Tate & Tryon's Form 990 Forum

There is a cost for everything

One of the most interesting parts of the instructions to any IRS Form is the section at the end that summarizes the time needed to complete and file that Form and any related schedules.  Where the IRS comes up with these estimates is anybody's guess, but the instructions clearly state that all times may vary depending on individual circumstances.

That said, on page 65 of the instructions to the 2007 Form 990, the IRS indicates that the average time to prepare the Form 990 is 22 hours and 20 minutes.  If the filing organization is a public charity exempt under Section 501(c)(3), you can add 13 hours and 21 minutes to complete the Schedule A.  In addition, if that organization is required to disclose donors on Schedule B, you can add another hour and 31 minutes.  If you add all that time up, a public charity might need 37 hours and 12 minutes each year to prepare the Form 990 and required attachments.  Bear in mind, these are estimates and as such might be more or even less than the actual time required to prepare a complete and accurate Form 990 for a public charity.

Those are startling estimates by anyone's measure.  Assuming the average times stated in the instructions are accurate, one might be even more astonished at the estimates for the annual record keeping required to prepare a Form 990, Schedule A and Schedule B.  Again, according to the instructions, the IRS suggests a public charity might need a total of 192 hours and 57 minutes each year to compile the required record keeping necessary to prepare and file their Form 990 on an annual basis.  All together, the above estimates add up to well over one month of time - a rather substantial investment of time for any organization.

Obviously, a significant part of the record keeping time is already accounted for in the daily activities of an organization's finance department.  There is, however, a substantial amount of information that must be gathered for the preparation of the Form 990 that is generally beyond the routine responsibilities of any given finance department's staff.  It stands to reason that the time required for the preparation of the Form 990 might be substantially reduced with more efficient and regular updates to the information required for the preparation of the Form 990.  Doing so will make the process less stressful for the finance department's staff and should result in a more refined and accurate return.

Bear in mind, the above estimates are for the 2007 Form 990, which is a Form most of us are already familiar with.  I honestly can't wait to see what the IRS proposes as the new time estimates in the instructions to the 2008 Form 990 once they are finally published.  Whatever the estimates may be, they are certain to be higher.  Given these facts, it is wise for organizations required to file Form 990 to not only familiarize themselves with the changes to the Form, but also to asses their capacity to perform the necessary record keeping required to compile the information needed to complete the Form.  Doing so will not only make the process smoother, it may keep down the compliance costs in both time and money - which is something every business is interested in.

Fred

New 990 and Other Tax Filings

The IRS Form 990 redesign includes a new set of questions that help organizations determine if they have additional tax reporting requirements beyond the core 990 and its related schedules. Conveniently grouped in the core form, Part V - Statements Regarding Other IRS Filings and Tax Compliance is a list of twelve multi-part questions written mostly in plain English. The questions start with those that pertain to all Form 990 filers and flow down to questions specific to certain exempt classifications. Answering the questions will determine if newer and more prevalent compliance items such as electronic filing and reporting of contributions of intellectual property; or more exotic reporting and disclosures of prohibited tax shelters and foreign bank accounts or even the usual and ordinary filings for UBTI and disclosure of the number of W-2 employees are be reported correctly.

Of course the devil is always in the details, for example the section has questions on the existence of prohibited tax shelters and the filing of Form 8886-T Disclosure by Tax-Exempt entity Regarding Prohibited Tax Shelter Transaction, but it does not alert an entity to the fact that other reportable transactions (considered neither prohibited nor listed) may still require the filing of Form 8886 Reportable Transaction Disclosure Statement. And, though such reportable transactions are unlikely for the majority of tax exempt organizations, failure to file Form 8886 to report such a transaction results in substantial penalties ranging from $10,000 to $50,000 per unreported transaction. Form 8621- Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund is also completely omitted from this section. As entities invest more and more heavily in alternative investments the chance of this type of reporting increases. Of course, there are exemptions and exceptions and thresholds to protect tax exempt entities with small holdings in pass-thorough type investments. But, it is better to err on the side of caution when dealing with the magnitude of the possible penalties as a result of non-compliance.

As we've seen in other sections of this new form 990 the IRS is gently prodding organizations to be mindful of procedures and policies that will make the new filing requirements a bit less burdensome. But as always, it's best to make every effort to be aware of all the possible ramifications of any asset, transaction or tax position held by your organization.

Subrina Wood

Schedule D

The main purpose of the new Schedule D is to serve as a continuation page for the Core form's balance sheet . . . but with a few new additions, and an unexpected twist.

Additions: Exempt orgs now will provide information on conservation easements (a hot button for the last year or two), museum collections, donor-advised funds, trust and custodial arrangements, and the like. Investments will be broken out into program-related and "other," with a focus on alternative investments.

