Tate & Tryon's Form 990 Forum

Charities - are you mailings "educational"?

The last few years have been ones of significant change in the audit and accounting community.  The 990 has been revamped, auditing standards have been revised, and the FASB continues to churn out new accounting standards.  As a result, financial professionals in the non-profit world have been spending considerable amounts of time reviewing the operations of their organizations.

Since we're in the middle of a rather tumultuous time anyway, I'd like to suggest one more item to add to the list of things to review.  What's the harm in adding one more thing to the already lengthy list?

This item will apply mainly to 501(c)(3) organizations that complete the "joint costs" section of the 990.  On the revised Form 990, this section can be found on Part IX, Line 26 of the core form.

Many 501(c)(3)s have "education" as one of their core exempt purposes.  As part of their activities, these organizations may distribute mailings that contain both an educational component (advocating the issues of concern to the entity) and a fund raising component.  (Since the costs of the mailings serve the joint purpose of advancing program and fund raising functions, they are referred to as "joint" costs.)  There is certainly nothing wrong with such conduct, but it does lead to some accounting and tax complications.

Typically, accountants are primarily concerned about the allocation of the joint activity costs between the programmatic and fund raising activities that benefited from the mailing.  This is an important consideration that impacts how an entity presents its finances on the 990.  Fortunately, the accounting for joint costs is covered quite comprehensively in the AICPA's SOP 98-2.

Setting aside the issue of accounting for the joint costs, there is another, deeper concern - one that accountants typically do not consider.  That is to say, one must also weigh whether the IRS would consider the mailings to actually have an "educational" purpose.  If the mailings are a significant part of an entity's activities, and the IRS does not consider them to have an educational component, the IRS may question whether the entity has been functioning in accordance with its exempt purpose.

IRS Revenue Procedure 86-43 outlines the criteria the IRS has said it will use when evaluating whether an educational component exists in advocacy-type communications.  The Rev. Proc. indicates that the presence of any of the following factors indicates that a communication is NOT "educational":

1.  The presentation of viewpoints or positions unsupported by facts is a significant portion of the organization's communications.

2.  The facts that purport to support the viewpoints or positions are distorted.

3.  The organization's presentations make substantial use of inflammatory and disparaging terms and express conclusions more on the basis of strong emotional feelings than of objective evaluations.

4.  The approach used in the organization's presentations is not aimed at developing an understanding on the part of the intended audience or readership because it does not consider their background or training in the subject matter.

Thus, if you are involved with a 501(c)(3) that conducts significant issues advocacy communications, it wouldn't be a bad idea to review the organization's style of communication against the above criteria.  Given all the internal financial and governance review that's going on anyway, now might be a good time to do a self-audit related to the guidance in Rev. Proc. 86-43.

Naturally, the area discussed in Rev. Proc. 86-43 quickly gets into the world of law and legal interpretations.  (For example, how do you define "inflammatory"?)  Thus, if you have any doubts at all as to whether your advocacy communications could withstand IRS scrutiny, a qualified exempt organization attorney should be consulted.

Doug Boedeker

The Restricted Net Asset Police Are Coming!

Since the advent of Statement of Financial Accounting Standards No. 117 (SFAS 117) back in the mid-1990s, non-profit organizations have been required to segregate their net assets between "unrestricted", "temporarily restricted", and "permanently restricted" balances.

Although a theoretically simple concept, in practice there has often been confusion about when to classify net assets as permanently restricted. 

For example, Organization A received a $1,000,000 contribution and initially classified the contribution as permanently restricted.  Several years later, Organization A has a new Executive Director (ED) who reviews the entity's finances.  She decides that a strong argument can be made that the donor did not intend for the $1,000,000 to be permanently restricted.  Rather, the ED believes the contribution should be reclassified and presented as part of temporarily restricted net assets.  The donor is now deceased, so short of holding a successful seance, further clarification of the donor's intent is not possible.

The question naturally arises, "So what happens if we make this reclassification?  Do the permanently restricted police kick down our door?"

This has always been a tough question to answer.  There are state laws governing the stewardship of charitable gifts, but from a pragmatic perspective, it can be difficult for non-accounting (aka "normal people") to see the real impact of making an ostensibly "paper entry" to the entity's financial records.

