How a Non-Profit (or Any Business) Can Find Themselves in Trouble

Our local communities are reeling from the recent events concerning the Fire Safe Council non-profit organization.  Regardless of legal charges, evidence the District Attorney or Grand Jury may have uncovered, the fact is, a scenario like this could careen out-of-control for anyone.  Let me explain.

After reviewing the Nevada County Grand Jury’s report posted here https://www.nevada.courts.ca.gov/system/files/general/fsc-report-final.pdf

I wanted to address the following points within the report, as well as the legal charges against the leadership (please note that I have no opinion on the investigation and will let the courts decide):

1)      On page 8, Section D of the above report, the Grand Jury indicated tax returns were not filed from 2019 through 2023 (the investigation began in 2022).  Not filing non-profit tax returns for three tax years results in revocation of non-profit status, which was likely the major red-flag that triggered the Grand Jury investigation.  See the following link for the steep price a non-profit pays for not filing a correct return https://www.irs.gov/charities-non-profits/annual-exempt-organization-return-penalties-for-failure-to-file

In Jamie Jones’ defense, and per her LinkedIn, she was hired by Fire Safe Council in 2018 and was quickly promoted to Executive Director, meaning that the former staff likely handled preparation of the 2018 tax return, and she may have been clueless about filing anything after that.

Ok, some folks may not agree with me about my last statement, and that’s ok, but I see this ALL OF THE TIME, especially non-profits.  The thing is, only folks who are passionate about the non-profit are part of the non-profit.

 For example, most parent-run clubs associated with the local school are run by local “soccer moms” who have no clue about the seriousness of bookkeeping, recordkeeping, and filing non-profit returns on time.  They are only passionate about fundraising and getting the kids the goodies they want.  In the same way, Jamie is in this boat, although one would hope she had a little bit more business experience as part of her promotion to Executive Director.  Additionally, it is possible the Board could be held accountable for the non-filed returns as well, depending on how long they have been part of the organization, and how involved they are in the financial activites.  Ignorance is not bliss here.

As a side note: simply being late on the non-profit’s tax filings can cause the $100,000 worth of losses and misappropriated funds that the Executive Leadership of Fire Safe Council is charged with.

2)      Back to the Grand Jury report, page 8, Section E, items 1 through 8, and items 10-12:  There are very few people qualified to process payroll and most business owners, especially non-profits, will shave a penny anywhere they can by doing it themselves.  Also, many businesses and non-profits just aren’t big enough to follow the suggested GAAP internal controls.  This isn’t a crime, it’s just reality.  Plus, most folks involved in a business don’t know what a Balance Sheet is or what it is used for.

3)      Grand Jury report, page 9, Section E, item 9 “using FSC’s credit card for the Executive Director’s personal purchases.”  The footnote indicated these were ‘inadvertent’ charges. 

The Executive Leadership is also charged with embezzlement, which, without looking at the evidence, could be related to personal purchases on the company credit card that almost every business leader makes.  One of the main daily purchases I see business owners make is their morning Starbucks, or their daily lunch, or both.  The IRS is very explicit that business expenses have to be ‘ordinary and necessary’ to carry on business, but many folks don’t stop to consider whether that morning coffee qualifies.  And, boy, does it add up quick! 

A $5 coffee purchased 300 days per year is $1,500 per year.  Then add lunch, which might be $15 and we’re at $6,000 per year.  Unfortunately, this simple mistake can be considered embezzlement within any business, especially within a non-profit entity accounting for every penny of government grants. Additionally, these kinds of purchases may not be flagged in an independent audit, especially if the receipts are provided, and given the dollar amount is insignificant when compared to the overall income generated.

Tips to avoid disaster when operating a non-profit or a business:

A)     PLEASE, I’m begging you, speak with a Tax Professional! (Insert shameless plug for my own services here) Even the most competent people do not know everything, nor do they know all of the questions to ask, or that they even need to ask them.  Ignorance can be very expensive here.

B)     You and your business, or non-profit, are not one.  You have your expenses, and the entity has its expenses.  Think of the entity like your in-laws.  You wouldn’t borrow their credit card to pay for your expenses, nor give them yours to pay for theirs.

C)    PLEASE do not prepare your own tax return if your situation is complicated enough to create an entity.  In fact, don’t create an entity by yourself, without professional guidance. It’s like inviting your in-laws to move in with you, without realizing the boundaries each will require. Pretty soon it’s a mess you didn’t plan for and eviction is expensive, as well as time consuming. 

A good tax professional is worth the consult fee.  They have years of education and experience to guide this sort of thing.  I mean, you could perform surgery on yourself instead of going to a surgeon, but does it mean you should ?