By Jackie Henson
McKenna Long & Aldridge
Jackie Henson is a Washington-based attorney who frequently speaks and writes on nonprofit law.
NEW IRS FORM 990 --
DECIDING WHAT’S RIGHT FOR YOUR ORGANIZATION
Much has been written about
the redesigned IRS Form 990 and the desirability of answering YES
to all of the new questions that the IRS has included to encourage what
it perceives as good governance practices. There also has been
little discussion about the process by which organizations should consider
and decide what governance changes are appropriate, and when to say
NO with an appropriate explanation. For large tax exempt organizations
that report on a calendar year basis, the December 31 deadline is fast
approaching for making these decisions.
Background
The IRS Form 990 is the annual information return that must be filed
by most nonprofit organizations, including charities, trade associations
and other tax exempt organizations. For tax years beginning in 2008,
many tax exempt organizations will be required to prepare and file a
newly redesigned IRS Form 990. For others, the new Form 990 will be
phased in over a three-year period.
The redesigned Form 990 is
the biggest project the IRS has undertaken relating to the tax exempt
community in the last quarter century. The redesigned Form 990 has been
described by many as an extension of Sarbanes-Oxley principles to the
nonprofit sector. It also is a reaction to specific scandals and questionable
practices involving prominent tax exempt organizations.
As the IRS notes in its background
documents, the redesign of the Form 990 is intended to: (1) enhance
the Form 990 as the key transparency and disclosure tool relied on by
the public, state regulators, the media, researchers, and policymakers
to obtain information about a tax exempt organization; (2) strengthen
the disclosures required by the Form 990 to promote accountability by
tax exempt organizations; and (3) bolster and add new disclosures to
position the redesigned Form 990 as the IRS’ primary tax compliance
tool for tax exempt organizations.
Just a glance at the redesigned
Form 990 indicates that it is no longer merely a financial document
or tax return. The Form 990 has been transformed into a public disclosure
document--a tool that many, including the IRS, Congress, state regulatory
authorities, potential contributors, members, the media and bloggers,
may use to evaluate the efficiency, effectiveness and merit of your
organization. For these reasons, your organization needs to take
great care in preparing the Form 990. Your organization’s responses
will be made under penalties of perjury. Also, the IRS recently
indicated that there may be increased penalties for reporting that is
incomplete or inaccurate (although the IRS has repeatedly indicated
that NO answers will not automatically trigger an audit).
At the same time as you are being careful, you also should take advantage
of the opportunity to highlight the positive accomplishments of your
organization in your responses.
Of immediate and critical importance
is a new series of questions, which asks whether your organization has
adopted certain governance and management policies and disclosure practices
by December 31 (or the end of the organization’s fiscal year beginning
in 2008). For many questions, the preferred response will be YES.
For other questions, it may be more appropriate for an organization
to answer NO, in light of your organization’s particular operational
and legal requirements, and be prepared to explain the reason for your
response. The new IRS Form 990 does not ask who ultimately is making
these governance and management decisions, but presumably it should
be your organization’s Board of Directors or a Board Committee with
authority to make such decisions (e.g., the Executive Committee or Audit
Committee).
A New Core Form and 16
Schedules
The redesigned Form 990 consists of a new core form that must be completed
by all organizations required to file the new form. There are also 16
schedules that organizations must complete to the extent they are applicable.
Among other things, the new
Governance section in the core form asks whether your organization has
a conflict of interest policy, a whistle blower policy, and a document
retention/destruction policy. If nothing else, the governing body of
every tax exempt organization should adopt these three basic policies
as soon as possible, since they represent and incorporate good governance
practices, and help guard against Sarbanes Oxley liability.
The new Form 990 also inquires
about the independence of the Board; the outside relationships of Board
members to one another (about which the organization must carefully
inquire); the authority of members to elect the governing body and approve
Board decisions; whether the Board and Board Committees keep minutes;
and if there are written policies and procedures for chapters, branches
and affiliates. Other questions in the Governance section ask whether
an organization discloses its governing documents, conflicts policy
and financial statements to the public; whether there is a Committee
that assumes responsibility for oversight of the outside accountant;
and whether the governing Board is provided a copy of the Form 990 before
it is filed (and a requirement to describe the organization’s Form
990 review process).
A major focus of the redesigned
Form 990 involves the disclosure of compensation and benefits provided
to directors, officers and key employees of the organization.
The new Form 990 asks whether an organization’s process for determining
compensation for top management includes review and approval by “independent
persons,” the use of comparability data, and contemporaneous, written
substantiation of the deliberation and decision. Public disclosure of
the compensation of many senior exempt organization employees may be
required for the first time.
Several places in the new Form
990 and the accompanying schedules will require disclosure of compensation
and compensation-related information of directors, officers and key
employees. For example, Schedule J includes a series of check
boxes regarding certain fringe benefits provided to highly compensated
individuals, such as first class and companion travel, tax indemnification
and gross ups, health and social clubs, discretionary spending accounts,
housing, business use of a residence, and the provision of personal
services (e.g., maid, chauffer, chef). Although these fringe benefits
are not unlawful, such expenditures should be appropriate for your organization
and you should make sure your organization is properly reporting them
for tax purposes.
Finally, other parts and schedules
of the new Form 990 inquire about contributions, fundraising, gaming,
lobbying/political activities, gift acceptance policies for those organizations
that accept non-cash contributions, policies for organizations that
enter into joint ventures, limited liability companies and partnerships
with others, and grant-making record-keeping procedures and criteria
for organizations that make both foreign and domestic grants.
How Should Your Organization
Respond?
How will your organization respond to the questions posed by the new
Form 990? Will and should your organization answer YES to all
of these questions? Is your organization prepared to provide an adequate
explanation if it decides it is more appropriate to answer NO
to some of these questions?
The introduction to the new
Governance section states that the information to be disclosed is NOT
required by the Internal Revenue Code (and also may not be required
by any state authority). Even though these policies and procedures are
not required under the Internal Revenue Code, the IRS is alerting the
tax exempt community that it considers such policies and procedures
important for tax compliance.
Moreover, it is important to
note that the governance policies and practices mentioned on the new
IRS Form 990 are not necessarily the only governance practices or policies,
or even the most important governance practices and policies that organizations
should consider at this time. The new IRS Form 990 merely reflects those
good governance policies and practices about which the IRS felt it could
appropriately inquire. In any event, the policies that each organization
adopts must be appropriate to its particular circumstances and legal
requirements.
Who Should Decide?
The Board of Directors of each organization is ultimately responsible
for the organization’s governance and management practices. Therefore,
the Board of Directors (or an appropriate Board Committee) should ultimately
decide how the organization should respond to these new IRS Form 990
questions. With crowded agendas for year-end meetings, however,
it may be more useful for a much smaller group to review these issues
and make appropriate recommendations, so that the Board of Directors
can focus on the key policy issues and not get bogged down in the details.
Although each organization
will be different, your organization may want to consider assembling
a team to review and respond to the new Form 990. Such a team
should consist of your CEO, CFO, a Board representative, your legal
advisor, and your CPA or financial advisor, Your organization may also
want to consider including, as a part of the team, those in your organization
who are responsible for the organization’s public image.
If you have not already done
so, now is the time to assemble your team, to develop a plan to review
your governance and management policies, and to recommend a compliance
plan to your Board of Directors in response to the redesigned
Form 990.
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