Nonprofits May Influence New Form 990, But They Must Act
By Frank Monti, CPA
The following focuses on the major overall differences between the current form and the draft version. Form 990 is the only form in the 990 series that is getting a facelift. Other forms, such as Form 990-EZ and 990-PF will not be significantly changed at this time.
OverviewThe IRS will tweak its draft to reflect public comments and suggestions. Otherwise, heres what we can expect to see in the final version.
Form 990 will consist of a 10-page core (versus nine pages now) that all filers must complete. This core form is supplemented by 15 schedules, identified alphabetically as Schedules A through R, that must be completed only if the filing entity engages in the activities covered by a particular schedule or must report information in addition to that required in the core form. There is also a nine-page Glossary of terms used in the draft form and its instructions.
The first page of the core form will detail the organization's identifying information and summarize its key financial, compensation, governance, and operational information, taken from the rest of the return. The summary page will make the return more user friendly. The downside is that the chance of having totals on one page not agreeing to the totals on the first page is a potential problem.
The same information required by the current Form 990 is generally also required in the draft version, but the design of the proposed form organizes the required information more logically. To facilitate electronic filing, much of the information currently required to be furnished as an attachment will be reported on one of the schedules.
The EssentialsAlthough it's premature to dissect the proposed form line by line, it is helpful to examine its focal points. Not surprisingly, they include compensation, governance, activities outside the U.S., and fundraising/gaming. These have been IRS hot buttons for sometime.
CompensationThe draft continues to require that all current officers, directors, trustees, and key employees be listed, regardless of whether they received any compensation. However, there are several changes concerning the data reported. The listed person's address must be his or her city and state of residence, whereas now there's the option to use the organization's address. (Street addresses aren't being required in an attempt to preserve privacy.) The draft eliminated the "hours per week devoted to position" requirement in favor of a box to check if the person is a full-time officer or employee.
Reporting the amounts of contributions to benefit plans and deferred compensation plans and expense amounts is eliminated unless Schedule J, (discussed later), must be completed. Instead, four amounts will be required: compensation from the organization, compensation from related organizations, loans owed to the organization, and loans owed to related organizations. Reportable compensation would be the amount reported in Box 5 of Form W-2 (officers and employees) or Box 7 of Form 1099-MISC (for directors and individual trustees) for the calendar year ending with or within the organization's year. This is a simplification over current requirements that deferred compensation be reported when accrued and again when paid, and that payments to welfare benefit plans be reported, regardless of taxability to the listed person.
The draft form further simplifies reporting by raising the compensation threshold for listing persons from $50,000 to $100,000.
If any person receives more than $150,000 in current compensation or receives or accrues more than $250,000 of current and deferred compensation, nontaxable fringe benefits, and expense reimbursements from the organization and related organizations, Schedule J must be completed by furnishing significantly more details than currently required. Although, the IRS estimates that approximately only 5% of filers will have to complete Schedule J, that's of no consolation if you are in the 5% group.
Finally, there apparently is a major simplification in the definition of "related organization."
Sarbanes-Oxley Affects the Nonprofit SectorThe Sarbanes-Oxley Act of 2002 (SOX) imposed new or enhanced governance and accountability standards on public companies in the for-profit sector. The IRS believes that exempt organizations, especially Section 501(c)(3) entities, should voluntarily adhere to certain of those standards as well.
Consequently, Part III of the core form requests information related to policies and procedures that the IRS concedes (in the draft instructions) may not be required under the Internal Revenue Code. Among other things, the organization must indicate whether it has a written (1) conflict of interest policy, (2) whistleblower policy, and (3) document retention and destruction policy.
Similarly, Part VII questions ask the organization whether it has (1) a written policy to review its investments or participation in disregarded entities, joint ventures, or other affiliated organizations; or (2) a written policy that requires it to safeguard its exempt status for its transactions and arrangements with related organizations. The examples of safeguard in the instructions suggest that the IRS is primarily concerned that an organizations participation in a partnership or joint venture with nonexempt persons furthers its exempt purposes rather than the interests of the other partners.
The IRS has given no hints concerning the consequences of wrong answers to its policy questions. Perhaps the answers will be used as part of a scoring process to determine whether a return should be audited or supplemental information requested on certain issues. At any rate, organizations should discuss with their legal counsel the merits of adopting these policies if they are not already in place.
Activities Outside the U.S.An organization that provides a grant or other assistance to a government, organization, or individual outside the U.S. must show the amount thereof on a separate line in the statement of functional expenses (Part V) of the draft and complete Schedule F. An organization must also complete Schedule F if it conducts virtually any activity outside the U.S. or has an interest in, or signatory authority over, foreign financial accounts during the year. Schedule F, a two-page document, requires extensive data regarding any foreign activities.
Foreign grants obviously include grants or assistance to persons who aren't citizens or residents of the U.S. They also include grants or assistance to U.S. citizens residing in foreign countries and grants for the primary purpose of study or research in foreign countries.
Gambling Not all Fun and GamesIRS examinations of exempt organizations have uncovered continuing noncompliance for fundraising and gaming activities. Moreover, the Service says that it is increasingly concerned about the lack of transparency for fundraising activities, particularly the difficulty in determining the amount of each dollar given by a donor that actually reaches a charity.
Organizations that either (1) have $10,000 or more in gross revenue from fundraising events (including gaming activities, but not charitable contributions received as part of event revenue) or (2) pay $10,000 or more in fees to a professional fundraiser will have to file Schedule G. Schedule G, a three-page form, asks numerous questions and requests substantial data about the fundraising and gaming activities.
The IRS Wants Your InputThe redesign of Form 990 is based on three guiding principles: enhancing transparency, promoting compliance, and minimizing the filing burden (for most organizations).
The IRS wants your feedback by September 14 on how well the proposed form accomplishes these objectives, especially the first two.
Questions and comments should be emailed to the IRS at: Form990Revision@irs.gov, or mailed to:
IRS, Form 990 Redesign ATTN: SE:T:EO,