The twist: Schedule D asks EOs to reprint, word-for-word, the FIN 48 footnote from their audited financial statements. This innocuous-looking directive is actually a red flag -- as FIN 48 is better known as FASB Interpretation 48, "Accounting for Uncertainty in Income Taxes." If your organization has an uncertain tax position (think: possible unrelated business income, shaky net operating losses), your FIN 48 footnote can lead the IRS right to it.

FIN 48 doesn't go into effect for EOs until 2008 - that is, for fiscal years beginning after December 15, 2007. This means you have a year or so to straighten out any "uncertain" tax positions you may have -- and avoid getting slapped with a FIN 48 "road map."

Debbie

Your Board and Form 990 - an important new question!

In this era of enhanced disclosures and stepped-up control environments, I guess it's not really surprising that the IRS has included this new question on the redesigned 990 (Question #10, Part VI of the Core Form):

"Was a copy of Form 990 provided to the organization's governing body before it was filed?  All organizations must describe in Schedule O the process, if any, the organization uses to review the Form 990."

I think this question is clearly designed to get Boards to become more cognizant of what is being reported on the 990.  In my experience, most Boards have not spent much time dealing with the 990 - it's been viewed as an administrative function that is taken care of by internal staff and outside CPAs.

Obviously, with the addition of the question above, the IRS is trying to nudge Boards into a more active oversight role regarding the 990.

Although increased Board oversight is certainly hard to argue against, the new question does raise the issue of practicality.  That is to say, given the often extremely tight agenda at most Board meetings, how will the Board squeeze in a review of the 990?

My sense is that this task is best delegated to the Treasurer, the Audit or Finance Committee, or the chairs of the Audit or Finance Committee.  The designated individual or committee could receive a "draft" copy of the 990, review it, and then approve it for issuance.  A report could then be made to the Board that the review and approval took place, and the Form has been filed.

Naturally, another layer of review will add to the time needed to process and issue the 990.  Therefore, this is one more reason for clients and accountants to get cracking quickly on the prep of each year's 990.  Given the busy schedules of Board members, it may prove hard to get them to do a last-minute review of a 990 that's due on "final" extension in a few days!

As a final note, there's no real IRS requirement that mandates an organization be able to answer "Yes" to the Board review question.  However, a "Yes" answer to this question makes the exempt organization appear well-governed, and might just reduce the risk of an IRS audit.  Thus, I'd encourage all exempt organizations to begin putting the process in place to ensure a Board-level review of the 990 for 2008.

Doug Boedeker

New 990 Design Makes Public Research a Reality

One of the more interesting objectives of the new Form 990 Redesign is the IRS goal to make financial and program services information more readily available both internally and to other public researchers. The changes in the Program Services section of the core form and the addition of the new Activity Codes should make accessibility to this information a reality.

These new Activity codes are not to be confused with the current Exclusion Codes found in the Analysis of Income Producing Activities section. In fact, the Exclusion codes will not be part of the new design. The Activity codes will not be required for the first returns filed on the new 990 forms, to allow the IRS more time to determine which code system will be the most effective. The most likely system is an abbreviated version of the National Taxonomy of Exempt Entities.

The National Taxonomy of Exempt Entities (NTEE) was created in the 1980's as a special project of the Center on Nonprofits and Philanthropy(CNP), one of ten research centers of the Urban Institute, a think tank located in Washington, D.C. The Institute was established as an independent organization in 1968 by the Lyndon B. Johnson administration to study the nation’s urban problems and evaluate the Great Society initiatives embodied in more than 400 laws passed by that administration. Gradually, its research and funding base broadened. Today, the Center's mission is to promote understanding of civil society and improve nonprofit sector performance through rigorous research, clear analysis and informed policy.

In a recent brief published by the CNP titled What Drives Foundation Expense & Compensation, the first large-scale, long-term, systematic study of independent, corporate, and community foundations' expenses and compensation patterns and the factors behind them, the authors pointed out the need for improvement to IRS Forms 990 and 990-PF, the main sources of data for the three year study, "the forms do not allow for adequate reporting of new types of expenses, such as technology, communications and evaluation, or non-grantmaking activities, in-kind gifts, and donated labor, which makes it difficult to fully assess foundations' administrative costs and to provide a complete picture to stakeholders and the public," said coauthor Loren Renz, senior researcher for special projects at the Foundation Center.

We won't know which set of codes will be the basis for the new Activity Codes until the final version of the forms and instructions are released. But it will be important to bear in mind that the more precise and exact an organization is in its understanding and use of the the new Activity codes the more precise and exact future research aimed at helping the entire nonprofit community will be.

