Tate & Tryon's Form 990 Forum

IRS Releases 990 Draft Instructions

Ladies and gentlemen: sharpen your pencils; flex your typing digits. IRS today released the new draft Form 990 instructions, and you'll be able to comment on them only through June 1. By my count, that's 55 days - a significantly shorter period than the 90 days we were alloted to comment on the 990 itself.

I've not had a chance to give the instructions much more than a glance yet (I can blame that on a balky Internet connection late this afternoon), so I'll let you know in a few days what I think. The new instructions should be interesting, and hopefully informative: the overview promises numerous tools scattered throughout, to help taxpayers fill out the new form. These include:

• Comprehensive glossary of terms
• A sequencing list to help organizations determine the order in which to fill out parts of the form
• A compensation table to help organizations determine how and where to report items of compensation
• Many illustrative examples

IRS wants to hear from you in electronic format, if you can manage it - and please, text-only messages, not pictures. All comments will be posted on the IRS website, and text makes that way easier.

If you simply must do the snail mail thing, here's where to send your written missive:

IRS
Draft 2008 Form 990 Instructions, SE:T:EO
1111 Constitution Ave., NW.
Washington, DC 20224

You can view the IRS announcement here . . . view the overview here . . . and get into the nitty-gritty here.

Debbie

At least the new form makes some things easier...

"Well, we'd be happy to call the IRS and talk to them about the notice, but they won't talk to us without a valid power of attorney."

That's a phrase that independent accountants were forced to use whenever a client got a notice from the IRS regarding some kind of issue with a Form 990.  The IRS takes taxpayer privacy quite seriously, and they won't talk to a client's service provider without first receiving a properly completed power of attorney (POA).  Although POAs are easy enough to complete and file, it an administrative hassle that most folks would be happy to avoid.

Happily, one new addition to the "core form" of the redesigned 990 is a line on page one, just below the signature block that asks:

"May the IRS discuss this return with the preparer shown above?"

If you check "Yes" to this question, the IRS telephone reps will generally speak to the accountant who prepared the return. 

This check-the-box-yes type of authorization is generally valid for about a year after the return is filed.

Therefore, depending on the timing of the notice, a POA may still need to be obtained.  However, the need for POAs should be greatly reduced.

I recommend that if you use a paid preparer, check the box "yes" and let that person sit on-hold with the IRS.  (From my experience, the IRS only has two CDs in its on-hold music library.  The first is a suite of pieces from The Nutcracker, the second is Eine Kleine Nachtmusik.  Both selections will serve to drive one mad after 45 minutes on-hold.)

Doug Boedeker

Schedule M - Additional Reporting for Non-Cash Contributions

The redesigned Form 990's Schedule B remains virtually unchanged, but it will coordinate with the new Schedule M, which is specifically for non-cash contributions.  So, if you thought with no changes to the Schedule B that you were going to report non-cash contributions as you always have, think again.

If you check YES to Question 29 in the Checklist of Required Schedules, Part IV of the 990 Core Form you must file Schedule M along with the Schedule B. The IRS admits that Schedule M will "result in additional burden for many organizations", but Question 29 asks if you reported more than $25,000 in non cash contributions. That's a threshold amount that should release many smaller organizations from this requirement. The IRS also gives museums and other organizations with collections additional reporting relief by restricting their reporting to "check-the-box" (column (a))and "number of contributions"(column(b)).

For those organizations with over $25,000 in non cash contributions that are not museums or have collections, get ready for additional record keeping. The Schedule M is a virtual checklist of twenty-four specific types of non-cash gifts, with 4 additional lines for "Other" types (dilithium gemstones, perhaps?). Books, publications, clothing and household goods do not require a count total. Art, Securities and Real Estate are further separated into various types. There's even a line just for gifts of Taxidermy (think Trigger).

The general compliant during the draft review period was that Schedule M is redundant to Schedule B. But, while Schedule M asks for pretty much the same information found on Schedule B, its focus is different. Column(c) concentrates on how the items have been reported, e.g. whether as revenue when received with a follow up question to describe the reporting if not and column (d) focuses on the method used to value these items. There are five detailed practice and procedure type questions in addition to the ones in the Compliance section of the 990 Core Form, including if there is a gift acceptance policy for non-standard gifts and if third parties or related organizations are used to solicit, process, or sell non-cash contributions. Accordingly, Part II of the schedule is another Supplemental Information Sheet.

