Reporting Requirements for Exempt Organizations with Activities Outside the U.S.

Editor: Rick Klahsen, CPA

The IRS’s introduction of the new Form 990, Return of Organization Exempt from Income Tax, for 2008 and subsequent tax years has in some respects streamlined reporting but in other ways has significantly increased disclosure requirements for exempt organizations. Significantly increased reporting requirements apply to exempt organization activities outside the United States. This item is intended to introduce and clarify the foreign disclosure requirements reported on Schedule F, Statement of Activities Outside the United States, of the new Form 990.

Introduction

Reporting foreign activities on the old Form 990 was limited to a few questions/ areas on foreign bank accounts (including indirectly held accounts through an over-50%-owned stock entity) (line 91b), foreign grants (checkbox in Part III), and foreign offices (line 91c). New Form 990, introduced in 2008, requires exempt organizations that meet certain dollar amount thresholds for their international activities to present detailed information on Schedule F. Schedule F is a four-page schedule that consists of four parts. Supplementary Schedule F-1 is available for users that need extra space to report certain activities.

The filing exempt organization is required to report only the activities that it performed directly, or those performed indirectly through a disregarded entity or joint venture taxed as a partnership. In addition, financial accounts reported on Part V, lines 4a and 4b, are not considered for Schedule F disclosure. If the exempt organization qualifies and chooses to file Form 990-EZ, Short Form Return of Organization Exempt from Income Tax, Schedule F does not need to be completed, even if there are foreign activities that meet Schedule F filing requirements.

Grantmaker Information and Activities per Region

Schedule F, Part I, is to be completed by exempt organizations that have aggregate revenues orexpensesofmorethan$10,000 from grantmaking, fundraising, business, and program service activities outside the United States. Usually these activities are quickly identifiable and easy to define. However, in order to determine if the exempt organization meets this $10,000 threshold test, revenues and expenses attributable to foreign investments also must be taken into account. (If the investment is in a foreign corporation that is treated as a separate corporation for U.S. tax purposes, the corporation’s revenue and expenses should not be considered for the purposes of the threshold test but may be disclosable as a foreign investment in Part I.)

For 2008 and 2009 tax years, investment activity should be reported on a region-by-region basis (a foreign partnership’s legal domicile dictates which region to disclose, not the regions in which it may hold investments); all investments in a particular region may be aggregated for this purpose (e.g., all investments in South America may be reported together on one line); the organization may use the term “investments” to describe the foreign activity in Part I, column d; and an organization need not report, as an investment activity on Schedule F, foreign investments indirectly held through a domestic (U.S.) passthrough entity because the domicile of the passthrough entity is not a foreign location.

For foreign investment activity, the only details required to be reported are the region (column a) and foreign activity (column d); all other information on any particular line is not required. Program-related investments are to be reported as and with program services, rather than as or with other types of foreign investment activity. Thus, the rules just described for limited foreign investment disclosure do not apply to foreign program-related investment activity. Finally, a double reporting requirement potentially exists for foreign investments if that investment activity could also be considered a related organization reportable on Schedule R, Related Organizations and Unrelated Partnerships (e.g., investment in a 51%owned foreign corporation by the filing organization would be reported on both Schedules F and R).

The first two of three questions in Schedule F, Part I, apply to exempt organizations that made grants to foreign organizations, governments, or individuals. The first is a yes-or-no question that asks if the exempt organization maintains records to substantiate the amount of grants, the grantees’ eligibility for the grants, and the selection criteria used to award the grants or assistance. The second question asks the exempt organization to describe its procedures for monitoring the use of grant funds outside the United States on Part IV of the schedule. These questions are designed to ensure that the grants are used for proper purposes and are not otherwise diverted from their intended use. It is important that organizations that award foreign grants have procedures in place for monitoring the use of those grants. Failure to disclose an adequate procedure in place will no doubt be a cause for further inquiry by the IRS. The last question in Part I requires exempt organizations to list each type of activity conducted at any time during the filing period in each region.

The instructions to Schedule F identify nine regions and list the countries within each region. If a particular country is not specifically listed in one of the regions in the instructions, the filing exempt organization may list the region it believes that country would fall into if it were listed. If an organization conducts multiple activities in each region, it must report each type of activity on a separate line. This section of Part I also requires listing the total number of offices in each region and the total number of employees or agents in the respective region(s). This number should not include individuals who merely pay on-site visits or are considered volunteers of the exempt organization. For program service activities, the exempt organization must disclose specific program services.

Finally, this section requires listing the expenditures in the region. This amount should include salaries, wages, and other employment-related costs as well as costs related to maintaining an office, bank fees, and payments to agents. The IRS clarified in its FAQs posted on August 21, 2009, that an exempt organization might use different accounting procedures and practices to keep track of foreign expenses for financial statement purposes, so there may be a variation in how that organization accounts for or allocates direct or indirect costs relating to its foreign activities. For 2008 and 2009 tax years, the Form 990 filer may use the method it used for its financial statements to report expenditures for Schedule F, Part I, column f. For example, if under a university’s current accounting procedures, expenses associated with a study abroad program are not separately tracked, such expenses are not required to be included in Part I, column f.