Subrina

Less work through more paperwork

With the addition of new schedules, the new Form 990 might actually take less time and paperwork for an organization exempt under Section 501(c)(3) to complete than the current Form 990 requires.  Previously, the Form 990 required all organizations exempt under Section 501(c)(3) to file Schedule A - a seven page schedule that included questions on a wide variety of topics and activities such as lobbying, compensation of contractors, compensation of employees, and relationships with non charitable exempt organizations.  For the most part, only about one third to one half of the old Schedule A applied to any given filing organization.  Now, with the newly redesigned Form 990, filing organizations are freed from the burden of filing a seven page schedule which mostly didn't apply to them in the first place.  Instead, the new core Form 990 helps filers to determine which additional schedules apply to them and they may therefore compete only those schedules. 

One such schedule is the new Schedule A - Public Charity Status and Public Support. The new Schedule A is really a combination of the old Schedule A Part IV - Reason For Non-Private Foundation Status and Part IV-A - Support Schedule.  Because these two sections apply to most Section 501(c)(3) organizations, it makes sense that these two parts of the old Schedule A would become the new Schedule A.  Where the new Schedule A is four pages while Parts IV and IV-A of the old Schedule A were only two pages comes the irony that twice as much paperwork actually translates to less time and work required to complete the supplemental information required to be reported by a majority of the organizations exempt under Section 501(c)(3).

The basic mechanics of the public support test for organizations described in IRC 170(b)(1)(A)(iv), 170(b)(1)(A)(vi), and 509(a)(2) are the same except the two tests are calculated on two different pages - the 509(a)(1) test is calculated on page 2 while the 509(a)(2) calculation is on page 3.  Page four is reserved for supplemental information required to be disclosed by 509(a)(1) organizations not within their first five years of operations who do not meet the 33 and 1/3 support percentage.

There are, however, two major changes to both support tests.  The first has to do with the number of years taken into account for the calculation.  Under the current support calculation, only the previous four years, not including the current year are taken into account.  In the new support calculations, the previous four years and the current year are taken into account.  The second change has to do with the method of accounting for the support test.  Currently, the support test must be completed on the cash basis while the new Schedule A allows the support test to be completed using the same method of accounting used to complete the Form 990 (generally, the accrual method).  This is good news and will spare many of us the need to make the accrual to cash adjustment even though in some circles, it has been general practice to complete the support schedule on the accrual basis anyway.

Fred

Governance is all the rage - and the IRS wants to know about yours!

The revised "super-deluxe" 990 continues a trend that began on recent versions of the "old" 990.  Namely, the IRS is asking questions regarding the governance policies in place at tax-exempt organizations.  (See Part VI, Section "B" of the core form.)

Here are the governance questions:

1.  Does the organization have a written conflict of interest policy?  If you have such a policy, are officers, directors, trustees, and key employees required to disclose annual interests that could give rise to conflicts?  Does the organization regularly and consistently monitor and enforce compliance with the policy?  If so, describe how this is done.

2. Does the organization have a written whistleblower policy?

3. Does the organization have a written document retention and destruction policy?

4. Did the process for determining compensation of [the CEO and other key employees] include a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision?

Question #4 is a hot-button question that will be particularly useful to the IRS for identifying 501(c)(3) and 501(c)(4) organizations that might be running afoul of the "intermediate sanctions" regulations.  Thus, these organizations in particular should carefully review their compensation practices (and the intermediate sanctions rules) to ensure they can be comfortable with their answer to this question on the 990.

For Questions #1, #2, and #3, there are not really specific IRS requirements for an organization to have these policies in place.  However, each of these policies is widely considered to be a corporate governance "best practice".  Thus, I would consider these policies to be "highly recommended."   It seems logical to assume that the IRS would be more likely to audit an organization that has not adopted these governance policies.  The lack of these policies would tend to be symptomatic of an organization that has a weak control environment.

Therefore, I'd recommend that organizations adopt the governance policies discussed on the new 990.  Having these policies in place will improve corporate governance and just might make the IRS happy as well!

Happy policy writing,

Doug Boedeker

Thoughts on Schedule J

When the Treasury Regulations for Section 4958 were enacted in 2002, my belief was that the IRS would begin to actively examine executive compensation for the existence of excess benefit transactions.  It has only been within the past year that the additional scrutiny has begun to materialize.  Now with the introduction of Part VII of the redesigned Form 990, the IRS might be indicating even greater interest in the amount and components of compensation reported on Form 990. 

Section 4958 imposes a three-tier tax commonly referred to in the tax-exempt industry as intermediate sanctions.  The term intermediate sanctions was so coined because the three-tier-tax now gave the IRS a means to penalize exempt organizations for improper or abusive transactions other than the revocation of the organization’s tax-exempt status.  This revocation of an organization’s exempt status was previously the only alternative available to the Service.

The first tier of the tax is equal to 25 percent of the excess benefit received by the disqualified person in a transaction found to be an excess benefit transaction under Section 4958.   An excess benefit transaction is any transaction in which a disqualified person receives an excess benefit either directly or indirectly from an applicable tax-exempt organization.

