5 Common Nonprofit Accounting Errors and How to Avoid Them

Whether your nonprofit organization is small or large, old or new, you can make mistakes in your accounting. The mistakes that you make can draw attention and scrutiny from the IRS. You can take a few steps to avoid some of the most common errors if you’re aware of their causes.

Failure to Sufficiently Report Unrelated Business Incomecalculator-385506_1280

The IRS reports that one of the most common accounting errors they encounter with nonprofit filings is that they do not report unrelated business income accurately. Unrelated business income is income that usually comes from a trade or business transaction that the organization regularly engages in, but that does not substantially relate to furthering the exempt purpose of the nonprofit organization, other than by producing income for the organization. Does your nonprofit have an investment or other source of income that it is not properly reporting? If you are unsure, consider contacting a local certified public accountant.

Failure to Report Changes to Activities

If a nonprofit makes changes or additions to their practice areas, responsibilities, or other undertakings, and if they fail to properly report them to the IRS, they cannot ensure that the new actions are properly tax-exempt in accordance with the organization’s nonprofit status. If your organization has made modifications to its functions, make sure that they are properly documented for the IRS.

Ignoring IRS Notifications Concerning Procedural Changes or Audit Cautions

One of the most glaring ways that nonprofits can find themselves in trouble with the IRS is by ignoring the warning signs that the IRS will provide. When the IRS is changing their own procedures for how they handle nonprofit accounting cases, they will send your nonprofit organization a note explaining as much. Likewise the IRS, if you are not properly recording your financial statements with the IRS, they will send your nonprofit organization a notice explaining that they may be investigated for an audit. If your organization fails to properly file in accordance with IRS standards, they will most likely be investigated. You should contact a certified public accountant if you’re afraid that your organization is out of step with proper disclosure procedure.

Incorrectly Classifying Employees

The IRS makes an important distinction between a contractor and an employee: a contractor is responsible for accomplishing a certain task whereas an employee is also responsible for the means by which that task is accomplished. In other words the employee is legally subject to being told how to specifically accomplish a task, while the contractor should only be tasked with making sure a job is successfully accomplished. Contractors and employees require different tax documentation, and conflating them can lead to complications with the IRS. If you are unsure of whether the workers at your nonprofit classify as employees or contractors, consider the type and degree of instruction given to your workers, where they’re working, the training provided to them for their services, how the worker is paid, and whether they are reimbursed for out-of-pocket expenses.

Lacking formal, documented accounting processes

One of the most important ways your nonprofit can ascertain that they behaved in accordance with the tax code is through clear accounting. Your nonprofit should expressly detail every step of your accounting procedures in writing. The IRS reports that unclear accounting procedures complicate federal audits because they mystify how your nonprofit organization when about its accounting procedures, and they also make it more likely that you will be served a federal audit because employees can deviate from proper accounting procedure and accidentally create errors that are difficult to explain.

The errors listed here are easy to make and pervasive among nonprofits. That’s why it’s important that you make sure you have a significant bookkeeping staff at your nonprofit, and that you work with trusted local certified public accountants to make sure that your filings accord with IRS standards. The money that you spend making sure your books are in order is time and money that you will save by avoiding a federal audit.