Update: The IRS has closed the audit.
The 2013 990 tax return and audited financial statements for Food for the Hungry (FH) are hot off the press and available at their website.
I previously discussed the costs incurred by Food for the Hungry to address their audit from the IRS. See previous post: Case study of legal and accounting costs during major IRS audit.
I am looking at that situation because this audit is of interest to the wider non-profit community and it is also a case study of the costs involved in a major dispute.
Try to stay out of court
Here are two posts on the whole idea of avoiding litigation:
Update of costs
After my last discussion of the costs incurred by FH, I reached out to FH for comment. I received a brief reply from Mr. Barry Gardner in February with a few comments with indication there would be more comments to follow after additional analysis. I haven’t received any followup comment. One item Mr. Gardner pointed out in his e-mail is that the 990 schedule of functional expenses did not accumulate any costs for the substantial amount of time spent by the FH staff to address the audit issues.
I think the previous analysis approximated the costs well except for staff time. With no additional comment on my post or any other followup from FH, I feel comfortable extending my analysis to 2013.
So let’s update that estimate of costs. Here are the legal and accounting costs from the 990. Remember the audit kicked off in 2011, which is why you see the increase starting there:
| FY | legal | acctg | combined | change |
| 2010 | 15,767 | 74,125 | 89,892 | 13,884 |
| 2011 | 16,865 | 175,648 | 192,513 | 102,621 |
| 2012 | 28,158 | 168,460 | 196,618 | 4,105 |
| 2013 | 47,706 | 160,334 | 208,040 | 11,422 |
Drilling down further, here are the legal costs as allocated to program, general & administrative, and fundraising for those years:
| year | prog | g&a | F/r |
| 2009 | – | 3,882 | |
| 2010 | 1,000 | 8,987 | 5,780 |
| 2011 | 1,491 | 12,824 | 2,550 |
| 2012 | 500 | 27,658 | |
| 2013 | 6,746 | 35,414 | 5,546 |
Here are the accounting costs by category:
| year | prog | g&a | F/r |
| 2009 | 7,000 | 65,126 | |
| 2010 | – | 74,125 | |
| 2011 | 94,115 | 81,533 | |
| 2012 | 90,360 | 78,100 | |
| 2013 | 100,345 | 59,989 |
I think the correct way to approximate the costs to address the IRS audit are to accumulate the increase in legal fees charged to program and G&A over the 2010 base year, excluding the amount allocated to fundraising. Then combine that with the accounting costs allocated to program.
Here are the amounts for legal fees paid to outside counsel:
| year | Prog/GA | increase |
| 2010 | 9,987 | – |
| 2011 | 14,315 | 4,328 |
| 2012 | 28,158 | 18,171 |
| 2013 | 42,160 | 32,173 |
| total | 54,672 |
Here are the amounts for accounting, presumably paid to the auditor, but I’m not sure (cue to Francine, et. al. to discuss independence):
| 2011 | 94,115 |
| 2012 | 90,360 |
| 2013 | 100,345 |
| total | 284,820 |
The gives an approximated total cost through 9/30/13 of:
| legal | 54,672 |
| accounting | 284,820 |
| total | 339,492 |
My previous estimate for ’11 and ’12 was $206,974. Additional estimated costs for ’13 are around $132,518.
Here is my aggregation of estimated costs by year:
| 2011 | 98,443 |
| 2012 | 108,531 |
| 2013 | 132,518 |
| total | 339,492 |
Again, please try to stay out of court.
Doesn’t seem like the IRS audit has been resolved
The notes to the 2013 financial statements contain a comment that the IRS audit is still open. That comment would apply as of the balance sheet date of September 30, 2013. The audit report on the financial statements is dated January 17, 2014. That means the IRS audit had not been resolved as of January 17th. That there is no comment on the FH website or visible in public sources suggesting the case has been resolved as of today. That means there will be additional costs in fiscal 2014 that are not included above.
The above amounts are approximations. I have listed all the amounts rolling into my calculation so you may review my work and revise it as you wish.
The cost of staff time is not included in the above aggregations.
Will comment later as time allows on the drop in revenue, negative change in net assets, and the deficit in undesignated unrestricted net assets for 2013.
Will also reach out to Food for the Hungry for comment. Will update as needed.
What say you?
Let me know if I made an arithmetic or transposition error.
Any suggestions on how to revise or improve my calculations above?
All comments welcome (subject to maintaining a minimum level of professionalism).
Update: IRS has closed the audit.