Schedule D of the revised Form 990 will serve to give more weight to SFAS 117's definition of unrestricted, temporarily restricted, and permanently restricted net assets.  Part V of Schedule D now requires organizations to give an overview of its "endowment funds".  In Part V, organizations will be required to report: (1) a five year history of revenues and expenses related to the endowment funds, (2) the allocation of the endowment funds by net asset class, and (3) the intended use of the endowment funds.

Thus, an entity will now be officially "on record" with the IRS as to what is being treated as permanently restricted, temporarily restricted, and board-designated (quasi-endowment). 

As a result, it will be even more important for non-profits to carefully consider the classification of donations.  It's not just a matter of making a "paper entry".  Rather, it is part of the public record on file with the IRS.  The IRS will likely take a dim view of entities that "shuffle" their net asset classifications from one year to the next.

Doug Boedeker

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

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

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

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

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

Here's a link to the 2008 Form 990

Here's a handy link to the current version of the 2008 Form 990.

http://www.irs.gov/charities/article/0,,id=176637,00.html

You need to view or print each schedule separately, but I've found it doesn't take too long to print them all out.

Happy reading,

Doug

Politics and Lobbying - Schedule C and watch the 527 Organizations!

I don't know what relevance one can assign to the lettering system of the new supporting schedules for the 2008 990.  However, it does seem more than a little coincidental that the IRS assigned the letter "C" for the schedule that discloses an exempt org's political and lobbying activities.

This lettering serves to place the schedule near the top of the pile - easily in view of the public (and IRS examiners).  It's no secret that the IRS has taken a keen interest in monitoring the political activities of 501(c)(3) orgs.  Thus, I'm not surprised that the political and lobbying activities schedule made its way to the top of the heap.  (Or, perhaps they simply thought "C" for "Campaign"?)

From a reader's perspective, Schedule C should actually make more sense than the hodgepodge of questions and disclosures spread among the old 990 and the old Schedule A.  At least Schedule C gets all the "governmental affairs" items into one place. 

A lot of Schedule C is really nothing new.  Much of it simply compiles questions and tables that were present on the old 990 and Schedule A.  However, there are a few items that I found interesting:

First, Part I-A is to be completed by ALL exempt orgs.  (Including 501(c)(3)s.)  Question #2 of this part asks the org to report its total "political expenditures".  If a 501(c)(3) is in the position of having to report any amount on this line, it seems likely to trigger an audit from the IRS.  501(c)(3) orgs are prohibited from engaging in any political activity.  Therefore, it stands to reason that a 501(c)(3) would never incur any political expenses.  If I was designing the IRS's audit selection criteria, I'd definitely tell the computer to spit out a list of any 501(c)(3) orgs that reported an amount on Part I-A, question #2.

Part I-C is especially interesting because orgs are now required to list (including EIN) all of the 527 organizations (i.e., PACs) to which it has contributed.  On the old 990, there was always a debate as to whether contributions to PACs should be included in the detailed listing of "grants and contributions" on Part II (Statement of Functional Expense).  Clearly, there's now nothing to debate.  Schedule C now provides a concise listing of every 527 supported by the organization.  This is something that each organization should carefully consider before making political expenditures.

Theoretically, most, if not all, contributions made to 527s are open to public disclosure through PAC filings with the FEC and state election agencies.  However, compiling a comprehensive listing of PACs supported by an exempt org would have been cumbersome.  Schedule C removes that barrier.  In my mind, the listing of supported 527 organizations is the single most important change regarding political and lobbying expense disclosure on the 2008 990.

Finally, Schedule C has been designed so that an org has got plenty of space to describe its direct and indirect political campaign activities.  This is a good thing, because such a description is now required!

Just in time for the 2008 political season!

Doug

Overview of Form 990 Changes

Here's a quick, "to the point" two page summary of the major changes to the 990.  As you'll see, the theme of the new 990 is increased transparency.

Naturally, this translates into more information about everyone's favorite topic - COMPENSATION!

Enjoy,

Doug

Download summary_of_990_redesign_for_2008.pdf