Redesigned Form 990 Demands Immediate Attention of Executive Director and Board
By Jack B. Siegel, Charity Governance Consulting LLC
May 2008
On December 20, 2007, the Internal Revenue Service released a final version of a redesigned Form 990 with much fanfare, including a press conference. Several weeks ago, the IRS proposed voluminous instructions, filling in many of the details.
The new form greatly expands the information that tax-exempt organizations, including Community Action Agencies (CAAs), must disclose about their operations, creating both opportunity and potential peril. One thing is already clear: The Form 990 can no longer be relegated to accountants. It is now the face of the organization, a document that journalists, grantmakers, and members of the public will review carefully. Every executive director and board will want to have input into the preparation of Form 990.
The Basics.
The redesigned Form 990 consists of an 11-page Core Form to be completed by all organizations. Organizations will use a checklist to determine which of 16 supplemental schedules apply to them. The intent is to isolate particular schedules so that organizations can simply skip those that do not apply. For example, it is unlikely that CAAs will need to complete Schedule F, Statement of Activities Outside the U.S. or Schedule H, Hospitals. On the other hand, it is likely that many CAAs will be required to complete portions of Schedule D, Supplemental Financial Statements. Schedule J, Compensation Information, also will be required for at least some CAAs. Those CAAs that engage in transactions with interested parties will be required to complete Schedule L.
Effective Date.
CAAs will first be required to file the revised Form 990 for tax years beginning in 2008, unless they are smaller organizations eligible to file Form 990-EZ. CAAs must continue to use the current Form 990 for the 2007 tax year. For smaller organizations, use of the redesigned Form 990 will be phased in over three years through adjustments to the filing thresholds for Form 990-EZ. For the 2008 tax year, an organization can take advantage of the phase-in if its gross receipts are under $1 million and its assets are less than $2.5 million. Those levels are reduced in 2009 and 2010.
Implementation.
CAAs should begin planning now. The redesigned form asks questions about a number of potentially embarrassing activities and transactions.
The critical date is the first day of a CAA’s 2008 tax year. For calendar year CAAs, this date is January 1, 2008; for other CAAs it will be later in the year. Regardless of when a CAA’s 2008 tax year begins, now is the time when CAAs can most meaningfully adjust the practices and policies that will be reflected on the revised form when it is filed in 2009. CAA executive directors and boards should take the following steps now:
1. Determine Whether the Accounting System is Capturing the Right Financial Information. The person who is responsible for preparing the Form 990 should review the redesigned Form 990 to make sure that the organization’s accounting system is capturing the financial information that will be necessary to complete the revised form.
2. Review Governance Questions. The board and executive director should review the governance questions in Part VI of the Core Form to determine whether governance practices and policies should be implemented or changed. These questions ask whether the organization has adopted conflicts-of-interest, whistleblower, and record retention policies. The questions also cover board independence, how compensation is determined, and whether there has been a material theft or embezzlement.
3. Think About How Best to Describe Program Accomplishments. The executive director and program heads should focus on how best to describe and measure program accomplishments. Part III of the Core Form provides the opportunity to provide detailed program information. CAAs will want to take advantage of this opportunity.
4. Make Sure the Determination of Compensation is Supportable under the Intermediate Sanctions. The board’s compensation committee (or equivalent) should review Parts VI and VII of the Core Form and Schedule J (if applicable) to focus on required disclosures concerning compensation and how those disclosures might affect the structure of compensation packages.
5. Catalogue Conflicts and Relationships. The executive director and the board should focus on relationships and potential conflicts of interest which are subject to disclosure. Schedule L is a good starting point, but before completing Schedule L the CAA should review Part IV of the Core Form to determine whether Schedule L is required. Because of the tripartite structure and the new Head Start governance requirements, it is conceivable that certain board members will be beneficiaries of CAA programs such as Head Start or LIHEAP. Depending on how the final instructions are worded, this assistance may be subject to disclosure on Part III of Schedule L.
6. Contact Outside Accounting and Tax Firm. The appropriate person should contact the CAA’s outside accounting firm for additional suggestions, particularly if that firm prepares the Form 990.
