From the May 2008 issue of Investment Advisor • Subscribe!

Changes in Charitable Compliance

Revised not-for-profit reporting offers opportunities for advisors

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Warning! Warning! Do not drive or operate any machinery or heavy equipment while reading this article. The reading of this article may cause sudden dizziness or sleepiness. A grande skim latte with a double shot of espresso is highly recommended before continuing. Why the warning? Because this month we are taking a look into the newly issued redesigned IRS Form 990 --Return of Organization Exempt From Income Tax. On December 20, 2007, the IRS redesigned these forms and organizations will begin using them for the 2008 tax year (returns filed in 2009).

The discussion is somewhat tedious, but imperative if you are working with or trying to work with the nonprofit sector. The importance of this should not be underestimated, since the 990 is not only the primary tax compliance tool for nonprofits, it is the leading source of information for regulators, policymakers, the media, donors, and you.

This is big news in the not-for-profit world since there has not been a change to this form in almost 30 years. While the form had not changed for three decades, the non-profit world has changed significantly in that time. Not only are nonprofits more complex, diverse, and competitive than thirty years ago, their donors are much more sophisticated and require greater transparency than 30 years ago.

The redesign of Form 990 is based on three guiding principles:

  1. Enhancing transparency to provide the IRS and the public with a realistic picture of the organization;
  2. Promoting compliance by accurately reflecting the organization's operations so the IRS can efficiently assess the risk of noncompliance; and
  3. Minimizing the burden on the filing organizations.

Digesting the New Form

The new 990 is comprised of an 11-page core form and 16 schedules. It requires exempt organizations to provide considerably more information about their internal policies and practices than has been previously required, as well as information in a number of areas not addressed by the current form and greater detail than had been required in certain areas. The new core form allows an organization to describe its exempt accomplishments and mission up-front, thus The Statement of Program Service Accomplishments is moved to the front of the form.

The new version also provides more opportunities throughout the form for the organization to explain its activities. In addition, all questions regarding general activities and tax compliance are consolidated and executive compensation, governance, and other financial statement information sections are moved to the back of the form. Some examples of changes and new information required to be reported is as follows:

Governance. New governance questions request information about organizational policies, including those concerning conflicts of interest, whistleblowers, document retention, and joint ventures. The form also requests information about the composition and independence of the governing body, as well as governance practices such as documentation of board and committee actions, approval of compensation, and review of the Form 990. The section is broken down into three sub-parts: governing body, policies, and disclosures.

Compensation. The core form requests new information about compensation of directors, officers, key employees, and highly compensated independent contractors. The form clarifies that reported compensation should include W-2 or 1099 compensation. It should also include other compensation, including that received from related organizations. Compensation must be reported on a calendar-year basis even if the organization is a fiscal-year taxpayer.

Public Charity Status. Schedule A requests more detailed information concerning the basis for a 501(c) (3) organization's public charity status, including additional information concerning supporting organizations. For publicly supported organizations described in Section 170(b)(1)(A)(vi) that do not meet the 33 1/3% public support test, the form requires an explanation of how the organization meets the 10% facts and circumstances test.

Supplemental Financial Statements. Schedule D requests detailed information concerning donor-advised funds; conservation easements; art, historical treasures, and similar assets; trust, escrow, and custodial arrangements; endowments; and investments.

Fundraising and Gaming. Schedule G solicits information about fundraising methods and gaming activities, as well as expenses associated with these activities.

Hospitals. Schedule H requires licensed hospitals exempt under Section 501(c)(3) to provide a description of the charity care and other community benefits they provide. Schedule H also requests information about community-building activities, bad debt, Medicare and collection practices, and transactions with management companies and joint ventures.

Specific Compensation. Schedule J requests a description of specific types of compensation, including first-class travel, companion travel, gross-up payments to cover taxes, housing allowances, club dues, and personal services such as a maid or chauffeur. The organization must also describe the process used to approve executive compensation and provide specific information about deferred compensation, incentive compensation, nontaxable benefits, and other compensation.

Transactions with Interested Person. Schedule L requires organizations to report excess benefit transactions, loans, grants, and business transactions with directors, officers, and key employees.

Non-cash Contributions. Schedule M requests information about non-cash gifts, gift-acceptance policies, number of IRS Forms 8283 filed, and use of third parties or related organizations to process non-cash gifts.

Greater Explanations. New schedule O provides explanations and narrative responses to the form's questions that the organization believes are necessary for clarification.

Related Organizations. Schedule R requires organizations to identify and provide information about "disregarded" entities, such as single-member LLCs, related tax-exempt organizations, related partnerships, related taxable entities, and transactions with related organizations.

In connection with the revisions, the IRS also granted transitional relief to smaller organizations. A phase-in process over three years has been established. For the 2008 tax year, organizations with gross receipts of less than $1 million and assets of less than $2.5 million may file Form 990-EZ rather than the new Form 990.

For the 2009 tax year, organizations with less than $500,000 in gross receipts and $1.25 million in assets may file Form 990-EZ. Thereafter, organizations with less than $200,000 in gross receipts and $500,000 in assets may file Form 990-EZ. Starting in 2010, the threshold requirements for filing a 990 or 990-EZ will double from $25,000 in gross receipts to $50,000. Organizations with less than $50,000 in gross receipts will have the option to file Form 990-N, the new "postcard" return, rather than Form 990 or 990-EZ.

Hospitals and organizations with tax-exempt bonds get a short reprieve with respect to new schedules that apply to them. For 2008, only limited identifying information must be completed on Schedules H (Hospitals) and K (Tax-Exempt Bonds). Schedules H and K must be completed in their entirety for the 2009 tax year.

As you have probably guessed, many nonprofits will find an increased burden in completing the new form and may not be comfortable with some of the new disclosures they will be required to make. Audit committees, board members, and management should become cognizant of the new requirements well before implementation in order to avoid surprises.

A Value-Added Opportunity

Here is where you can come in. This is a perfect opportunity to add value to an organization, especially if you partner up with accountants who are very familiar with these changes in order to counsel non-profits. Become familiar with the new form and help your nonprofit clients and prospects assess their policies and procedures with respect to the new reporting requirements.

You may want to suggest that these organizations do the following:

  • Review and, if necessary, revise their governance policies and practices;
  • As appropriate, adopt policies and procedures to address issues covered in the new form, such as whistleblowers, document retention, and compensation;
  • Develop and implement new internal tracking and reporting procedures to capture relevant information.

The 2008 Form 990, as well as other key information describing the new form, is available on the IRS Web site, www.irs.gov/eo.


Susan L. Hirshman, CFP, CPA, CFA, CLU, is a managing director for JPMorgan Asset Management in New York. In that position, she develops strategies to provide wealth solutions to the affluent market. She can be reached at susan.l.hirshman@jpmorgan.com.

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