By: Shobha Lizaso
There has been a growing trend in the substance abuse rehabilitation industry to provide services through a non-profit, tax-exempt organization. Unfortunately, there is also a growing trend relating to IRS audits of non-profits. An audit by the IRS can yield many negative outcomes, including the revocation of a treatment center’s tax exempt status and fines imposed on the organization and/or its Directors when the non-profit fails to operate within the rules applicable to 501(c)3 non-profit organizations.
A non-profit may be able to fly under the IRS’s radar for a few years, but as the years pass, the chances that non-profit non-compliance will be caught by the IRS grows exponentially. To protect your non-profit, please follow some of these basic rules:
- Avoid competition with for-profit entities: The IRS does not want non-profits competing with for-profits in the marketplace. For example, there are non-profit rehabilitation centers that have lost their non-profit status due to having the same rates, service audience, and operating hours as a for-profit substance abuse rehabilitation company. A non-profit should make sure that its fees are lower than market rate, that it serves the general public (not just referrals from a source), and operates to fill the gaps that for-profit substance abuse rehabilitation centers neglect.
- Deliver a public benefit: A substance abuse rehabilitation non-profit needs to have operations that directly benefit the public and cannot financially benefit any individual, Board Member, or company. A substantial private benefit to anyone will nullify the rehabilitation center’s tax-exempt status even if the non-profit is providing a benefit to the public.
- Related-party transactions: A non-profit may not privately benefit anyone who has decision making authority within the non-profit. Any transaction that benefits a director, officer, member, etc., could raise a flag to the IRS that the organization is acting for the benefit of individuals rather than the public. A non-profit must have a Conflict of Interest Policy in place to provide guidance for these transactions. Also, payments to any decision maker within the non-profit must be voted on and well documented. Very important: NEVER USE THE NON-PROFIT SOLELY AS A REFERRAL TO OR FROM A FOR-PROFIT ENTITY THAT HAS COMMON DIRECTORS, OFFICERS, OR MEMBERS unless you seek the counsel of an attorney to appropriately structure the relationships between the entities. Non-profits that work with for-profits are high on the IRS audit list.
- Adhere to the Public support requirements: Public charities generally receive a greater portion of their financial support from the general public or governmental units, and have greater interaction with the public. Contributions to charitable organizations may be deducted up to 50% of adjusted gross income computed without regard to net operating loss carrybacks. At least 33% of a public charity’s annual support must come in the form of small donations from members of the general public. The IRS, however, will not require an organization to prove this 33% in its first five years. After five years, if a nonprofit does not meet this 33% benchmark the IRS will automatically convert the public charity into a private foundation. Contributions to private foundations are limited to 30 % of adjusted gross income computed without regard to net operating loss carrybacks.
- Keep in line with the non-profit’s mission and articles of incorporation: If a non-profit changes or expands the scope of their mission or purpose, the organization must notify the IRS of such changes. Significant changes to the organizing documents must be reported to the IRS.
- Avoid the activities that jeopardize the tax-exempt status of the organization: The non-profit must not make contributions to a political campaign and it may not engage in substantial political lobbying. The non-profit cannot distribute profits to the Directors, Officers, or Members. The non-profit must pay income tax on profits that are not directly related to the scope of the non-profit’s mission or purpose, and it cannot receive substantial profits from such unrelated activities.
With IRS enforcement actions on the rise, it is very important to get the operational details of the non-profit reviewed by an attorney. An attorney can perform an audit to identify areas of risk so that the substance abuse rehabilitation organization can continue to help people turn their lives around.