Implications of the Revised Form 990
Recently, the IRS released a discussion draft of the revised Form 990, the annual reporting form for certain tax-exempt organizations. The revised Form 990 marks a significant redesign of the form, which, as a result of having only been revised on a piecemeal basis since 1979, failed to present a full picture of a tax-exempt organization because of unclear questions often arranged in an illogical sequence. The proposed form consists of a 10-page core form, 15 schedules and a summary page. The IRS’s stated objective for the new Form 990 is to enhance transparency, to promote compliance with the Internal Revenue Code, and to minimize burden, so that the form is "relatively easy to fill out, and there is not an undue recordkeeping burden imposed."
Despite the IRS’s intention to minimize the burden on tax-exempt organizations, we believe that all tax-exempt organizations – both large and small – will be impacted by the changes. The revised Form 990 requires a great level of detail, which will likely necessitate expensive recordkeeping procedures and professional assistance in tax preparation. The proposed Form 990 also requires tax-exempt organizations to provide detailed written narratives in response to several questions throughout the core form and schedules. Small tax-exempt organizations that are unable to afford professional services may be at a disadvantage in preparing these narratives, which, if inartfully written, may lead to further examination by the IRS. Larger tax-exempt organizations, such as hospitals, museums, and higher-education institutions, will suffer the largest recordkeeping and filing burdens. The revised Form 990 asks questions that specifically target hospitals, museums, and higher education institutions and require these institutions to provide new detailed information regarding their joint ventures, amounts and forms of compensation, use of tax-exempt bond financing, and endowments. The revised Form 990 also has a new schedule, which must be completed by any organization that operates a facility that provides health or medical care (including university-run hospitals. This schedules requests very detailed information on the facility’s charity care and community benefits policies and practices, and other measures that would help justify exempt status.
Areas of concern raised by members of Congress in recent years have found a niche in the revised Form 990. There are a myriad of questions throughout the core form and the schedules that concern joint ventures, compensation, insider loans, non-cash charitable donations, and tax arbitrage, among others. Because Form 990s are public documents, the new information requested may be fodder for future legislative and policy initiatives that may curtail exempt status in certain industries. For example, the rationale for the new Schedule H specifically notes the concerns regarding the difference between for-profit and nonprofit hospitals. Another example is that Congress may use the endowment distribution information provided in the new Schedule D to justify a payout requirement from such funds.
The IRS anticipates using the redesigned form for the 2008 tax year (i.e., returns filed in 2009), and seeks comments by no later than September 14, 2007. In light of the significant changes to the form and the attendant impact the revisions will have on an exempt organization’s operations, we strongly encourage tax-exempt organizations to submit comments and we are able to help with those submissions. The IRS is looking for comments relating to the overall impact the revised form will have on tax-exempt organizations, especially within specific industries. In addition, the IRS specifically requests comments regarding: (1) ways in which to minimize reporting burdens; (2) raising the Form 990 filing thresholds; (3) whether portions of the revised form can be used for Form 990-EZ; (4) the efficiency indicators on the summary page; (5) items regarding governance and management practices; (6) hospital reporting of community benefit (the revised form uses the model adopted by the Catholic Health Association); (7) how to define "relatedness" for compensation and other purposes; (8) whether transition periods are necessary to ease the burden; (9) privacy concerns; and (10) whether the IRS should preclude group rulings.
Revised Form 990 Overview
The 10-page core form of the revised Form 990 reorganizes many of the information requested in the original Form 990 and requests some additional more detailed information. Below are some areas of the revised form that may specifically warrant comment:
- Part I, Summary. The first page of the proposed Form 990 is a Summary page, which requires the organization to provide its identifying information (i.e., mission and top activities) and a snap shot of its key financial information (including the percentage of contributions and grants spent on fundraising), compensation, governance (i.e., board composition and governance and financial practices), and operational information. This page includes information on issues that have been of concern to the IRS in recent years, such as compensation, governance, unrelated business income, and fundraising expenses.
- Part II, Section B, Compensation & Other Financial Arrangements with Officers, Directors, Employees and Independent Contractors. The IRS raised the reporting requirement for the five highest paid employees and contractors from $50,000 to $100,000. In addition, the reporting organization must list all former directors and trustees who receive more than $10,000 in reportable income from the reporting organization and any related organization. This Part also asks about non-qualified deferred compensation, and business relationships between key insiders and organizations doing business with the reporting organization. Schedule J, "Supplemental Compensation Information," is triggered if the combined reportable income from the reporting organization and its affiliates is more than $150,000.
- Part III, Statements Regarding Governance, Management, and Financial Reporting. This Part is new and seeks information that is not specifically required by the Internal Revenue Code (and typically within the purview of state law). Organizations must answer each question in this Part, which include questions regarding the organization’s governance, board size, written policies, conflicts policy, existence of audit committee, and review of Form 990 by the Board.
- Part V, Statement of Functional Expenses. This Part is greatly expanded, requiring a detailed breakdown of expenses, including grants to governments and individuals outside the United States, for example.
- Part VII, Statement Regarding General Activities. This Part asks about organizational activities that have represented "hot button topics" in recent years. Specifically, this Part includes questions regarding overseas activities, investments of proceeds of tax-exempt bonds beyond a temporary period, whether an organization conducts a substantial part of its activities through a partnership or LLC, reporting information by any partnership or LLC that is managed by a for-profit, how the organization protects its exempt status when it negotiates transactions with for-profit entities, and information on disregarded entities. Many of the questions in this Part trigger the various schedules.