7. Develop a Form 990 Mindset. There is no doubt that CAAs will incur additional costs when completing the redesigned Form 990 for the first time. If CAAs build Form 990 compliance into their internal systems, however, that cost should decrease significantly in subsequent years. For example, the redesigned Form 990 requires disclosures about compensation paid to certain persons. If the HR or payroll departments develop a method for identifying those people and automatically tracking their compensation through the payroll system, the CAA will not have to assemble the data from scratch each year. Similarly, CAAs are required to identify board members who are considered to be independent. Each time a new board member is elected, the appropriate person should determine whether the new member is independent and make appropriate adjustments to a master list.
Governance
The redesigned Form 990 places far greater emphasis on corporate governance than did its predecessor, as is evidenced by the questions regarding. conflicts-of-interest, whistleblower, and document retention policies. Although these policies are not required, many organizations are likely to take the not-so-subtle hint that such policies should be put in place. Of particular note is one question that asks whether the board has reviewed the Form 990.
Compensation
Part VI of the Core Form asks whether an independent body determined compensation of key officials and whether comparables (data on compensation paid for similar services by comparable organizations under similar circumstances) were used. Part VII then provides a schedule where reportable compensation for officers, directors, key employees, and the five highest compensated employees (defined as employees who do not fall into one of the other categories, but who receive over $100,000 in reportable compensation) is to be reported. The proposed instructions, in defining who is a key employee, focus on an employee’s control over a segment of the organization’s operations. The proposed definition provides that someone must earn over $150,000 before they are considered a key employee.
As noted, Schedule J is also devoted to compensation, asking for additional details. This schedule will only be required of organizations that meet certain conditions. For example, Schedule J will be required of any organization that pays its executive director, or any officer, key employee, or highest compensated employee in excess of $150,000 per annum. That will mean providing more detailed information regarding compensation, as well as answering a series of questions regarding perquisites.
Program Accomplishments
The IRS has provided organizations with the opportunity to tell their story. The first question in Part I of the Core Form asks the CAA to briefly describe its mission and most significant activities. Page 2 requests the CAA to then describe what are termed exempt purpose achievements for its three largest program services. It is no coincidence that this information was placed toward the front of what will be a lengthy document. The IRS received comments urging it to give organizations the opportunity to tell their stories to the public and the media in a meaningful and positive way. Any organization that answers with a just a sentence or two will be ignoring an opportunity for positive self-promotion.
The Reality
Many have and will continue to complain that the redesigned Form 990 imposes unnecessary, but costly compliance burdens on tax-exempt organizations. No matter what side of this debate you are on, there is nothing anyone can do about it now. There is, however, one certainty: If a Head Start or an energy-assistance program in your state or community becomes embroiled in a scandal, some investigative reporter is going to pull your CAA’s Form 990 once it is available. You need to start thinking now about what that form is going to say about your organization and whether you want what it says splashed across the front page of the newspaper for state officials, members of congressional appropriation committees, and grantmakers to read. Although the new form was designed to disclose information (and lots of it) without judgment, people will pass their own judgments based on what the form discloses. This is your organization’s new public face.
Obtaining a Copy of the Revised Form.
The redesigned Form 990 and the proposed instructions are available at http://www.irs.gov/charities/index.html. Make sure your printer has plenty of paper and ink before printing the form and instructions.
Jack is an attorney and CPA. He holds an LLM(Tax) from New York University and a Masters of Management from Northwestern University’s Kellogg Graduate School of Business. Jack provides consulting services to nonprofits and boards, focusing on board and officer training, financial and governance issues, and special projects. Jack is the author of a Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good (Wiley 2006). He authors the Charity Governance blog (http://www.charitygovernance.com).
The intermediate sanctions are a comprehensive set of tax rules designed to assure that compensation paid to key employees and other insiders reflects a market rate of compensation. If the IRS determines that the compensation is excessive, it can force the recipient to return the excess to the organization and assess an excise tax equal to 25% of the excess on the recipient. Under these rules, there is a rebuttable presumption that the compensation is reasonable if certain procedures were followed in determining the amount and approving it. These rules apply to section 501(c)(3) and (c)(4) organizations.
