Directors And Executive Directors Need To Act Before December 31, 2008.

For the 2008 tax year, there will be a new Form 990, the information return for most 501(c) tax-exempt organizations other than private foundations.  The old Form 990 was primarily a financial information return, but the new draft Form 990 is now more of an annual report that provides a wealth of information to the stakeholders of an entity (i.e., public and regulatory authorities).   The final draft of the new Form 990 is expected to be substantially the same.  For 2008, the new 990 applies to organizations with gross receipts greater than $1,000,000 or total assets of $2,000,000 or more; for 2009 the amounts are $500,000 and $1,250,000 respectively, and for 2010 and thereafter $200,000 and $500,000 respectively. 

The new form is an outgrowth of Congressional investigations of abuses and front page newspaper stories of excessive payments by charities to or for the benefit of its management.  The IRS' new information return requires the organization to not only provide financial data but requires the organization to provide a substantial amount of information relative to its governance, its administration, and expenditure of its resources. Board members and executive directors of tax-exempt organizations would be well-advised to familiarize themselves with the new draft 990 and make any necessary changes in order to answer the important questions appropriately.

The new draft 990 questions below are just a sample of the substance of the information that the IRS will be requesting.  For example, in order to answer the questions in the affirmative, your organization's policies and procedures will need to be in place and/or revisited before Dec. 31, 2008 (e.g., the conflicts of interest policy, the whistleblower policy and the document retention policy as well as other policies).  In addition, organizations may want to closely scrutinize both employee compensation and transactions with related parties to assure there is appropriate documentation supporting no excess benefits.  

The new draft Form 900 makes this an opportune time for organizations to establish and/or review their internal governance policies.  A word of caution in this regard is in order. Tax-exempt organizations will be tempted to use the form policies, however, "one size does not fit all."  The potential problem with form policies is that the form policies may not be workable within the organization and the organization may not be able to adhere to and administer such policies efficiently.  To perpetuate good governance, it is not enough to have adopted the policies, the Board must actually operate and adhere to such policies.  

An effective action plan to consider in light of the new draft Form 990 should include the following elements:

  1. Review the questions

  2. Review or establish new policies before the end of the 2008

  3. Review documentation for supporting compensation and other payments

  4. Review whether compensation paid by related entities will be disclosed

  5. Review business transactions and loans involving interested persons (e.g., current and former management, governing body, and related parties).  

While the new draft Form 990 might present some initial challenges to board members and executive directors, the public will ultimately benefit from this reform effort as a result of the increased transparency of the operations and activities of nonprofit 501(c) organizations. 

The New Draft IRS Form 990

The following, in substance, are some of the questions contained in the new 990:

  • Does the organization have a written conflict of interest policy; and if so, (i) is the governing body required to disclose annually any interest that could give rise to conflicts; and (ii) is it regularly and consistently monitored and enforced?

  • Does the organization have a written whistleblower policy?

  • Does the organization have a written document retention and destruction policy?

  • Did the process for determining compensation for management include a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberations and decisions?  A description of the process is required.

  • In determining management compensation, which applied: (i) a compensation committee, (ii) independent compensation consultant, (iii) written employment contract, (iv) compensation survey or study?

  • Did the organization provide any of the following to current and former officers, directors, trustees, key employees (regardless of whether compensated) and highest compensated employees; (i) first class or charter travel, (ii) travel for companions, (iii) tax indemnification gross-up payments, (iv) discretionary spending account, (v) housing allowance or residence for personal use, (vi) payments for business use of personal residence, (vii) health or social club dues or initiation fees, or (viii) personal services (e.g., maid, chauffeur, chef?)

  • Did the organization follow a written policy requiring substantiation for the payment or reimbursement of the expenses described in the preceding question?  

  • Did the compensation included from the organization and related entities include the following categories:  (i) base pay, (ii) bonus and incentive pay, (iii) other compensation (iv) deferred compensation and (v) nontaxable benefits?

  • Disclosure of related organization transactions and certain unrelated partnerships?

  • Any officers, directors, trustees have family or business relationships with other officers, directors or trustees?

  • Has management been delegated to a management company?

  • Was there a material diversion of organization's assets?

  • Did the governing body and committees document meetings?

  • Did the governing body receive a copy of 990 before filing? 

WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE PRECEDING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW.  THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION.  EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

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.