The redesigned Form 990 for tax-exempt organizations requires time and planning…starting now.
After more than a year of public comment and debate, the new IRS Form 990, Return of Organization Exempt from Income Tax, is finally complete. While this is cause for celebration at the IRS, the new Form 990 is raising some questions and concerns among not-for-profit organizations. Finance committees and board members want to know how the new form will impact their duties and how much additional work will be needed between now and their 2008 filing deadline.
To answer these questions, not-for-profit administrators must realize that the new Form 990, like its predecessor, is more than a fill-in-the-blank for income and expenses. To an even greater degree than in the past, the redesigned and fortified form openly challenges not-for-profit boards to look more closely at the broader organization, its governance, compensation, accomplishments and overall processes. Boards of directors will now be held more accountable for organizations’ reporting practices and procedures, not just their financial information.
This change of focus goes to the heart of why the form was revised in the first place. The IRS believed that the previous version of Form 990, which had not undergone a major revision in nearly 25 years, was failing to keep pace with the changing not-for-profit sector. Tremendous growth, changing tax laws and calls for closer scrutiny of all exempt organizations spurred the tax agency to action.
The IRS also concluded that the old form was not meeting its own tax compliance interests, or the transparency and accountability needs of states, and the public and local communities served by exempt organizations.
Structure and content changes
How has the form really changed? The best way to find out is to get a copy and read it—every word of it, including the draft instructions. The official form has not yet been printed, but a copy of the final draft can be viewed and downloaded from the IRS web site (www.irs.gov/charities). The nearest IRS office, an accountant or tax preparer can also provide a copy for review.
The revised Form 990 consists of an 11-page core form that must be completed by all Form 990 filers, including more than 200,000 of the largest public charities, social welfare organizations, advocacy groups and professional associations. A summary page provides a snapshot of key financial and operating information, and displays a two-year comparison summary of financial information for the organization.
In order to provide context before proceeding on to sections on tax compliance, governance, compensation and financial statements, the core form asks for a description of the organization’s program service accomplishments immediately after the summary page.
In addition, there are 16 schedules (see Table 1) designed to collect information from organizations that perform specific activities. A checklist is included to help determine which schedules (if any) an organization must complete.
Many of the questions on the new core form and schedules probe deeply into the inner workings of not-for-profit management and governance. Some samples of the scope of information requested:
- How is executive compensation set by the board? Was it reviewed by an independent person?
- What is your expense substantiation policy?
- What types of payments are made to the board?
- What are your conflict-of-interest policies related to upper management and the board?
- How has your organization tracked and reported specific program measurements for clients served, days of care, number of sessions, events held, etc?
- How many fundraising events raised more than $5,000?
These are not questions that one individual can or should answer on their own. If the answer to any of the questions is that there is no policy or procedure in place to address the issue, the implication is that there should be. Starting to develop required policies from scratch will take time, especially for complicated policies like conflicts of interest (a sample conflict of interest policy can be found at www.irs.gov/instructions/1023).
The IRS will be scrutinizing these answers closely, so it is critical that they be answered accurately and completely to avoid further inquiries or audits. Drafting, editing and finalizing the language will likely take time and effort on the part of employees and governing bodies.
Who must file Form 990?
Form 990 is the primary reporting mechanism for organizations that are exempt from federal income tax under IRS Code Section 501(c). Less detailed versions of Form 990, including Form 990-EZ, are available to certain organizations based on their annual revenues and assets.
Affected organizations will be phased in over the next two years, but the majority of those with more than $1 million in annual revenues and more than $2.5 million in assets will be required to file Form 990 for tax year 2008. Every organization that is required to file the new form must complete all of the core form (Parts I through XI). By completing Part IV, Checklist of Required Schedules, the organization determines which schedules must be completed.
Public inspection copy of tax returns
The tax-exempt status of not-for-profits brings with it certain responsibilities to the public. One of those responsibilities is public disclosure of the information filed on Form 990. Exempt organizations must make the following applications and returns available for public inspection:
- Forms 990, 990-EZ, 990-PF, 990-BL, 1023 (501(c)(3) application), 1024 (non-501(c)(3) application), 8871 and 8872
- Annual returns must be available for a three-year period beginning with the due date of the return plus extensions.
• Form 990-T filed after Aug. 17, 2006
- An exempt organization is not required to disclose Schedule K-1 of Form 1065 or Schedule A of Form 990-BL.
- With the exception of private foundations, exempt organizations are not required to disclose the name and address of any contributor to the organization.
The bottom line for most not-for-profits is that change is here to stay for annual IRS filings. It’s all part of the greater accountability and transparency requirements being imposed in both the public and private sectors. Most tax professionals are advising their not-for-profit clients to begin reviewing and preparing material for the new Form 990 at the earliest possible opportunity. Last-minute scrambling can only lead to unnecessary pressure and increase the risk of omissions and errors.iBi
Sam Cigelnik is a senior tax manager at Clifton Gunderson. He can be reached at 309-671-4500 or [email protected] Download a free copy of our white paper, Understanding the Design of Form 990, in the Resource Library section of www.cliftoncpa.com.