage place for other key documents, such as annual plans, 990s, and policies.
Send out an annual reminder to file tax returns.
Either require chapters to complete a compliance checklist or do a self-assessment. For each compliance requirement, have them assess their chapter’s performance against best practices. For example, if their check signing policy doesn’t follow best practices, they’ll see the need to change the policy. You could encourage best practice compliance by rewarding high-performing chapters with financial, consultative, or award incentives.
Get help from technology. For example, an IRS approved e-filer for forms 990N and 990EZ displays the statuses of each chapter and sends reminders to all the chapters when they need to file.
You can avoid troublesome situations by , keeping a watchful eye, and providing enough support so chapters can’t fail. Yes, it’s the chapter’s responsibility to file their taxes annually and stay in compliance. However, if National doesn’t provide reminders and explain why these compliance issues are so critical, chapters may blame you for a lack of communication. When it comes to taxes, you can never communicate too much.
In our next post, we’ll cover a growing topic of concern, cybersecurity.