New IRS Form 990 Stresses Compliance

March 10, 2010

For nonprofits on a calendar year, May 15th is right around the corner. The IRS reminded organizations of their responsibilities in I.R. 2010-3.

The IRS made substantial and significant changes to Form 990 in 2008 since it was last redesigned more than 30 years ago. The IRS has made further revisions to the 2009 Form 990 and its instructions as explained in “2009 Form 990 – Significant Changes” released on February 15, 2010.

The purpose of the new Form 990 is to obtain substantial information on how tax-exempt organizations are operated; enhance transparency; and promote compliance by ensuring that Form 990 accurately reflects the organization’s operations and use of assets enabling the IRS to more efficiently assess any risk of noncompliance. Nonprofits should treat the preparation of the new Form 990 as if it were a compliance audit.

In 2008, organizations with gross receipts in excess of $1 million or total assets over $2.5 million were required to use new Form 990. For the 2009 tax year, the new Form 990 must be used by organizations with more than $500,000 in gross receipts or $1.25 million in assets. If an organization is not required to file a Form 990, it must file either Form 990-EZ or Form 990-N. If the organization fails to make its required filing for three consecutive years (beginning in 2007), it will automatically lose its exempt status, and contributions to the organization will no longer be deductible.

There are several important sections that filing organizations must be aware of so that the return is correctly filed for IRS purposes. For a more detailed overview of the new Form 990 and the 2009 changes, see “Challenges of the New Form 990 for Nonprofits.”

Part V – Reporting Other IRS Filings & Tax Compliance

This Part addresses questions regarding employment tax obligations, unrelated business income, foreign bank account reporting requirements, solicitations, disclosures, donor-advised funds, and supporting organizations. Responses on this Part could alert the IRS to tax compliance problems and potentially trigger future examinations or audits of the organization’s activities.

Part VI – Governance & Management

The IRS continues its focus on governance, despite the fact that most of these governance matters are not requirements for tax exemption under Internal Revenue Code section 501. The IRS continues to believe that a well-governed organization is more likely to be a tax-compliant organization.

This Part of Form 990 covers a host of governance-related questions concerning the composition of the governing body and management of the organization, including questions about the independence of voting members; relationships between officers, directors, and key employees; delegation of management responsibilities to third parties; oversight; contemporaneous documentation of board meetings; and board review of Form 990 before filing.

In addition, this Part queries whether the organization has certain policies, including a written conflict of interest policy, whistleblower policy, document retention and destruction policy, and compensation policy. While the failure to have a policy in and of itself is unlikely to trigger an audit, the IRS has indicated that other responses on Form 990, when certain policies are lacking, could trigger further inquiry. An example would be transactions with directors or officers when the organization does not have a conflict of interest policy.

Part VII – Compensation

Because of congressional concern and public requests for transparency on salary and benefits paid to key employees, officers, and directors, Form 990 requires that the organization provide Form W-2 or Form 1099 compensation information for an expanded list of individuals, including current officers, directors and trustees, as well as current key employees (who are not officers, directors or trustees) earning reportable compensation in excess of $150,000; the five current highest paid employees exceeding $100,000; former officers, key employees, and highest paid employees exceeding $100,000; and former directors or trustees exceeding $10,000.

Form 990 requires reporting the names of the persons, titles, hours worked, and reportable and estimated compensation from the organization and related organizations. Compensation includes reportable compensation from Form W-2 or Form 1099-MISC and also tax-deferred contributions to a defined contribution retirement plan. The IRS is reviewing not only the tax-deferred contribution, but also the annual increase in the actuarial value of the defined plan and the value of health benefits not includible in reportable compensation. The organization must also identify independent contractors receiving more than $100,000 from the organization and describe the services provided and the amount of compensation.

Clearly, these questions, when coupled with the information requests regarding other IRS tax filings and policies on governance and management, are designed to seek out potential excess benefit transactions, conflicts of interest, and improper management of tax-exempt assets.

Parts VIII, IX, X & XI

The IRS is requiring more detailed breakdowns of revenues, statements of functional expenses, balance sheets, financial statements, and reporting on board of directors oversight and independent audits as a result of federal grants.

Additional Schedules

Schedule A – Public Charity Status & Public Support

Charities will be required to describe in more detail the basis for public charity status. Parts II and III will require specific financial information to show that the support test has been met. If the organization is actually a private foundation, because it has failed to meet the public charity test it must acknowledge that fact and is required to file Form 990-PF.

Schedule D – Supplemental Financial Statements

Particular attention must be paid to the reporting of finances and assets. Schedule D requests detailed information about donor-advised funds, conservation easements, art, historical treasures, trust, escrow, custodial arrangements, endowments, and investments. It also asks for the text of footnotes in financial statements that might indicate a lack of certainty regarding the tax basis for taking a position on a particular issue. This of course could lead to further examination or audit by the IRS.

Schedule H – Hospitals

Part 1 focuses on charity care and community benefit provided by a hospital requesting information on the cost, revenue offset and net cost of charity care, lack of reimbursement from Medicaid, community/health improvement services, research, cash and in-kind contributions. The IRS is also requiring a statement whether or not the hospital prepares an annual community benefit report, and if it has a charity care policy, how such policy is communicated to patients.

Schedule K – Tax-Exempt Bonds

This schedule requires significant detail on every bond, including the purpose, amount outstanding, proceeds, and any third-party use of the facility.

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