A diversion of assets encompasses theft, embezzlement, or any unauthorized use of the association's assets. It can involve any person, regardless of whether he or she is an officer, director, key employee, volunteer, or independent contractor. The definition also includes diversions by investment advisors and recipients of grant funds.
The diversion is "significant" if the gross value of all diversions (not counting restitution, insurance, or similar recoveries) discovered during the association's tax year exceeds the lesser of 5 percent of its gross receipts for its tax year, 5 percent of its total assets at the end of its tax year, or $250,000. If an association is filing a group return, in determining whether a diversion of a subordinate organization's assets meets the reporting threshold, only the total assets and gross receipts of that subordinate should be considered.
An association may be disclosing a diversion that occurred in prior years but was just discovered in the tax year being reported. If the association became aware during the tax year of a significant diversion of its assets, then it must explain on Schedule O the nature of the diversion, dollar amounts and any other property involved, corrective actions taken, and pertinent circumstances. The person or people who diverted the assets should not be identified by name.
In cases where a diversion of assets is the result of the activities of a person who can substantially influence the organization, there could also be an adverse impact on the organization's tax-exempt status or penalty taxes on the wrongdoer. Therefore, oversight procedures should be in place for everyone, including those who manage and govern the association.
Laura Kalick is director of nonprofit tax consulting at BDO in Bethesda, Maryland. Email: firstname.lastname@example.org
[This article was originally published in the Associations Now print edition, titled "Fraud and Form 990."]