The Redesigned IRS Form 990…Ready Or Not,
Here it Comes!!!

After almost 30 years of no changes the IRS has revamped Form 990. Below please find the transition rules that will apply to all organizations filing Form 990 for tax years ending on or after December 31, 2008.

2008: Organizations with gross receipts over $1 million or net assets over $2.5 million must file the redesigned Form 990

2009: Organizations with gross receipts over $500,000 or net assets over $1.25 million must file the redesigned Form 990

2010: Organizations with gross receipts over $200,000 or net assets over $500,000 must file the redesigned Form 990.

Any organization falling under these thresholds will file Form 990-EZ; however, if gross receipts are under $25,000 the organization will file the new Form 990-N (electronic postcard), please note that this amount increases in 2010 to $50,000.

Due to the redesigned Form 990 transition rules in affect from 2008 through 2010, several of you may be Form 990-EZ filers over the next couple of years. Unlike Form 990 the Form 990-EZ is mostly unchanged. It has been updated to include new schedules from the redesigned Form 990, which replaces previously unstructured attachments.

The new Form 990-EZ now consists of a 4 page core form that must be completed by all organizations. The new Part VI is to be completed by only 501(c)(3) organizations. Beginning with 2008, Form 990-EZ contains up to seven schedules to be completed by certain types of organizations or those that conduct certain activities. The 2008 Form 990-EZ schedules include the following:

• Schedule A - Public Charity Status and Public Support
• Schedule B - Schedule of Contributors
• Schedule C - Political Campaign and Lobbying Activities
• Schedule E - Schools
• Schedule G - Supplemental Information Regarding Fundraising and Gaming Activities
• Schedule L - Transactions with Interested Persons
• Schedule N - Liquidation, Termination, Dissolution or Significant Disposition of Assets

As with the old Form 990, the Redesigned IRS Form 990 is also open for public inspection and disclosure. This means that all information reported on Form 990 and 990EZ (including schedules and attachments) must be made available to the general public, except for Schedule B-Schedule of Contributors. Form 990-T filed after August 7, 2006 by a 501(c)(3) organization to report any unrelated business income, must also be made available to the general public.

General Rules: A tax-exempt organization is required to make available during regular business hours a copy of their exempt application and the three most recent annual information returns.

Rules as to Inspection: A tax-exempt organization must make its exempt application and information returns available at its principal office and regional or district offices having three or more employees.

Rules as to Copies: A tax-exempt organization must provide copies of the documents, in response to an in-person request, at all offices immediately upon request. If the request is in writing the organization has 30 days to comply with the request.

Failure to Comply: If a tax-exempt organization denies a request to an individual that individual may report to the IRS that the denial was in violation of these requirements. Organization may be subject to penalties of $20 per day, maximum of $10,000 per return for failing to allow inspection of information returns and a maximum of $5,000 per return for failing to allow inspection of exempt application.

Widely Available Exception: A tax-exempt organization is not required to comply with a request for copies if the organization has made the document widely available. The rules as to public inspection of the documents continue to apply. A tax-exempt organization can make its application or a return widely available by posting the document on a web page established by the organization. The document is considered widely available only if:

• The web page clearly informs readers that the document is available and provides instructions for downloading it.
• The document is posted in a format that exactly produces the image of the application or return as it was originally filed with the IRS, except for any information permitted by statute to be withheld from public disclosure.
• Any individual with access to the Internet can access, download, view and print the document without special computer hardware or software required and can do so without paying a fee to the exempt organization or entity maintaining the web page.

Service on a non-profit board carries with it an important ethical obligation; to serve the public good and to ensure proper management of the organization's assets and resources. A conflict of interest exists when the personal or professional concerns of a board or staff member affect his or her ability to put the welfare of the organization before their own personal or professional benefit. Board or staff members are likely to be associated with many organizations in their communities, so it is not unusual for actual or potential conflicts of interest to arise.

