Changes to Form 990 Reflect IRS Policy Goals

Editor: Michael D. Koppel, CPA, PFS

The IRS recently issued major changes to Form 990, Return of Organization Exempt from Income Tax. This is the first major overhaul of Form 990 since 1979. The IRS focused on three primary areas in the redesign:

• Enhancing transparency;
• Promoting tax compliance; and
• Minimizing the burden on the filing organization.

The old Form 990 had only eight pages in the core form and included two schedules. The new form has 11 pages in the core form and 15 schedules. Not all organizations will have to file all the schedules. Based on IRS analysis, only 5% of nonprofit organizations will have to file more than 10 schedules.

Transitional Use of Form 990-EZ

For the 2008 filing tax year, some exempt organizations may choose to file form 990- EZ, Short Form Return of Organization Exempt from Income Tax, instead of the new Form 990 if their gross receipts are greater than $25,000 and less than $1 million and if they have total assets of less than $2.5 million. In 2009, an organization with gross receipts greater than $25,000 and less than $500,000 and with total assets of less than $1.25 million will qualify to file form 990-EZ. In 2010, an organization with gross receipts greater than $50,000 and less than $200,000 and with total assets less than $500,000 will qualify to file that form. Organizations with gross receipts of $25,000 or less must file Form 990-N, Electronic Notice (e-Postcard) for Tax- Exempt Organizations Not Required to File Form 990 or 990-EZ.

Goals of the New Form 990

The redesigned Form 990 addresses several complaints the IRS has received about the old Form 990:

• The questions and instructions were often unclear and very confusing. The best feature of the redesigned form is that the questions are less vague and offer more information about the organization’s activities.
• The arrangement of schedules was confusing and did not flow properly; the flow of the new form is more logical.
• The old form did not represent the organization’s activities during the year. Part III of the new form requires the organization to specify what it accomplished during the year; a blanket statement covering every year will not suffice.

Enhancing Transparency

The old form was missing some important items that reflect how the organization used its assets. On the new form, it will be easier to follow how the organization used its assets to accomplish its exempt purpose. The new form will also compare some of the more important financial data from the prior year with the current year’s activities, which will make it much easier to see how the organization has done year to year.

The IRS wanted to make this form as easy as possible for the reader to understand. They wanted to standardize how every organization reports certain activities, such as the use of the organization’s assets, and also require more management accountability. Additional schedules will simplify the process of comparing similar organizations. There are many new schedules that will specifically address important parts of the core form, such as tax-exempt bond issues (Schedule K), hospital operations (Schedule H), and foreign activities (Schedule F).

The IRS spent a significant amount of time in this area. A potential donor can now compare similar organizations because there will be standard schedules that tax preparers must follow for various activities (e.g., fundraising and tax-exempt bonds). Because all similar organizations will have to report their current year’s activities in the same way, management will not be able to deceive the reader by attaching misleading schedules.

Minimizing the Burden on Filing Organizations

Although there are 15 new schedules, most organizations will not have to file them because many of the schedules will not apply. The IRS believes that less than 5% of tax-exempt organizations will have to file most of the new schedules. The most common compliments about the new form have been that the questions are now clear and the required schedules are easy to follow.

New Required and Suggested Policies

The new form focuses on a few new policies that the IRS believes public charities should implement if they have not already done so. The following written policies are required or suggested:

• Conflict of interest for board members, officers, and senior staff: Establish procedures to determine if a relationship, business affiliation, or financial interest results in a conflict of interest; what the board should do if such an event occurs; and how to mitigate potential excess benefit transactions. (A review of compensation agreements with interested parties is also recommended.)
• Whistleblower policy: Create procedures for the receipt, retention, and treatment of employee complaints regarding suspected financial impropriety or misuse of the organization’s resources.
• Document retention and destruction policy: Establish guidelines on maintaining and documenting the storage and destruction of hard copy and electronic files.
• Investment and joint venture policies: Establish procedures to evaluate other entities (usually taxable) and preserve the organization’s exempt status.
• Easement policy: Provide for the periodic inspection, monitoring, and enforcement of any conservation easements.
• Gift acceptance policy: Review any extraordinary contributions, require substantiation of gifts more than $250, and adhere to state solicitation laws.
• Compensation policy: Outline procedures for payment, reimbursement, provision, and substantiation requirements before reimbursement of the following expenses:
  • First-class or charter travel;
  • Travel for companions;
  • Tax indemnification and gross-up payments;
  • Discretionary spending account;
  • Housing allowance or residence for personal use;
  • Payments for business use of personal residence;
  • Health or social club dues or initiation fees; and
  • Personal services.

Suggested Procedures

• Review the information return before filing with the IRS;
• Make sure that organizational documents are available to the public;
• Document board meetings;
• Review rules applied to lobbying and political activities by the organization; and
• Provide FIN 48 analysis on current and prior activities (this will also apply to audits of exempt organizations in the near future).

Suggested Committees

• An audit committee will have the responsibility for oversight of the audit and review or compilation of financial statements.
• A compensation committee is responsible for the documentation, review, and approval of compensation of officers and key employees of the organization.

Conclusion

The changes to the new form are dramatic and were necessary to enhance the transparency of organizations. They will also help make management more accountable for the day-to-day operation of the organizations. With the new core form and schedules it will be easier for readers to see exactly what the organization has done in the current year and to compare its operations from year to year to determine if they should contribute to such an organization.

Editor Notes

Michael Koppel is with Gray, Gray & Gray, LLP, in Westwood, MA.

The Tax Adviser would like to acknowledge the special contribution to the December Tax Clinic of Singer Lewak LLP; Mark G. Cook, tax partner in the Irvine, CA, office; and Steve Cupingood, the partner in charge of that firm’s tax practice.

For additional information about these items, contact Mr. Koppel at (781) 407-0300 or mkoppel@gggcpas.com.