A Guide to 501(c)(3) Responsibilities in RecordKeeping/Reporting
The Importance Of Accurate Recordkeeping
There are no federal or state laws that specify the recordkeeping process except in a few rare cases. However, the Evangelical Council for Financial Accountability (ECFA) has set Seven Standards of Responsible Stewardship™ for organizations to follow. To achieve this accreditation from the ECFA, it is essential that your nonprofit keeps up-to-date and accurate records and follows the seven standards. Any signs of irregularity or financial mismanagement can cause a nonprofit to lose its monetary backing. Without good recordkeeping, your organization and all of the good work it does are at risk.
The goodwill established by a nonprofit can be lost if donors perceive that there has been ineptitude in recordkeeping practices. Effective recordkeeping will also enable the nonprofit to monitor the success of campaigns, generate financial reports, and use this information when applying for any grants.
Recordkeeping For Nonprofits
A nonprofit organization can use any recordkeeping system suited to their activities. Your recordkeeping method should show your income and expenses. If you have more than one program, the system should separate income and expense items attributed to each program.
A quality recordkeeping system will include a summary of all transactions. The system will show, among other things, receipts, purchases, expenses, any employment taxes, and assets. The size of your nonprofit may dictate what type of recordkeeping systems you employ, but all organizations need to keep all documentation that supports their claims.
The United States Internal Revenue Service has a guide, Publication 4221-PC, to help walk you through compliance for public charities.
A Nonprofit's 501(c)(3) Responsibility
A nonprofit's recordkeeping system has the potential to make or break the organization. With a nonprofit, it is important, indeed, critical, that your organization keep accurate records.
501(c)(3) organizations are highly regulated, and strict rules apply to the activities and governance of nonprofits. Having a 501(c)(3) requires compliance at state and federal levels.
Annually, your nonprofit will need to file IRS Form 990 Series and a Charitable Solicitation Registration for the state in which your nonprofit resides. If the nonprofit cannot show through its records that it qualifies for exemption, it could lose its tax-exempt status.
In addition, if a nonprofit cannot submit accurate returns because of lax recordkeeping, it may be subject to penalties.
Responsible Recordkeeping Advances Goals Of Nonprofits
Nonprofit organizations strive to have funds coming into their organization go directly towards their cause. By maintaining a high standard with records, a nonprofit can ensure that it will move towards its goals.
Here are some of the ways responsible recordkeeping benefits nonprofits and their donors.
Tracking Program Progress
An important aspect of accurate recordkeeping for nonprofits is that it will enable an organization to monitor the progress of campaigns and programs. When a nonprofit's recordkeeping is up-to-date and on target, the organization will know which campaign is successful. It will also alert them to changes that might need to be made along the way.
Record Keeping of Event Donations
Since nonprofits frequently host events for the purpose of fundraising, there are often a lot of donations associated with them. The types of donations can vary greatly, such as registration fees for a 5k or a gala, donations to a cyclist in a bike-a-thon, pledges for a walk, or donations to a crowdfunding campaign. It’s important to keep track of these different types of donations, how they came in, if they’re still outstanding, and whether they’re tax-deductible.
At FundEasy, each of our products is designed with this in mind, so managing your donations - whether given online, offline, or by pledge - is as simple as can be. Our many integrations allow you to automate the moving of donation records into your CRM, making this transaction management as easy as can be.
Accurate Reporting To Funding Sources
All donors are entitled to and should receive an official receipt from the nonprofit they donated to for their income tax purposes. Donors of gifts-in-kind should also receive an official receipt that reflects the gift's market value.
Donors are privy to viewing financial and end-of-year reports that show how monies coming into the nonprofit were spent. Accurate recordkeeping assures the donor that they can confidently give to your nonprofit and goes a long way towards retaining those donors.
Preparing Accurate Financial Statements
Your organization needs to generate revenue and expense statements, and they also need to have a balance sheet to prepare financial statements. By keeping accurate and up-to-date statements, your nonprofit will benefit from having this information when working with banks, creditors, donors, and funding organizations.
Preparing Annual Returns and Tax Returns
A nonprofit must have all of the records that support income, expenses, and credits reported on Form 990 for federal returns and state tax returns. The books of a nonprofit must be available for inspection by the IRS at all times.
If the IRS asks for an explanation of any items reported, an up-to-date set of records will be invaluable. A trouble-free IRS audit for any tax-exempt organization will help keep your nonprofit out of IRS crosshairs!
Proof of Taxable Revenue And Expenses
Your nonprofit will also need good recordkeeping to prove revenues, expenses, and deductions for Unrelated Business Income Tax (UBIT.)
Your organization may be tax-exempt, but it’s still liable for Unrelated Business Income Tax. The revenues and expenses, if any, must be tracked in such a way as to be claimed on Form 990-T, the Exempt Organization Income Tax Form.
Best Practices For Nonprofit Recordkeeping
Create And Maintain Communication Between All Departments
Effective communication among all departments is key for a nonprofit organization. On top of that, staying organized is essential for recordkeeping. If you don't keep on top of completing recordkeeping tasks, things can get out of hand in a hurry. Although meetings are not high on anyone's wish list, it is crucial to have regular meetings regarding finances to reconcile any discrepancies.
Create Internal Controls
Internal controls act as a system of checks and balances for your organization. Your nonprofit should have a code of ethics related to accurate and responsible recordkeeping.
While fraud may seem unthinkable in an organization's staff, it is possible. Ineptness can be just as crushing, and internal controls will help monitor, enforce and update policies regarding keeping your records up-to-date, accurate and secure.
Have Realistic Operating Expenses and Fundraising Forecasts
When creating an annual budget, your nonprofit should be realistic; if not, it could result in overspending during the year. When you have effective recordkeeping for your nonprofit, you will better predict your operating costs and fundraising expenses.
The Types Of Records Your Nonprofit Should Keep
There are records that should be a part of what your nonprofit keeps permanently, especially those documents that pertain to your organization's activities.
Those documents are:
Articles of incorporation
Any audit reports
Board policies and resolutions
Bylaws
Corporate resolutions
Checks
Depreciation schedules
Fixed asset reports
IRS application for tax-exempt status (Form 1023)
IRS determination letter
IRS Form 990 tax returns
State sales tax exemption letter
Any and all correspondence letters from the IRS
Year-end financial statements
Insurance policies
Minutes from both board and annual meetings of members
Real estate deeds, bills of sale, or mortgages
Employment and termination agreements
Retirement and pension plan documents
State unemployment tax records
Payroll records
With other documents not necessary to save permanently, when the time comes, erase, shred or otherwise destroy the document so that confidential information cannot be read or reconstructed.
Final Thoughts
Responsible, accurate recordkeeping will show a nonprofit whether programs are improving, which programs are successful, and if the nonprofit needs to make any changes throughout the year.
Accurate recordkeeping contributes to the success of your organization and supports your nonprofit in legal or other challenges. That makes it prudent for nonprofits to keep scrupulous financial records and enables them to continue to make a much-needed difference in this world.
If you'd like to learn more about our Attendance, Peer-to-Peer or Crowdfunding products, please reach out! We'd love to chat.
Also, if you haven't joined already, we have an exclusive Facebook Group just for our customers! If you are a current FundEasy Customer and would like to join, go here to learn more and request to be added!
Crystal Hoag
This article was inspired by our customers and written to encourage your fundraising efforts. Although we work with nonprofits and events daily, our team members are not Event Consultants. We encourage you to consult with your event consultant, executive team, and/or affiliate organization before making any major changes to your events.
