IRS Releases Redesigned Form 990

The IRS has released for public comment a discussion draft of the redesigned Form 990, which is the information return filed by tax-exempt organizations. Comments are due no later than September 14, 2007. The IRS anticipates using the form for the 2008 tax year (returns filed in 2009). This is a very significant development, as it may impact the way the public views an organization, as well as an organization’s susceptibility to enforcement action. The form can be found on the IRS website.

The IRS advises that the Form 990 was last redesigned substantially in 1979, and the tax-exempt sector has undergone tremendous growth and change since that time. It asserts that the current Form 990 has not kept pace with the changes. The redesign of the Form 990 is based on three guiding principles: enhanced transparency; promoting tax compliance; and minimizing the burden on filing organizations.

Highlights of Revised Form

The redesigned Form 990 consists of a 10-page core form, plus 15 schedules to be completed as applicable by various types of organizations. The most remarkable revision of the core form is the first page, which is a summary page to be completed by all Form 990 filers. The summary provides information regarding: the number of individuals receiving compensation in excess of $100,000; the highest compensation amount for any one individual; the number of members of the governing body and, of such number, how many are independent members; and the amount of program service expenses, management expenses and fundraising expenses. It requires the amount of fundraising expenses to be converted into a percentage of the contributions received by the organization.

Part II of the core form requires expanded reporting regarding compensation of officers, directors, trustees and disqualified persons. In a change from the current form, compensation must be based on amounts reported on W-2s issued to employees and 1099s issued to directors and other independent contractors. “Officers” has an expansive definition which includes anyone, regardless of title, who has or shares responsibility for implementing the decisions of the governing body, supervising the management, administration or operation of the organization or for managing the finances of the organization. It also includes anyone identified as an officer in the governing documents or who qualifies as such under state law.

Part III of the core form requires expanded governance disclosure. This includes information regarding many governance matters which are not requirements for tax exemption, including: board composition, extent of board review of Forms 990 prior to filing, use of an audit committee, existence of whistle-blower and document retention/destruction policies, maintenance of contemporaneous board minutes, information regarding who prepares financial statements and the level of independent accountant review of such statements.

Part VII of the core form requires statements regarding the general activities of the organization and disclosure of whether the organization engaged in certain highly scrutinized activities, such as conservation easements, provision of credit counseling and maintenance of donoradvised funds. Organizations must also disclose activities conducted through partnerships and joint ventures and the existence of written policies regarding such activities.

As indicated above, there are 15 schedules to be completed as applicable. For example:

1. Schedule A requires reporting supplemental information by all 501(c)(3) organizations.

2. Schedule D requires supplemental financial statement information. One controversial requirement is a disclosure of the text of any footnote to an organization’s financial statement that reports an organization’s potential liability for uncertain tax positions under FIN 48. This requirement is certain to receive comments during the comment period, as it could easily be used for selection of returns for examination.

3. Schedule H is an expansive schedule required to be completed by hospitals. As currently drafted, the term “hospital” includes any organization that “operates or maintains a facility to provide hospital or medical care.” This definition, if kept, could sweep in many organizations that are not traditional hospitals. The IRS is seeking comments on this issue.

Recommendations

Organizations should become familiar with the new form now. Completing a “test” Form 990 for this purpose is advisable. This will allow organizations (and their audit committees) to become familiar with the information which must begin to be tracked to properly complete the form and to develop procedures to capture this information. In addition, strategies can be developed to ensure that the Form 990 presents the organization accurately and in the best light.

If you have any questions about this article, please contact Jerry O. Allen at 614.227.8834 or .jallen@bricker.com.

Quick Hits

Senate Finance Committee releases IRS response on tax-exempt compliance issues
In March, 2007, Senate Finance Committee Chairman Max Baucus and Ranking Member Charles Grassley asked the IRS to answer tough questions on issues relating to the tax-exempt sector. In releasing the report, Grassley said, “Big problems remain across the board.” Issues identified included reported high salaries, generous fringe bene.ts and loans to executives of exempt organizations, according to Grassley.

The IRS notifies small organizations of “e-Postcard 990” filing requirements
The IRS began mailing educational letters this month to more than 650,000 small tax-exempt organizations that may be required now to file a Form 990. As part of the Pension Protection Act of 2006, a majority of small organizations will be required to submit e- Postcards, beginning in 2008. Previously, these small organizations, with gross receipts of $25,000 or less, were not required to file returns.

Church group requests exemption from published disclosure of Forms 990-T
The Church Alliance requested that churches be exempted from the requirement that Forms 990-T be available for public inspection, which was a change in law added by the Pension Protection Act of 2006. Form 990-T is filed to report unrelated business income. It does not appear promising at this point that churches will be exempted. Thus, churches, like all exempt organizations, must prepare themselves for public inspection of these returns. An alternative may be to form a for-profit subsidiary to conduct these activities, whose tax returns would remain confidential.

Legislation urged to require 5 percent charity care by nonprofit hospitals
The Republican staff members of the Senate Finance Committee proposed adoption of legislation that would establish strict requirements for tax exemption for nonpro.t hospitals. One controversial requirement would require that each hospital provide at least 5 percent in uncompensated charity care, using strict definitions of what qualifies as charity care. In addition, each hospital would be required to develop and publicize a written charity care policy. Hospitals also could not charge indigent patients without insurance more than the hospital’s cost for their treatment. Committee Chairman Charles Rangel has not expressed a view on these proposals, and the likelihood of enactment is unclear.

United States Supreme Court denies standing in action against Office of Faith-Based Initiatives
In a 5-to-4 decision, the Court, in Hein v. Freedom from Religion Foundation, ruled that only a person or organization that is directly harmed by the White House Office of Faith-Based Initiatives has a legal right to sue. This decision was adverse to groups opposing the White House’s work to help religious groups seeking governmental aid. The case focused on who has standing to sue, but did not reach the merits. Therefore, it is possible that further assaults on the constitutionality of the unit may be forthcoming.

New IRS Information Tool: “Lifecycles of Tax-Exempt Organizations”
The IRS has added a new information tool to its website, entitled Lifecycles of Tax-Exempt Organizations. These tools include information regarding documentation needed to create an organization under state law, acquire an employer identification number, apply for exemption (including links to forms), required filings, information on ongoing compliance and reporting significant events.