Schedule M is another tool in the IRS effort to ensure that non-cash contributions are reported fairly. If your organization falls into this reporting category, be prepared.

Subrina

Emphasize Your Achievements

Do you toot your own horn? You should -- on your Form 990, that is. Your 990 can be one of your best PR tools, if you let it. Here's how.

The current Form 990, in Part III, requires you to describe your "program service accomplishments" -- in other words, the activities that you carry on that advance your exempt purpose. While some organizations give these descriptions short shrift (I hope yours is not one of them), others make it a point to fully describe their operations. The IRS wants details: how many people were served by the activity? How many books or magazines did you publish? What did you do that was not concretely measurable, but still important? This narrative is important, not only for IRS reporting, but to provide an accurate picture of your organization and its activities. You never know who may be looking at your 990 on Guidestar: prospective members? Potential sponsors? Possible donors? Give them the big picture; let them know what you're about.

The new form 990 preserves and somewhat amplifies this requirement. You'll still be reporting on your top three activities (renamed "exempt purpose achievements"), and you'll also describe your organization's mission or most significant activities, smack in the middle of Page 1. While we don't have instructions yet, you don't need instructions to know that this is an important question, and one you should give some thought to. You want to be brief, but concise. It may be a good idea to keep your response short enough so that it fits completely within the space provided. There no doubt will be overflow space available, and that may come in handy for the new Part III, where you will (re)state your organization's mission and describe your achievements in further detail. But for Page 1: keep it simple, keep it accurate, keep it positive. It's part of your overall Page 1 "snapshot" . . . and you know what they say about first impressions.

Debbie

Schedule G - It's Not Just For Gaming

If you're a trade association, will you be required to file Schedule G -- as in "gaming?"

Maybe. It depends on what sort of special events you hold throughout the year: at your annual trade show or convention, at regional meetings, at conferences. Schedule G's not just for gaming activities, though that's the obvious focus. Special fundraising events of any kind -- even use of a professional fundraiser -- may trigger Schedule G. Here are the thresholds for filing:

• Reporting more than $15,000 from actual gaming activities (Form 990, Part VIII, line 9a, or 990-EZ, line 6a)
• Reporting more than $15,000 from fundraising events (Form 990, Part VIII, line 8a, or 990-EZ, line 6a)
• Reporting more than $15,000 in professional fundraising fees. (Form 990, Part IX, line 11e)

A "special event" is one that does not advance your exempt purpose -- it's main goal is to merely raise funds. A golf outing at your annual meeting qualifies as a special event; so does a gala, or a dinner dance.

Furthermore, you may even be conducting a gaming activity, and not be aware of it. The term "gaming" or "gambling" usually brings to mind a bingo game, or perhaps a pull-tab operation. But there's more under the "gaming" umbrella than the usual suspects. A raffle, for example, is considered a gaming activity, as is a drawing. If you hold a "casino night" at your annual trade show, you're doing gaming.

What sort of information will you be reporting on Schedule G? Well, some of it will be very similar to what you might be reporting now, on Page 1 of your Form 990, for "special events." Page 2 of the schedule actually lays out what you need to report; frankly, it's a lot easier than what you're doing now.

Now, if you're actually doing any gaming, you'll need to answer a few new questions: for example, where you did the activity, and whether you were licensed to do it. Yes, do be aware that many states want you to register your gaming activity, even if all you do is give away an automobile. Furthermore, you may have a lot of reporting to do to that state, as well as a few extra rules to follow. So, when you're doing event planning, go check the state's gaming rules.

Want further information on gaming? IRS has a nice overview in the form of a phone forum transcript from 2007. Also, much more info is available in Pub 3079, "Gaming Publication For Tax-Exempt Organizations."

Happy gaming!

Debbie

A Contribution by Any Other Name

Our March 10th posting, The ghosts of the past-now even harder to avoid! pointed out the new requirements for comparative data of key line items in the redesigned Form 990. But, a first reading of the newly designed Statement of Revenue Part VIII might lead you to think that in the first year of using the form you might compare apples to oranges. A closer look reveals more evidence of the Service's attempt to simplify the use of this form.

The new form's "Contributions, gifts, grants and other similar amounts" Part VIII, Lines 1a-h will be compared with the prior form's "Contributions, gifts, grants and similar amounts received" Part 1, Lines 1a-e.  However, the line items in the new form's Contribution received section are almost all retitled. "Donor-advised funds", "Direct public support" and "Indirect public support" have completely disappeared. In fact, the only titles remaining unchanged are "Government" and "non-cash" contributions, which just might be telling us what the IRS thinks haves consistency.

