By Kelly Frank, CPA, J.H. Cohn LLP
It's been almost a year since the release of the "new" Form 990 instructions, yet many public charities are just now wrestling with its broader disclosure requirements. Most agree that the most significant difference between the old and new forms can be found in the areas of governance and internal controls including document retention, conflicts of interest, and compensation.
A Brief Recap
The new Form 990, which hadn't been revised since 1979, represents a major change in reporting. In keeping with the times, there is a strong emphasis on transparency including disclosure about conflicts of interest, transactions with related parties, and compensation. According to the IRS, the new form enhances transparency, promotes tax compliance, and minimizes the burden on the filing organization. Some of the major features of the new form include a new summary page; new governance section; enhanced reporting of executive compensation and an organization's relationships with insiders and other organizations; and new reporting for non-cash contributions, foreign activities, tax-exempt bonds, and hospitals. The form's 15 schedules request information about a variety of areas from fundraising to political campaigning to international activities. Are you operating within the law as a non-profit? Are proper policies and procedures in place and being adhered to? These are the kinds of questions that the IRS is seeking to answer through the questions posed throughout the form.
A number of December 31 filers completed their new Form 990s by May 15 which is the 990 due date. Many others have presumably requested an extension. The final extension date to complete and file Form 990 is November 15 if your organization has a December 31 year end.
Schedule O: An Opportunity to Further Explain
Much of the form and its schedules are set up in a "yes" and "no" format and many of the questions have to do with the establishment of proper policies and practices. In Part VI of the form, Governance, Management, and Disclosure, there are several new policy questions that must be answered. The IRS does maintain throughout, however, that none of these policies or practices are mandated, but they are viewed as hallmarks of a compliant organization—one that practices sound managerial and financial practices. The IRS states that",the absence of appropriate policies and procedures may lead to opportunities for excess benefit transactions, inurement, operation for non-exempt purposes, or other activities inconsistent with exempt status. Whether a particular policy, procedure, or practice should be adopted by an organization may depend on the organization's size, type, and culture. Accordingly, it is important that each organization consider the governance policies and practices that are most appropriate for that organization in assuring sound operations and compliance with tax law."
Certain "no" answers will raise a red flag in the eyes of the IRS and your organization's current and potential donors. For example, there is a question asking if the organization's financial statements have been audited. If you produce a consolidated financial statement with your parent and subsidiary organizations, you may still have to file two separate 990s because each entity has their own Employer Identification Number. So you may have to mark the box "no." The opportunity to provide an explanation— which is a perfectly good one—would be on Schedule O.
Schedule O—Supplemental Information to Form 990—is used to provide details when required by the core Form 990 or any of its schedules, or additional information, voluntarily, that is not required. The only issue it poses is that not everyone may read it. The IRS says it most definitely will, but your donors and other important, interested parties may not, especially if they are flipping through your Form 990 on the Guidestar Web site where many 990s are available for viewing in their entirety.
Is There a Records Retention Policy in Place?
Most notable among the broader disclosures required are those dealing with document retention and conflicts of interest. With regard to document retention, every organization should consider a policy that sets guidelines for the length of time that various documents—ranging from contracts to employment agreements to vendor communications and receipts— will be kept by the organization, electronically or otherwise. Maintaining a document retention policy establishes the time periods for which documents should be maintained and helps prevent any wrongful disposal or destruction of data.
Consulting with legal counsel, an organization should develop a policy containing a list of document categories with the amount of time that the organization should retain such documents. The policies should also contain a provision that prohibits employees, officers, and directors of the organization from destroying documents.
Conflicts of Interest Section Greatly Expanded
Conflicts of interest is not a new concept for the Form 990, but it has been greatly expanded. The IRS now wants more detail: what is the relationship between board members—familial, business, and otherwise? Are there any special deals or business arrangements that may create undue influence between board members?
What we recommend is to have legal counsel review the form and provide guidance on the proper wording that should be used. What the IRS wants to see is that there has been a concerted, reasonable attempt to procure this information. Any relevant information beyond the scope of the immediate answer should be included on Schedule O.
A Stronger Focus on Compensation
The IRS is extremely interested in knowing much more about the compensation of the key people within your organization. Now the IRS is requiring information on the cash and non-cash compensation of officers, directors, key employees, and any other "highly compensated individuals", such as calendar year-end W-2s. They also want details about former officers, directors, key employees, and trustees if they've been paid certain amounts over the current year. This is a considerable change from the previous reporting requirements.
In addition to the compensation, the IRS wants information about how the organization determines compensation including the review and approval of compensation by a governing board or compensation committee; the use of comparable data; and the contemporaneous, or real-time, documentation of compensation decisions.
With this plethora of sensitive information in the hands of the IRS and potentially in the public domain via Guidestar, there is clearly cause for concern. Donors and others can see exactly what the people at your exempt organization earn, which could potentially affect their giving decisions. As an example, it could be difficult to substantiate salaries to your employees when you are actively soliciting contributions. This can be explained further using Schedule O.
The Results of Providing All This Information?
It's too early to tell the real ramifications of the new Form 990, including donor reaction to the information contained within and the possibility of any IRS or regulatory scrutiny, based on the answers given. However, if organizations provide as much information as they can with the goal of being transparent, as well as being able to show that its policies and procedures are focused on the compliance of the organization, it will go a long way toward providing a good foundation between the IRS and the organization—as well as the organization and its donors—in the future._
Kelly Frank, CPA, is a J.H. Cohn LLP partner and practice director of the Firm's Not-For-Profit Industry Practice. She can be reached at [email protected] or 877-704-3500.