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Is Your Charity Ready for the New Form 990?

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The public has a new window into nonprofit governance, courtesy of the recent work of the Internal Revenue Service in overhauling its Form 990 (Return of Organization Exempt From Income Tax).  Form 990 must be filed annually by public charities and certain other tax-exempt organizations.  This revision, effective for tax years beginning in 2008, marks the most significant change to the form in nearly thirty years.

The change that has garnered the most attention is a new set of questions devoted to the organization’s governing body, management policies and disclosure to its constituents.  These questions are meant to elicit information on policies not required by the tax code, such as whether the board of directors was provided with the organization’s Form 990 before it was filed.  Yet the Service maintains that these inquiries are within its purview, because it sees good governance as fostering tax compliance.

The enhanced transparency brought by the new Form 990 extends to the organization’s success stories.  There are prominent places where an organization can showcase its mission and program service accomplishments.  Because the giving public and the media will have ready access to the Form 990 on the Internet – whether through Guidestar or the organization’s own website -- it is incumbent on the organization to take advantage of the public relations opportunity that the form provides.

The revisions to Form 990 require the immediate attention of governing boards and management.  Policies must be reviewed and systems must be put in place to assemble the necessary information.  For example, the Service has advised that the questions about governance, management and disclosure may be answered affirmatively by an organization only if the policies are adopted by its board of directors before the close of the 2008 tax year.

Governance, Management and Disclosure

To complete the revised Form 990, an organization must be prepared to answer these questions:

  • Does any officer, director, trustee or key employee have a family relationship or a business relationship with any other officer, director, trustee or key employee?
  • Did the organization become aware of a material diversion of its assets during the year?
  • Does the organization contemporaneously document meetings or written actions undertaken by the governing body and committees acting on its behalf?
  • Does the organization have a conflict of interest policy requiring officers, directors, trustees and key employees to disclose annually any interest that could give rise to conflicts and how does it monitor and enforce compliance with the policy?
  • Does the organization have a whistleblower policy?  A document retention and destruction policy?
  • What is the organization’s process for determining the compensation of its top management official and other officers and key employees?  Does it involve review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision?
  • Has the organization invested in, contributed assets to, or participated in a joint venture and does it have a policy for entering into such joint ventures?
  • How does the organization make its governing documents, conflict of interest policy and financial statements available to the public?

Compensation and Transactions with Interested Persons

The revised Form 990 requires more extensive reporting of compensation.  Schedule J has been added, calling for detailed information for those individuals whose compensation packages from the organization and related organizations exceed certain thresholds, as well as the disclosure of an odd assortment of perks such as the payment of health club dues, maid services and the cost of travel for companions.  In addition, new Schedule L requires the reporting of transactions with interested persons, including current and former officers, directors and key employees.  Such transactions include loans, grants or other assistance, and business dealings.

Highlights of the Other New Schedules

An organization must also be prepared to complete the following new set of schedules.  While a number of the questions come from the old form, much of the required information is either new or has taken on a new importance.

  • Non-cash contributions, including whether the organization has a gift acceptance policy for non-standard contributions, on Schedule M.
  • Political campaign and lobbying activities on Schedule C.
  • Activities outside the United States on Schedule F.
  • For hospitals, community benefit, collection practices and facility information, among other things, on Schedule H.  However, only the list of facilities must be completed for tax year 2008; all other parts will be required beginning in 2009.
  • Supplemental information regarding financial statements on Schedule D.
  • Fundraising or gaming activities on Schedule G.
  • Tax-exempt bonds on Schedule K.  However, only the list of outstanding bond issues is required for 2008; all other parts must be completed beginning in 2009.

There are still open questions about the new Form 990, because many of the reporting requirements depend on definitions contained in the Instructions.  A draft of these Instructions was released for comment in April.  The Service expects to issue the final Instructions at the beginning of August.

This summary was prepared by the members of Nutter Charitable Advisors.  For more information on the many requirements of the new Form 990, or on charitable giving or non-profit organizations in general, please contact your attorney at Nutter at 617-439-2000.

Circular 230 Disclosure:  To ensure compliance with IRS Circular 230, we inform you that any federal tax advice included in this communication is not intended or written to be used, and it cannot be used, for the purpose of (i) avoiding the imposition of federal tax penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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