Are you ready for the redesigned IRS Form 990? More disclosure, more detailed schedules and more pitfalls abound
By Larry Levy and Cathleen West
In December of last year, the IRS released the first major redesign of the form 990 in nearly 30 years in order to keep pace with the increasing size, diversity and complexity of the tax-exempt sector. The new design is consistent with the IRS's three guiding principles of enhancing transparency, promoting tax compliance, and minimizing taxpayer burden.
The core form has been rearranged, and new schedules have been added, converting the two existing schedules into sixteen detailed schedules. For organizations with gross receipts of less than $1.0 million and total assets of less than $2.5 million, there will be a temporary transition period permitting the use of the Form 990EZ.
The “Statement of Program Accomplishments” was moved to the front of the form to allow organizations to “tell their story” first. There is now a Summary Page, which provides a snapshot of the organization overall. Other new features include a section on governance, expanded disclosure of compensation, and new schedules focusing on fundraising, lobbying and political activities.
Governance, Management and Financial Reporting
> Practice Tip: Take steps now to ensure well-defined governance and management procedures by implementing conflicts policies, and review your process for determining compensation for top management officials.
Part VI of the new form 990 will shed light on an organization’s internal corporate governance and management. This part requests information about policies which are not actually required by law, which led some commentators to express concerns that good governance policies could become “de facto legal requirements.” However, the IRS believes that having an independent board and well-defined governance and management policies and practices increases the likelihood that an organization is in fact operating in compliance with federal tax law. Questions include inquiries about the number of independent voting members, a delegation of duties to a management company, a review of the Form 990 by the organization’s governing body, and the organization’s conflicts, whistleblower and document retention policies. Notably, there is a question asking about the process for determining compensation for top management officials. Some of this information is already on file with the IRS. For example, in the application for recognition of exemption (Form 1023 for a 501 (c) (3)), applicants report in Part V if there is a conflicts of interest policy, procedures for setting compensation, and information regarding the independence of the Board.
> Practice Tip: Review the organization’s filings with the IRS to ensure the organization is in compliance or has properly amended such filings to reflect current practices.
Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees and Independent Contractors
> Practice Tip: Organizations should have written compensation arrangements for top management, which are substantiated by the use of comparability surveys, and approved by an independent board of directors.
Part VII of the new form 990 requires the reporting of executive compensation using Form W-2 and Form 1099-MISC figures on a calendar year basis to reduce the degree of subjectivity which previously existed in the reporting of executive compensation. (Based on public comment, the new 990 also incorporates subjective types of executive compensation such as fringe benefits and retirement plans in a separate category.)
The reporting of compensation regarding officers, directors, trustees, and key employees by all types of tax-exempt organizations continues to be required. The new 990 also extends the obligation for reporting highest compensated employees (HCEs) to all tax-exempt organizations, and not just to 501(c)(3)s, thereby increasing compensation reporting by non-charitable organizations that are similarly subject to a private inurement prohibition. The thresholds for reportable compensation for “key employees” is $150,000, and it was increased from $50,000 to $100,000 for HCEs. You should also note that the disclosure of the five highest compensated independent contractors (receiving more than $100,000) is reportable by all tax-exempt organizations. Finally, there is a new schedule J, devoted to additional disclosure of compensation information pertaining to former officers, directors etc., and to any individuals receiving compensation greater than $150,000.
> Practice Tip: Organizations should ensure that professional fundraising fees are reasonable and substantiated in light of increased public disclosure.
Parts VIII and IX require the disclosure of financial information related to fundraising events and gaming, and professional fundraising, respectively. Organizations which report more than $15,000 in contributions and gross income from fundraising or gaming, or professional fundraising fees of more than $15,000, are required to complete a new schedule G.
Schedule G requires the disclosure of fundraising methods which is similar to information that is required to be provided to the IRS in forms 1023 and 1024. In addition, organizations need to name the ten highest paid fundraisers who received at least $5,000 and their compensation. Organizations are also required to list the states where they are registered with state charities bureaus, presumably enabling states to cross-check publicly disclosed form 990s for compliance with their state charities bureau registration laws. Whether this opens the door for states to aggressively pursue registration by those using internet fund raising or “walks” and similar activities that invite participants to solicit friends and family in a variety of jurisdictions is an open question.
Political Campaign and Lobbying Activities
> Practice Tip: All 501(c) organizations, especially 501(c)(3)s, should review the rules governing permissible lobbying or political activities. 501(c)(3) organizations are prohibited from engaging in political campaign activities, and are limited in the amount of lobbying they can conduct.
The new form 990 pulls out questions relating to political campaign and lobbying activities from the core of the form and injects them into a new schedule, Schedule C, containing enhanced political activity questions that reflect the IRS’s “Political Activity Compliance Initiative (PACI).” Included in the new schedule are now two different worksheets for 501(c)(3) organizations to report their lobbying activities: one is for those who have made a 501(h) election, and one for those who have not. For non-501(c)(3) organizations, there are now extensive disclosures relating to the amounts spent on direct and indirect political activities, including a chart in which to list the names, EINs, and amounts contributed to all 527s. And all exempt organizations must now describe the organization’s direct and indirect political campaign activities, including political expenditures and volunteer hours.
The legal and regulatory landscape in 2008 requires greater disclosure, transparency and accountability by not for profit entities and entities interfacing with the government. Now is the time to consult your legal counsel or accounting professional to ensure that your organization has systems in place to collect the newly reportable data and have appropriate programs and policies in place.
Federal lobbyists and firms employing or retaining federally registered lobbyists are now subject to the Honest Leadership and Open Government Act, requiring significantly enhanced disclosures and new restrictions which may impact the ability of non-profit organizations to fundraise. In our next column, we will explore the new rules and their impact on not for profits.
About the authors:
Larry Levy is the resident Partner in the New York City office of HoltzmanVogel PLLC, a boutique firm that provides counseling and compliance services to individuals, corporations, non-profit organizations, trade associations, PACs and candidates engaged in influencing the public policy arena or otherwise subject to regulatory controls. He has practiced law for over 30 years counseling government officials, business leaders and not for profit entities. He can be reached at LarryLevy@holtzmanlaw.net .
Cathleen West is a senior associate in the Virginia office of HoltzmanVogel PLLC.
She has an LL.M in Tax Law and previously served as a Fellow on the U.S. Senate Finance Committee specializing in tax and employee benefits law. Her practice focuses on tax exempt organization, government ethics, and lobbying compliance. Ms. West can be reached at CWest@holtzmanlaw.net .
(originally published in August 2008)