Tips to help prevent accounting and tax errors
January 3, 2023
Although failing to file a Form 990 with the IRS when required to do so is probably a more serious mistake, filing it with data errors isn’t recommended. Similarly, your not-for-profit should strive to be as accurate as possible when preparing accounting and other tax documents. Carelessness can cost you support from donors and grant makers and, in extreme cases, threaten your exempt status. Here’s how to avoid financial errors.
Follow processes and procedures
First, make sure your nonprofit has formally documented its accounting processes. All aspects of managing your nonprofit’s money should be reflected in a detailed, written accounting manual. This should include how to accept and deposit donations and pay bills.
Your organization may depend on accounting software for daily functioning. But even with the assistance of technology, mistakes happen. Your staff should follow certain procedures, such as double-checking entries and reconciling bank accounts, to ensure transactions entered into accounting software are complete and accurate.
Avoid common pitfalls
Next, keep an eye on unrelated business income (UBI). IRS officials have cited “failing to consider obvious and subtle” UBI tax issues as the biggest tax mistake nonprofits make. Organizations commonly fail to report UBI — or they underreport it. Be sure to follow guidance in IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations. And if you need more help, contact us.
Correctly classifying workers as employees (vs. independent contractors) is another area where nonprofits commonly make errors in judgment and practice. You’re required to withhold and pay various payroll taxes on employee earnings but don’t have the same obligation for contractors. If the IRS can successfully argue that one or more of your contractors meet the criteria for being classified as employees, both you and the contractor possibly face financial consequences.
For peace of mind
Finally, if your nonprofit doesn’t already regularly back up accounting and tax information, start doing so. Otherwise, your data may not be safe in the event of a fire, natural disaster or cyberattack. Back up data automatically using cloud-based or other offsite storage solutions.
For extra peace of mind, contact us. We can help prepare your organization’s tax filings and review financial statements for accuracy and adherence to Generally Accepted Accounting Principles.