- Part VIII, Statements Regarding Other IRS Filings. This Part attempts to discern whether the organization has complied with various IRS filing requirements regarding prohibited tax shelter activities, excess benefit transactions, donor advised funds, unrelated business income tax, employment tax, excise tax, and income tax.
- Part IX, Statement of Program Service Accomplishments. This Part requires the tax-exempt organization to provide information on its programs, services and exempt purpose activities and to describe, in a narrative, its most significant accomplishment for the year.
In addition to the core form, tax-exempt organizations will have to fill out one or more of the following 15 schedules.
- Schedule A: Public Charity Status . This Schedule focuses on public charity status by asking for very detailed information to help the IRS determine whether an organization is a public charity. The IRS is considering using this schedule to issue definitive rulings in lieu of Form 8734 (Schedule for Advance Ruling period, filed at completion of 5-year advance ruling period).
- Schedule B: Contributors . This Schedule must be filled out by any organization that receives $5,000 or more from any one contributor (this is the same Schedule B as last year).
- Schedule C: Lobbying and Political Campaign Activity . This Schedule requires tax-exempt organizations to provide a written description of their direct and indirect political campaign activities and requests other detailed information pertaining to expenditures made by the organization on lobbying activities.
- Schedule D: Supplemental Financial Statements . This Schedule requires detailed information on an organization’s investments, conservation easements, donor advised funds, and trust and escrow accounts. This Schedule also requires new information from organizations that maintain collections of art, historical treasures, and other similar assets, including disclosure of the text of relevant footnotes to the organization’s financial statements. Further, this schedule no longer permits such organizations to exclude from its financial statements information on difficult to value collections. Finally, this schedule requires organizations that maintain endowment funds to provide information relating to the organization’s spending of endowment fund assets over a 5-year period.
- Schedule E: Schools . This Schedule requires information pertaining to nondiscriminatory policies in schools. (This is the same as former Form 990, Schedule A, Private School Questionnaire).
- Schedule F: Statement of Activities Outside the U.S. This Schedule must be completed by organizations that conduct fundraising grant making, trade or business, or exempt activities outside of the United States, or have accounts, offices, or employees outside the country. The schedule requires detailed information about these activities. Comments are specifically requested on worker safety and security as well as the burden created by the schedule.
- Schedule G: Fundraising and Gaming . This Schedule expands reporting regarding certain professional fundraising for organizations with more than $10,000 from fundraising events or fundraising costs and seeks a breakdown of the amount of proceeds retained by an organization and amounts paid to a professional fundraising.
- Schedule H: Hospitals . This Schedule is new and must be completed by any organization that operates a facility that provides hospital or medical care. The Schedule models its detailed charity care and community benefits reporting requirements after those developed by Catholic Health Association. This Schedule also requests detailed information on management companies and joint ventures, and it requires written descriptions regarding community healthcare needs assessments, charity care and community benefits policies, emergency room policies and procedures, billing and collection practices, and other information on how the organization’s healthcare facilities further its exempt purposes.
- Schedule I: Supplemental Information on Grants and Other Assistance to Organizations, Governments and Individuals in the United States . This Schedule requires detailed information on an organization’s grant making and must be completed by organizations reporting more than $5,000 in grants to organizations, governments, or individuals located in the United States.
- Schedule J: Compensation . This Schedule is a new schedule and applies to organizations that pay more than $150,000 reportable compensation or $250,000 total compensation to at least one individual. The Schedule asks for detailed reporting on various types of compensation from the organization itself or a related organization, including supplemental compensation, first class travel, club dues, and use of personal residence.
- Schedule K: Tax- Exempt Bonds – This Schedule applies to organizations with an outstanding tax-exempt bond issue greater than $100,000. This schedule adds use and investment of proceeds information (to identify and discourage tax-arbitrage) and relationships with outside advisors, including compensation of third parties who provide services relating to bond issuances.
- Schedule L: Supplemental Information on Loans . This Schedule requires detailed information on loans provided between exempt organizations and their officers, directors, trustees, highly compensated employees, and other disqualified persons. The Schedule also seeks information on whether the loans are evidenced by a written agreement.
- Schedule M: Non-cash contributions . This Schedule is new and must be completed by organizations that receive more than the $5000 in non-cash contributions. The Schedule requires detailed information regarding the various types of non-cash contributions, including securities, intellectual property, cars, art, collectibles, real estate interests, conservation easements, household goods, and clothing.
- Schedule N: Liquidation, Termination, Dissolution or Significant Disposition of Assets . This Schedule is new and is designed to help ensure that an organization’s assets are used for exempt purposes following a termination or significant disposition of assets. Organizations must report information on any transactions involving 25% of the organization’s net assets, information on related transactional expenses of $10,000 or more, method of determining fair market value on transferred assets, compliance with state law and organization’s governing documents, involvement of key persons in the successor organization, cessation of the organization’s activities on tax-exempt bonds, and transfers of significant assets to joint ventures with forprofit entities.
- Schedule R: Related Organization . This Schedule requires detailed information regarding an organization’s relationship with other organizations in which there is a controlling relationship (includes partnerships and disregarded entities.). Transactions between affiliates must be reported.
As stated, comments to the form must be submitted to the IRS by September 14, 2007. You may submit comments via email to the IRS at [email protected] or via U.S. mail to: Form 990 Redesign, ATTN: SE:T:EO, 1111 Constitution Ave. N.W., Washington, DC 20224. Should you have questions or need assistance in the preparation of your comments, please contact us.
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.