The second tier tax is imposed on organization managers and is equal to 10 percent of the excess benefit, but is limited to $10,000 ($20,000 for taxable years beginning after August 17, 2006) for any one excess benefit transaction.   The second tier tax is imposed on organization managers only if those managers participated in the excess benefit transaction knowing the transaction was an excess benefit transaction.

The third tier of the tax is imposed on the disqualified person and is equal to 200 percent of the excess benefit in the excess benefit transaction.  The third tier tax will be levied only if the excess benefit transaction is not corrected within the taxable period.

Part VII of the redesigned Form 990 requires all filing organizations (not just charities) to disclose the compensation of the five highest paid employees who received compensation of $100,000 or more who are not officers, directors, trustees or key employees.  Previously, this threshold was $50,000. Because this reporting requirement has been expanded to include all filing organizations, this is an indication of the Service’s heightened interest in the area of executive compensation.

In addition, filing organizations may be required to disclose information on compensation in addition to that required in Part VII.  In order to make these additional disclosures, the 2008 Form 990 will offer Schedule J – Supplemental Compensation Information for filing organizations to report compensation information for persons whose compensation exceeds thresholds set by the IRS.  In short, Schedule J will be required in the event a reporting organization makes payments to former officers, directors, trustees or key employees; if compensation is paid to any person reported in Part VII that exceeds $150,000; and if any person listed in Part VII receives compensation from an unrelated organization for services rendered to the reporting organization.

A link to the Draft of Schedule J can be found here.

Because the tax is levied directly on the disqualified person or organization managers themselves rather than on the organization itself, executives in the nonprofit industry whose compensation is reported on the Form 990 should take particular interest in the steps that can be taken to safeguard themselves against the imposition of these sanctions.  Going forward, charities should follow the guidelines set forth in the Section 4958 Regulations and the instructions to the Form 990 in order to protect themselves from the potential imposition of these sanctions.  Non-charitable organizations, while not subject to Section 4958 still fall under the private inurement prohibition and can still have their exemptions revoked over excess benefits issues.  The instructions to the Form 990 Draft have not been published, but a link to the Section 4958 Regulations may be found here.

Fred

Schedule I - Grant Reporting Simplified

The new 990 redesign kills two grant reporting nightmares, incorrect and incomplete grant information, with one IRS stone, the new Schedule I - Grants and Other Assistance to Organizations, Government and Individuals in the U.S.

The current Form 990 separates grants into three reporting categories; Grants paid from donor advised funds, Other grants and allocations and Specific assistance to individuals, with each category necessitating additional clarification found in the line by line instructions. Grants to individuals can be a part of any of the three categories, but their inclusion requires yet another level of separation. Information regarding the relationship of individual grantees to the organization is often missing and personal information is sometimes unnecessarily incorporated into the return. The class of activity descriptions are sometimes vague, exactly what the IRS instructions states they should not be or omitted altogether. All three categories, regardless of the amount, require an attached schedule with the formatting instructions for these schedules buried in the line instructions. The mandatory E-filing requirements coupled with the possibility of such incomplete information gives every practitioner a chance to win Best War Story of the tax season.

The new Schedule I clarifies and simplifies grant reporting while providing a structured format that will make e-filing easier.  The grant categories are clearly worded; Grants and other assistance to governments and organizations in the U.S., Grants and other assistance to individuals in the U.S. and Grants and other assistance to governments, organization and individual outside the U.S. making proper segregation simple. Schedule I is required only for grants over $5,000 made in the U.S. so there will be some reporting relief (Schedule K is required for any amount over $5,000 made outside the U.S.).  Information regarding any relationship between an individual grantee and the organization has been move to Part IV, question 27 and Schedule L, Part III. The title, Class of Activity, which would seem to required a one-word response has been changed to the more open ended, Purpose of grant or assistance.

Of course all this clarity and simplification comes at a price. Schedule I will require information that was not previously part of the current 990 attachments, most notably the EIN and IRC Code section (if applicable) of grantee organizations. Another new wrinkle is a requirement, reminiscent of private foundation expenditure reporting,to describe the procedures for monitoring the use of the grant funds in the U.S. But where private foundation expenditure reporting applies only to grants made by one private foundation to another private foundation, the Schedule I description of monitoring procedures seems to cover to all grants made by the organization. We will have to wait for the final instructions on that issue. There are even count totals lines for the 501(c)(3), government organizations and other organizations that have received grants.

In the end, even though it requires new information and the $5,000 threshold is lower then most of us would like, Schedule I should reduce the reporting burden for some and alleviate incorrect and incomplete reporting issues for many more. The new categories of grants is practical and concise. The shift of the required format of grant information from the line instructions into the return itself will make compliance easier for organizations of all sizes and the structured format of a schedule will make e-filing less time consuming.

Click here to see the new Schedule I

Subrina