For those who deal with the new 990 forms in ways other then preparing or other wise living and breathing it...this might seem to thwart that mantra of consistency and comparability, but it is in fact making some things that have been ambiguous to some "direct"  vs "indirect" support or "donor-advised funds" clearer and more easily understood by everyone.

Here's a quick run down of the title changes and their match ups to the former return:

                  New Form                                            Current For

         Line 1a Federated campaigns            Line 1c Indirect public support

         Line 1b Membership dues                  Line 1b Direct public support

         Line 1c Fundraising events                Line 1b Direct public support

         Line 1d Related Organizations          Line 1c Indirect public support

         Line 1e Government grants               Line 1d Government grants

         Line 1f All other contributions, etc.    Line 1a Donor-advised funds

         Line 1g Non-cash                               Line 1e Non-cash

And with apologies to Juliet Capulet, the new titles, by any other name, clearly describe the types of contributions received by a tax exempt organization by leaving out the not so sweet smelling IRS defined terms. Again, the new form may take a little getting used to, but the changes generally make logically sense. 

Subrina

Taxable Subs and new planning opportunities

Traditionally, exempt organizations have established taxable subsidiaries as a means to permit the organization to engage in certain activities that might otherwise jeopardize it's exempt status.  Examples of such activities include the sale of certain commercial-type insurance policies and substantial unrelated business income.  With the new requirement in Schedule D for organizations to disclose the entire FIN 48 footnote from the organization's financial statements, exempt organizations with tax positions that might require a FIN 48 footnote are looking for another alternative to having to make this disclosure on the Form 990.

The federal Form 1120 is the tax return filed by taxable corporations.  The 2007 Form 1120 contains no requirement for organizations to disclose a FIN 48 footnote appearing in the corporation's audited financial statements.  As a matter of fact, corporations with total receipts and total assets of less that $250,000 are not required to prepare the balance sheet portion of the Form (Schedule L on page 4).  Therefore, the FIN 48 liability, should one exist, would be completely unknown to the IRS!

Exempt organizations that have a taxable corporate sub may want to consider conducting activities that may give rise to a FIN 48 footnote through the taxable sub.  Doing so will not necessarily prevent the FIN 48 footnote disclosure in the financial statements, but it will prevent raising a red flag on the exempt organization's Schedule D.

Fred

The ghosts of the past - now even harder to avoid!

"Consistency and Comparability" - two guiding tenets of accounting that are drilled into every second year business student's brain.

Prior to the 2008 version of the 990, it was relatively difficult to assess whether an exempt org. was accounting for revenues and expenses in a consistent fashion.  The reason for this difficulty was simple; there was no place on the form to report prior year revenues and expenses.  Thus, a reader would have to obtain a copy of an organization's prior year and current year form in order to start the task of seeing how the year over year numbers compared.

(It's worth noting that the "old" version of the 990 did contain prior year and current year data for the balance sheet.  Thus, some quick trend analysis was possible for assets, liabilities, and net assets.)

Well, apparently champions of easy comparability have scored a victory with the 2008 version of the 990.  Page one of the "Core Form" of the 990 now prominently displays "big picture" data for both prior year and current year revenues and expenses.  In addition, page one also displays prior year and current year total assets, liabilities, and net assets. 

For revenue, the IRS will now require side by side current and prior year comparative data for (1) contributions and grants, (2) program service revenue, (3) investment income, and (4) all remaining revenue.  (A comparative revenue grand total is also required.)

For expenses, the IRS will now require side by side current and prior year comparative data for (1) grants paid, (2) benefits paid to or for members, (3) salaries, compensation, & employee benefits, (4) professional fundraising expenses, and (5) all remaining expenses.  (A comparative expense grand total is also required.)

Comparative data for the organization's change in net assets (revenue less expense) is also shown on page one.

As a result, it will now be quite simple for a reader of the 990 to do a quick trend analysis of the organization's financial statements.  An in-depth trend analysis would still require having a copy of each year's 990 handy.  However, page one of the "Core Form" will enable a reader to determine at a glance whether there are areas with unusual fluctuations that might bear greater scrutiny.

Therefore, it will be even more critical for organizations to make sure they are adhering to the guidance of our old accounting friends "Consistency" and "Comparability" when reporting data on the 990.

Let the fluctuation analysis begin!

Doug Boedeker

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