Some activities fall under the Schedule F reporting requirements and are not obvious. For example, if the exempt organization sends its board members to board meetings or to attend or speak at seminars outside the United States and the $10,000 expenditure threshold is met, this activity must be reported in Schedule F, Part I. As stated, the organization should report all expenditures reportable on Schedule F based on the method used to account for them on the exempt organization’s financial statements. In some cases, there may be no expenses to report. For example, if the organization receives more than $10,000 of revenue from a foreign-based activity, the activity should be reported even if it did not generate any expenses either directly or attributable to it (revenue disclosure is not required at this time). In this instance, the activity would be disclosed, and the expenditure column would remain blank.

Grants and Other Assistance to Organizations or Entities Outside the United States

The first question of Schedule F, Part II, requires nonprofits to report grants or assistance of more than $5,000 to any particular foreign organization outside the United States. In addition, if the grant is made to a foreign government’s representative in the United States, such as a foreign embassy in Washington, DC, it must be reported in this part of Schedule F. Filers do not need to list the names of grantees or their identification numbers for security purposes. The required disclosures are the region, purpose of the grant, amount of cash grant, and manner of cash disbursement (cash payment, money order, electronic fund or wire transfer, check, etc.). Noncash assistance should be described, and the fair market value should be determined and disclosed along with the method of valuation. All the amounts must be entered in U.S. dollars.

The second line of this part asks for the total number of organizations listed on line 1 that are recognized as charities by a foreign country or for which the grantee or counsel has provided a Sec. 501(c)(3) equivalency letter. Thus, grantmakers must attempt to make a good-faith determination, based on an affidavit from the grantee or the opinion of counsel, that the grantee is the equivalent of a public charity in order to address this question.

The third and last line of Part II requires grantmakers to list the total number of recipient foreign organizations not listed on line 2 (foreign charitable or U.S. equivalency test met).

Grants and Other Assistance to Individuals Outside the United States

Schedule F, Part III, must be completed by organizations that paid grants or other assistance to individuals outside the United Statesthat exceeded$5,000in the aggregate during the filing period. U.S. citizens who live outside the United States at the time the grant is distributed must be reported as well (the payment is required to be a grant and not disguised or direct compensation). The grants are broken out by types of assistance and regions. The names of grant recipients are not disclosed in order to protect their confidentiality. The “Types of Assistance” column should include specific terms such as scholarships, food, clothing, etc. General terms such as “charitable,” “educational,” “scientific,” or “religious” are not acceptable. The nine regions used are the same as in Parts I and II.

This section also requires the exempt organization to list the number of recipients of each type of assistance located in each region. If there is no way to determine the exact number, the organization can use an estimate. However, if an estimate is used, the organization must describe on Schedule F, Part IV, how it arrived at the estimate. Additional disclosures in this part are identical to the disclosures in Part II and include the amount of cash grants, the manner of cash disbursement, amounts and description of noncash assistance, and methods of valuation.

Finally, the organization should use the same method of accounting it uses in reporting expenses throughout the Form 990 (i.e., the method checked in Part XI, line 1), whether cash or accrual. If the organization is reporting an accrued but unpaid expense in Schedule F, Parts II or III, it should report the anticipated manner of cash disbursement in Part II, column f, and/or Part III, column e, respectively.

Supplementary Information

The fourth and last part of the schedule is designed to provide supplemental, narrative information. The only required explanations are descriptions of the procedures to monitor the use of funds by grantmakers and an explanation of how the organization estimated the number of individual grant recipients (if the organization does not have a way to provide a specific number in Part III). This part can also be used to provide other narrative explanations and descriptions. Exempt organizations that choose to report additional explanations should identify the specific part and line of Schedule F that the response supports.

Conclusion

If an exempt organization required to file Schedule F is also a grantmaker and meets the dollar thresholds, the organization will be filling out not only Part I but also Part II and/or Part III. An organization will not just fill out Part II and/or Part III without disclosing regional activity information in Part I. Organizations that are not grantmaking organizations will fill out Part I if dollar thresholds are met.

In order to comply with Schedule F reporting requirements, it is important that exempt organizations with foreign activities create recordkeeping systems that keep track of activities, offices, employees in each region (as provided by the IRS in its instructions to Schedule F), and expenditures as required to be identified and/or listed on the schedule. It is also important that exempt organizations that operate a foreign grant program establish due diligence procedures for selecting recipients and monitoring the use of those foreign grant funds and establish a follow-up procedure to help evaluate the charitable status of the foreign entity grantees.

The 2009 Schedule F, Part II, line 2 contains expanded language regarding disclosure of those organizations considered exempt in foreign countries. Part II, line 2 now reads, “Enter total number of recipient organizations listed above that are recognized as charities by the foreign country, recognized as tax-exempt by the IRS, or for which the grantee or counsel has provided a Section 501(c)(3) equivalency letter.” The language added is “recognized as tax-exempt by the IRS.” New Schedule F is a substantial expansion of foreign activity reporting required by exempt organizations as part of the new redesigned Form 990. Internal exempt organization management steps are essential to capture the information that the IRS requires on the new schedule.

EditorNotes

Rick Klahsen is managing director, Tax Services, with RSM McGladrey, Inc., in Minneapolis, MN.

Unless otherwise noted, contributors are members of or associated with RSM McGladrey, Inc.

For additional information about these items, contact Mr. Klahsen at (952) 921-7630 or rick.klahsen@rsmi.com.