How can an organization prevent conflicts of interests? An organization cannot prevent conflicts of interest from occurring; they can only monitor these occurrences to ensure that the organization is not being compromised or harmed. Institute a system of checks and balances to monitor actual or potential conflicts of interest, beginning with well defined operating policies on all matters that might lead to conflict. Most important, create a carefully written conflict of interest policy. Ask each board and staff member to agree in writing to uphold the policy. The conflict of interest policy should be reviewed annually.

A conflict of interest policy should have three essential elements:

• Full Disclosure - board and staff members should annually make known their connections with groups doing business with the organization.
• Board Member Abstention from Discussion and Voting - board members with actual or potential conflicts of interest should not participate in discussions or vote on matters affecting transactions between the organization and the other group.
• Staff Member Abstention from Decision-Making - staff members who have an actual or potential conflict should not be substantively involved in decision-making affecting such transactions.

All non-profit organizations must have on file a written conflict of interest policy. The Redesigned IRS Form 990 asks several questions regarding this policy. If your organization has not adopted such a policy, MC&L will be happy to work with you on this.

As a result of the corporate scandals (Enron, Tyco and WorldCom), Congress passed the American Competiveness and Corporate Accountability Act of 2002. It is more widely known as Sarbanes-Oxley (SOX). SOX has redefined best practices in governance of all organizations, including non-profits. How does SOX affect non-profits? SOX requires two provisions in all nonprofits: (1) Whistleblower and (2) Documentation Destruction policies. Both of these provisions are now included in the redesigned IRS Form 990.

A Whistleblower Policy allows an employee to report ethics violations or suspected violations without the threat of harassment, retaliation or adverse employment consequence. If your organization has not adopted a Whistleblower Policy we strongly encourage you to do so soon. Attached to this email is a Sample Whistleblower Policy. Please feel free to edit this policy to meet the needs of your organization. This policy should be adopted by your Board of Directors and we recommend that it become a permanent part of your employee handbook.

As a result of the corporate scandals (Enron, Tyco and WorldCom), Congress passed the American Competiveness and Corporate Accountability Act of 2002. It is more widely known as Sarbanes-Oxley (SOX). SOX has redefined best practices in governance of all organizations, including non-profits. How does SOX affect non-profits? SOX requires two provisions in all nonprofits: (1) Whistleblower and (2) Documentation Retention and Destruction policies. Both of these provisions are now included in the redesigned IRS Form 990.

A Document Retention and Destruction policy details the organization's guidelines on retention and destruction of pertinent information. It defines how long specific records must be retained and which records must be retained permanently. If your organization has not adopted a Documentation Retention and Destruction Policy we strongly encourage you to do so soon. Attached to this email is a Sample Retention and Destruction Policy. Please feel free to edit this policy to meet the needs of your organization. This policy should be adopted by your Board of Directors and we recommend that it become a permanent part of your employee handbook.

Two principal responsibilities of a nonprofit board are to (1) hire and (2) evaluate the performance of the chief executive. The board chair, executive committee, or compensation committee often may act alone in conducting negotiations with the executive. However, the ultimate hiring responsibility falls to the board of directors. Before embarking on this process the board should consider the following:

1. Conduct Research - Review national, regional, and local information about compensation levels in the nonprofit sector.
2. Consider the nature of your organization and how that affects appropriate compensation levels for the chief executive - A larger and more complex organization that is competing with the for-profit sector may have to pay higher salaries.
3. Consider equity and the perception of equity - Consider the implications of paying the chief executive at a higher or lower level than the rest of the staff. Will this affect morale?
4. Protect the board's decision from undue influence by the chief executive and his or her close associates - The chief executive should not recommend his or her own salary. If a compensation consultant is hired, they should be retained by and report to the board.
5. Be aware of the IRS criteria for excessive compensation - Excessive compensation may be a factor in endangering an organization's tax-exempt status. In arguing cases of excess compensation, the IRS has two criteria that usually are a part of their argument. These are: (i) the amount of compensation compared to compensation of similar executives and (ii) the manner in which the compensation was determined.
6. Remember that the compensation package is likely to become common knowledge.
7. Understand that a compensation package includes more than money.
8. The board should approve the complete package, including benefits.

