Form 990 To Undergo Further Changes

A number of changes will be incorporated into the Internal Revenue Service’s new draft Form 990 for tax exempt organizations, as a result of comments received from hundreds of organizations. Comments on the draft form, released in June, were due in September.

Some of the biggest changes will come on the summary page of the form, on which the exempt organization briefly describes its key financial, compensation, governance and operational information. Some percentages will be eliminated from the summary page of the form, including those on compensation, fundraising, gaming and an expense-to-net-assets percentage. Additionally, the revenues and expenses portion of the summary page will provide a financial information picture of both the current year and the prior year, to allow a better view of material changes in revenues and expenses.

The IRS will move to the front of the form questions on an organization’s activities and accomplishments, which were located at the back of the redesigned core form. In doing so, the IRS noted that they were persuaded that “it was appropriate for these organizations to be able to tell their mission and activity story before getting into other things.”

Many questions about the Form have revolved around Schedule H for hospitals. Indeed, approximately onethird of the comments received by the IRS related to hospitals. With regard to the questions of bad debt and Medicare shortfall, some decisions are still up in the air.

The IRS says that it most likely will ask for bad debt expense and Medicare shortfall information outside of the community benefit report. On some issues there is no clear agreement on whether an activity clearly fits within the definition of community benefit. For example, while the Catholic Health Association has stated that activities such as the acquisition by a hospital of an affordable housing project should be considered as providing a community benefit, the IRS is not yet convinced on this point.

The Part III statement on governance, management and financial reporting likely will remain but be modified. The comments on that section likely will lead to a longer section in which some of the questions that appeared elsewhere have been moved there. Finally, there is a “realistic chance” that some transitional relief may be granted for those who must comply for the 2008 tax year, although final decisions on that have not yet been made. The areas most likely to get such potential relief would be those with new additional accounting and record-keeping requirements, such as Schedule H for hospitals, Schedule K for bonds and Schedule F for foreign activity, according to the IRS.

Major areas of comments included the following:

• The summary pages

• Content

• Ratios and metrics

• The focus of the Form, e.g., whether it should be about tax compliance, transparency, or promotion of best practices

• How integrated with state reporting the Form should be

• Sequencing of the core parts and schedules

• Appropriate order

• Overall reporting and recordkeeping burden on various sizes of organizations, from the smallest to the largest

• Whether certain information should be made public, based either on security or privacy concerns.

The IRS views the Form 990 as more than a tax compliance form due to its public availability. From the perspective of the IRS, the purpose of the Form is tax compliance, transparency, accountability, integrating a form that the states use, and education.

Governance Guide for Board Practices Released

On October 18, the Panel on the Nonprofit Sector, a national panel to improve accountability and ethical practice in charitable organizations that is comprised of 600 of the nation’s largest nonprofit organizations, released its Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations. The guide represents the first time that charities and foundations have come together to develop principles of ethical conduct, accountability and transparency that they aspire to and encourage all organizations to follow. The guide is a practical tool for charitable organizations to examine their operations and evaluate where they can improve.

The 33 principles constitute voluntary standards which address legal issues, governance, financial oversight and fundraising and purport to guide nonprofits to higher standards of governance. The Principles for Good Governance and Ethical Practice are organized into four categories:

1. Legal Compliance and Public Disclosure: responsibilities and practices, such as implementing conflict of interest and whistleblower policies, that will assist charitable organizations in complying with their legal obligations and providing information to the public.

2. Effective Governance: policies and procedures a board of directors should implement to fulfill its oversight and governance responsibilities effectively.

3. Strong Financial Oversight: policies and procedures an organization should follow to ensure wise stewardship of charitable resources.

4. Responsible Fundraising: policies and procedures organizations that solicit funds from the public should follow to build donor support and confidence.

The principles are available on the Nonprofit panel website.

An example of the principles includes No. 10, which deals with the size of a board of directors. Under this principle, a board could establish its own size and structure to be reviewed periodically. Another example would be principle No. 20, which states that board members generally are expected to serve without compensation.

The Some of the principles may not be needed by organizations that already have relevant procedures in place. Further, all principles may not apply to the operations of an organization.

Quick Hits

Ohio Attorney General on the Nonprofit Sector
Ohio Attorney General Marc Dann stated at the recent annual conference of the Ohio Grantmakers Forum that Ohio aggressively will enforce laws governing charities’ use of their assets and hold accountable nonprofits that abuse their status. Dann said he has “specific regulator concern” about executive compensation and travel reimbursement and about whether tax exemption is appropriate, noting particularly those involved in health care and other economic activities. Other concerns he mentioned were conflicts of interest and fair billing and collection practices for hospitals and health care agencies. He stressed the necessity for charity trustees and staff to understand their fiduciary duties and to put policies in place addressing conflicts of interest of the members.

Inspector General Releases Smithsonian Audit Report
According to an audit report from the Smithsonian Inspector General dated October 13, the Smithsonian Institution from 2002 to 2006 failed to report taxable income paid for employees’ moving expenses and paid in connection with recruiting new employees. The Smithsonian spent almost $2 million to attract new employees or move existing ones, reporting income of approximately $1.2 million on W-2 forms for that type of payment when it should have reported approximately $1.4 million, the report said. While it was auditing executive compensation, the Smithsonian Inspector General Ryan said the office discovered that the Smithsonian had weak policies and procedures for relocation and recruitment payments. The problems were attributed to decentralized organization at the museum, weak procedures and not enough training on data entry and reporting.

IRS Releases Reference Guide Sheets on Limited Liability Companies
On September 28, the IRS released a Reference Guide Sheet designed to help process requests for information on the federal tax treatment of limited liability companies associated with tax-exempt organizations and 501(c)(3) exemption applications filed by limited liability companies. Part I addresses general federal tax issues that may arise regarding an LLC that is associated with a taxexempt organization. Part II addresses issues that may arise when an LLC applies for exemption under 501(c)(3) separately from its owner. The Guide also references additional resources and a model information letter.

Endowment Fund Payouts Considered by CRS
The Congressional Research Service (CRS) has determined that using a portion of a distribution from a university or college endowment fund “could mitigate or eliminate tuition growth and substantially expand student aid” for many institutions of higher learning. These findings, reported in a memorandum made available October 2, also discussed the tax benefits associated with endowment funds. The findings in the memo were generated in response to a request from Senate Finance Committee Chairman Max Baucus (D-Mont.) and Sen. Chuck Grassley (R-Iowa).