Nonprofit Financial Transparency and Compensation Regulation Act
This Act aims to enhance financial transparency and regulate board member compensation for nonprofit organizations receiving federal or state funding.
Definitions
- Nonprofit Organization: Any entity classified under Section 501(c)(3) of the Internal Revenue Code.
- Federal or State Funding: Direct grants, subsidies, or contracts provided by government entities.
- Excessive Compensation: Payments deemed unreasonable as per IRS guidelines and verified by independent audits.
Requirements for Nonprofits Receiving Federal or State Funding
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Financial Reporting
Nonprofits must:
Publish annual financial statements online within 30 days of filing Form 990, including:
• Statement of Financial Position.
• Statement of Activities.
• Statement of Cash Flows.
• Statement of Functional Expenses.
• Disclose all sources of funding, including anonymous donations, with detailed explanations for fund allocation. -
Direct Donation Handling
• All donations, including government funds, must be deposited directly into the nonprofit’s official bank account.
• Donations may not be routed through individuals within the nonprofit before being transferred to the organization’s account. -
Public Disclosure
• Make IRS Form 990 publicly accessible on their website within 30 days of filing.
• Nonprofits receiving federal or state funding must file their annual Form 990 (or applicable variant) no later than May 15theach year, regardless of fiscal year-end date. Extensions for filing will not apply to public disclosure requirements. -
Spending Reports
• Disclose detailed spending reports showing allocation of funds, including programmatic and administrative allocations.
• Provide detailed reports on all expenditures related to lobbying and advocacy activities in annual financial statements. -
External Audits
Nonprofits receiving over $100,000 in government funding must:
• Mandate external audits to verify financial accuracy, compliance with spending restrictions, and donor intent.
• Ensure audits include reviews of electronic payment transactions (Form 1099-K), lobbying limits compliance, and segregation of government funds from unrestricted accounts. -
Mandate external audit reports for nonprofits receiving over $100,000 in government funding to verify financial accuracy.
- Audits must verify compliance with spending restrictions, accurate Form 1099-K reporting, and transparency requirements
- 1099-K Reporting:
- Nonprofits must track and disclose all electronic payment transactions reported via Form 1099-K, including donations, ticket sales, and other payments processed through third-party platforms (e.g., PayPal, Venmo, Square).
- Ensure all payments collected by volunteers or staff are routed directly to the nonprofit to avoid misreporting or tax liabilities for individuals.
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Nonprofits must disclose all salaries exceeding $90,000 in their annual financial statements and specify the funding sources used to pay these salaries.
- This information must be made publicly accessible
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Additionally, the information that is reported must be easily accessible and without charge to access to the public.
Prohibition on Political Campaign Funding: Federal or state funds provided to nonprofits may not be used to support or oppose any political campaign, candidate, or party at the federal, state, or local level.
- Prohibited activities include but are not limited to:
- Direct contributions to political campaigns.
- Funding advertisements, events, or materials promoting or opposing candidates or parties.
- Lobbying activities that exceed permissible limits under IRS regulations for 501(c)(3) organizations.
Reporting Requirements: Nonprofits must disclose all expenditures related to lobbying and advocacy in their annual financial statements and certify that no government funds were used for political purposes.
Board Member Compensation Limits:
- Compensation for board members must be:
- Approved by an independent body without conflicts of interest.
- Supported by market data to ensure reasonableness.
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Nonprofits are prohibited from using federal or state funds to pay any portion of a salary exceeding $90,000 per year for any employee, including executives, board members, and contractors.
- Salaries above this threshold must be paid exclusively through unrestricted funds or private donations.
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Nonprofits are prohibited from granting pay raises exceeding 10% annually unless justified by documented performance reviews and external benchmarks.
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Nonprofits must comply with Section 4960 of the IRC, which imposes a 21% excise tax on compensation exceeding $1 million for “covered employees” (the five highest-paid employees).
- Compensation subject to the excise tax includes salaries, bonuses, deferred compensation, and severance payments.
Penalties for Noncompliance:
Nonprofits failing to comply with the Act may face:
- Nonprofits found in violation of this Act will receive a written notice of noncompliance and must correct the issue within 60 days. Failure to comply within this period may result in:
- Suspension of federal/state funding until compliance is achieved.
- Monetary fines of up to $5,000 per violation.
- Recurring Offenses: For nonprofits with recurring violations (defined as more than four offenses within a three-year period):
- Federal or state funding will be permanently revoked for a period of no less than five years.
- The organization will be required to repay any misused funds identified during audits. Those funds will come from outside sources, not money attained through the government
- Audit-Triggered Penalties:
- If an independent audit reveals ongoing misuse of government funds or repeated violations of salary restrictions, immediate termination of federal/state funding will occur, regardless of prior warnings.
- Political Campaign Violations: Any nonprofit found using government funds for political purposes will face immediate termination of federal/state funding and be required to repay all misused funds within 90 days.