The redesigned IRS Form 990 addresses the issue of executive compensation in many of the core form pages and schedules. Part VI of the new Form 990 inquires about the organization's policies regarding determination of compensation (which includes benefits) for the exempt organization's CEO, executive director, top management official and any other officers or key employees. The IRS not only wants to know what salaries are paid but also the process of determining those salaries by posing these questions:

• Did the process include the review and approval by a governing body or compensation committee, provided that all persons with conflicts of interest with respect to compensation issues were not involved?
• Did the process include the gathering of comparable data?
• Did the organization substantiate the process and decision through documentation and recordkeeping?

Answering YES to all questions above adds an additional requirement that the organization fully describe their process on Schedule O and a process lacking these characteristics will clearly be red flags for IRS compliance staff. With these questions the IRS is telling you what it wants you to do within your organization and obviously checking NO to these questions is not the right answer. Therefore, we strongly encourage the use of an independent third-party and salary surveys of other similar entities when making executive compensation decisions. This will provide your organization with clear-cut YES answers to all of the above questions.

In Part III of the new core Form 990 organizations must describe their three largest program services, measured by total expenses incurred. This is not a new requirement of Form 990; however, the new 990 instructions do give us more detail on what to include in these statements. Descriptions should include the following: (1) specific measurements such as clients served, days of care provided, number of sessions or events held or publications issued; (2) description of the activities objectives (short and long term); (3) provide reasonable estimates for any statistical information if exact figures are not available; and (4) be clear, concise and complete in the description. Also, be aware that beginning in 2009 these program service accomplishments will be coded in order for the IRS to easily compare your accomplishments and the expenses incurred with other non-profit organizations.

Remember that your Form 990 will be available to the public via the Internet within a year after filing; make sure your program service accomplishments give readers a full appreciation for your work. This is a public relations opportunity that has too often been overlooked.

Schedule R of the redesigned IRS Form 990 for nonprofits, including charities and trade associations, requires full disclosure of relationships an exempt organization has with other organizations. If your organization owns or has control of other organizations, (both tax-exempt and taxable), information must be reported on Schedule R.

Information must be reported when entities have common ownership or can exercise control over another organization. The required reporting includes identification of the entity, disclosure of any revenue or expense transactions, loans, grants or capital contributions from one entity to another. It appears that the IRS has a special interest in any transfer of assets, sharing of employees, facilities, and reimbursement of expenses between organizations.

Recommendation - Organizations will need to be prepared to document and report all transactions with related entities. We encourage you to identify these transactions and discuss them with us before your Form 990 is prepared. This will bring about a new challenge.

One of the first questions asked on page one of the redesigned Form 990 is the number of independent voting members of the governing body. The rules states, if any officer, director, trustee, or key employee has a family relationship or a business relationship with any other officer, director, trustee, or key employee, they are not considered to be independent.

The IRS wants to limit or prevent organizational decisions from being made when individuals are not independent. The organization will now have to police this. In order to properly file the redesigned IRS Form 990, it will be imperative that board members and key staff members document any relationships they have with others in this group.

Recommendation - We suggest that the conflict of interest form be updated annually by all officers, directors, trustees and key employees in order to raise the awareness among board members about this focus on independence. Put a policy in place to cover conflicts and regularly enforce it. When members are not independent, document this in your minutes. This will present to the IRS that your organization desires to be above board and totally transparent.

Part VI of the new Form 990 asks whether the organization contemporaneously documented every meeting of its governing body and committees with authority to act on behalf of the governing body. For this purpose, contemporaneous means by the later of the next meeting or 60 days after the date of the meeting or written action. Answering NO to this question is not the right answer.

Recommendation - Keep formal minutes that are signed by the secretary, upon approval. When recording minutes, less is more; do not record entire conversations held during the meeting only the highlights. Report the following: (1) that the meeting was duly called and noticed, (2) when held, (3) who attended, (4) who was absent, (5) approval of prior minutes, (6) approval of the financial report, and (7) detail and approval of all actions taken.

