The accountants or accounting firms hired by nonprofits typically handle nonprofit tax returns -- Form 990 and Form 990-T -- completely and efficiently. But Form 990's Schedule K: Supplemental Information on Tax-Exempt Bonds often stumps even the best accountants at the best accounting firms. Accountants often send the schedule back to the nonprofit, asking the person responsible for the nonprofit's bond issues to complete it. The language of and questions asked on the schedule presume a complete understanding of the tax law and vocabulary of tax-exempt bond financing, which is a highly specialized and esoteric area most accountants have not studied, and of all relevant information about the organization's bond issues.
Complicating matters is the fact that the instructions accompanying Schedule K are not completely clear; the language for one section may appear to conflict with or contradict the language of another section. Reliance on the information provided in a prior year's Schedule K also may not be helpful, because both the information sought and the manner of the request have changed since the first Schedule K was added to Form 990 in 2010. In addition, new questions have been added more recently regarding both whether the nonprofit has developed written procedures to ensure compliance with the tax law affecting the exemption of interest on its bonds and whether the nonprofit has written procedures ensuring that violations of relevant tax rules have been "remediated" pursuant to certain Treasury regulations. These questions are designed by the Internal Revenue Service to require ongoing familiarity by the nonprofit with the tax law governing its bonds; the questions also require the nonprofit to monitor both the use and investment of bond proceeds before their expenditure and the use of facilities financed with bond proceeds. At numerous seminars discussing tax-exempt bonds, IRS and Treasury officials have indicated they review Schedule Ks as part of their process in deciding whether to audit certain bond issues.
Because many, if not most, nonprofit organizations are unfamiliar with the changes and complexities inherent in the tax law affecting their bonds, nonprofit organizations required to file Schedule K are well advised to seek assistance from their counsel or other advisers familiar with their tax-exempt bond issues and with current tax law in the area. In addition, nonprofits may wish to seek assistance in developing the written procedures asked about in the schedule. Attorneys at Day Pitney have assisted many nonprofits with both Schedule K and the development of these written procedures to ensure post-issuance compliance with all relevant tax requirements and to allow the nonprofit to favorably answer the questions on Schedule K.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
