No receipts for expenses can get you in trouble!

A new treasurer of a large homeschool co-op recently contacted me. The co-op had a long standing practice of giving checks to all the volunteer co-op teachers at the beginning of the school year. These checks were to be used for supplies in the co-op classes.

But the treasurer found that no one ever had to turn in receipts or document how they spent their “advances”!  This bothered her greatly. She felt there was no proper accountability.

She tried to implement a plan where teachers were reimbursed after they made a purchase by giving her a receipt. This was met with extreme opposition.

So she then tried to implement a program where teachers still received advance checks, but had to be held accountable by showing receipts of how the money was spent. This too was met with extreme opposition by the leaders of the co-op.

They complained that they had always run their co-op this way, other groups did things this way, it was too much work to change now, and that it would create a financial hardship for some families.

I did research and wrote letters to the board explaining the IRS laws and that the group was in violation of the law. Here’s what I wrote to the board:

A nonprofit organization should not continue to hold practices in violation of IRS regulations because of a long-held habit, nor because other nonprofits operate in a similar (illegal) manner. Your guide should be the law, not your history, nor the practices of others. The IRS does not accept an excuse of “we’ve always done it that way” or “other groups also do it this (illegal) way” for noncompliance.

The organization was running what the IRS calls a “nonaccountable plan” of reimbursements. Under a nonaccountable plan, the teachers receiving the advance payments should have included the payments on their tax returns as taxable income. (Yikes!)

Additionally, the group should have been issuing Form 1099MISC to all volunteers that received advance payments of $600 or more. The penalty for not filing these forms is $100 per occurrence which would total thousands of dollars for the group!

The poor treasurer was trying to do the right thing. She was met with so much opposition, that she resigned as Treasurer. The group lost a truly devoted servant who was trying to get them to do the correct thing.

A sad story all the way around.

I hope the group learns a lesson and changes their ways to implement a legal, accountable plan for reimbursements.

If you are concerned about the way your co-op is handling reimbursements, please send me an email and I can help your group stay within the law as well as have good practices for managing your money.

 

Carol Topp, CPA

 

 

Comments

  1. Barbie says:

    I am reading in the 1099MISC instructions that one of the exceptions to filing this form is “payments for merchandise, telegrams, telephone, freight, storage and similar items.” If the payment to our teachers is going for merchandise for their classes, does that not qualify as an exception and eliminate the need for filing this form?

  2. Carol Topp says:

    Barbie,

    You’ve got it correct. If you are simply reimbursing the teacher for her classroom expenses, then the teacher does not get a 1099MISC. The 1099MISC Box 7 Nonemployee compensation is for payment of services.

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