Part VI of the new Form 990 asks questions regarding grantmaking. If grants of $5,000 or more are made the organization must complete Schedule I. Organizations that answer no to this question should consider whether to complete Schedule I in order to report the provision of grants and other assistance in the US for state or other reporting purposes.

Recommendation - Keep records of all grants issued to include the following information: (1) name and address of organization, (2) EIN, (3) amount of grant, (4) amount of non-cash assistance, (5) method of valuation, (6) description of non-cash assistance and (7) purpose of grant or assistance.

An excess benefit transaction occurs when a disqualified person (person of substantial influence, family member or 35% controlled entity) receives economic benefit from a nonprofit that is greater in value than the benefit or service provided. Generally, this means an insider is getting premium pay on a transaction or service from a nonprofit.

Excess benefit transactions can have serious implications for all involved as excise taxes equal to 25% of the excess benefit can be imposed on both the disqualified person and organization.

The new Form 990 requires you to self-report any excess benefit transactions in Part IV of the new form.

Recommendation - Document the following information: (1) name of the disqualified person or entity including EIN, (2) transaction description and (3) Yes/No - was the transaction corrected. If this occurred, seek advice regarding what action is necessary for the correction of any excess benefit transaction. Take all appropriate steps to prevent such transactions in the future.

The redesigned Form 990 asks whether the governing body was provided a copy of Form 990 for review, before filing. If yes, the review process must be described in Schedule O.

Although we find no legal authority for requiring board review of Form 990, we hesitate to check the box "no". However, we are concerned about adding additional work to volunteer board members. Furthermore, some board members will have no interest in reviewing this government form or may be confused by all the details. This decision will need to be made by each organization.

Recommendation - We encourage organizations to provide a copy of Form 990 to their board, and check the box "YES". This may be done electronically. We think this can be used as a tool to further educate your board. The organization should attach a cover letter to the document explaining that this is a new process. We believe it would be best to highlight certain significant aspects (organization's mission, program accomplishments, revenue and expenses) to focus the board members' attention.

The redesigned 990 contains a new question. It reads:

"Did the process for determining compensation of the following persons include a review and approval by independent persons, comparability data and contemporaneous substantiation of the deliberation and decision?

• CEO, Executive Director or other top management official
• Other Key Employees?

1. We are told by the IRS that they will actively use this question for inquiry and enforcement. Be careful how you answer it.
2. This question is critical for employees with total compensation (including benefits) of $100,000 or more. Added info is required for these employees.
3. We recommend establishing a compensation or personnel committee with at least one member who is knowledgeable in compensation issues.
4. A check for conflicts of interest should be done prior to forming the committee as these board members must not have any family or business relationships with those being reviewed.
5. We expect the IRS to focus on Trade Associations complying.
6. Use and retain data about comparable compensation for similarly qualified persons in similar positions, with other organizations.
7. Document not only the decisions in your minutes, but also document the deliberations.
8. Our advice is to review the complete compensation package of the highly compensated employee, not just salary. Document your comparison and review in your minutes.

The redesigned Form 990 asks whether the organization has made certain documents available to the public: (1) governing documents (articles of incorporation, bylaws, etc.), (2) conflict of interest policy and (3) financial statements. If so, a description of how the organization makes them publicly available is required to be described on Schedule O.

We are not aware of federal laws that require such documents be made publicly available unless they were included in a form that is publicly available (such as the conflict of interest policy included in Form 1023).

Recommendation - We encourage organizations to carefully consider all document requests. This might be a matter where legal counsel should be consulted. Regardless of how you handle them, be prepared to provide an explanation on Schedule O of your document request procedures.

SURPRISE!! Does the organization have a Gift Acceptance Policy that requires review of any non-standard contributions? This question was a surprise contained in the new Form 990. Few organizations have adopted this policy, yet the IRS is asking about it. We believe it is good business. Checking NO may cause the IRS to view you as high risk and increase your odds of being audited. We encourage you to play along, adopt the policy and be able to answer YES.

Turning down a gift is contrary to the normal inclination of a nonprofit; but sometimes it makes better sense, strategically and financially, to say "No thanks." A gift acceptance policy should identify gifts your organization is willing to accept and those you do not accept, as well as the administration of the gifts.

