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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.