The acceptance policy may include the following elements:

• Purpose of the policy
• Types of gifts that are acceptable
• Recommendation of when to consult legal counsel
• Your policy when a potential gift is offered with restrictions
• Reporting requirements
• Possible gift acceptance review by your board or by a committee
• Ongoing review and update of the policy

Common types of gifts along with some issues that are expected with a particular type of gift are: Cash; Securities (policy should outline action taken with stocks once received); Personal Property such as cars, furniture, old equipment, etc. (policy should allow staff to refuse unwanted or out of date equipment that could be costly to maintain or repair); Intangible property (life insurance policies, intellectual property rights and promissory notes; valuation can be difficult); Real Estate (before accepting, verify clear title, determine any debt or back taxes owed and check for environmental issues). Your policy should also address gifts that can be used in your mission vs. those that cannot and might result in generating unrelated business income.

Recommendation - We encourage adopting a gift acceptance policy for two reasons: 1) to monitor donations that are hard to value and easy for donors to inflate deductions improperly, and 2) to protect charities from taking stupid gifts.

At the very least, your policy should state: "Any gift that is not cash or immediately sellable publicly traded securities may not be accepted without the express approval of the [Board, Officers, CEO]." Such a policy may also discuss what is constructive receipt of the gift, and whether any strings can be attached other than what the charity initiated (restricted gifts).

The new 990 has added schedules G and M; both schedules require additional reporting on each fundraising activity of the organization. The IRS encourages charities to adopt and monitor policies to ensure that fundraising solicitations meet federal and state laws; hopefully, this will ensure that solicitation material is accurate, truthful and candid. We encourage all organizations to adopt fundraising ethics as a part of your organization's code of conduct.

Please keep watching. Subsequent tax tips will have more detailed information on the reporting requirements of Schedule G and Schedule M.

Does your organization have local chapters, branches or affiliates?

If NO, this tip is not for you! If YES, keep reading! The new IRS Form Part VI, 9b asks does the organization have written policies and procedures governing the activities of such chapters, affiliates, and branches to ensure their operations are consistent with those of the organization? If this applies to your organization, develop a policy and be prepared to check “YES”. Your policy should include requiring provisions in by-laws or governing documents of affiliated groups and/or requiring annual certification from the affiliated group that they are in compliance with policies and procedures. If you have not developed written policies and procedures, you will check the box NO. Then, use Schedule O to explain how you are ensuring that the activities of the affiliates are in compliance with your own.

RECOMMENDATION: - For organizations with local chapters, branches or affiliates, we encourage you to prepare to check “YES” on this question. We believe that your risk of being audited increases considerably by checking “NO” to the question about written policies and procedures. This policy should be adopted by your Board of Directors and be put in place as soon as possible.

Schedules A & B are the original schedules from the old Form 990. Schedule A has been changed considerably where Schedule B remains almost unchanged.

Schedule A is filed by any section 501(c)(3) or section 4947 (a)(1) (other than a private foundation) to report information regarding public charity status and to calculate the organization's public support percentage. The percentage is calculated on a 5-year period instead of a 4-year period using the amounts based on the accounting method used by the organization. The 5-year period is now being used in order to include the current year amounts in the calculation. All other information previously reported on Schedule A is now reported on new schedules of the redesigned IRS Form 990.

Schedule B is required of every organization unless it certifies that it does not meet the filing requirements. All contributions of $5,000 or more must be reported. The biggest change to Schedule B is that we must now include non-cash contributions as well as cash contributions.

Schedule C reports information on political campaigning or lobbying activities. Additional information needed includes a description of the direct or indirect political campaigning and/or lobbying activities, expenses related to these activities and volunteer hours (if applicable). Any reasonable method may be used to estimate the number of volunteer hours. We know this will impact a few of you.

Schedule D reports additional detail on financial statement information such as donor advised funds, conservation easements, art and museum collections, escrow accounts and custodial arrangements. Organizations must also provide disclosures related to tax uncertainties on Schedule D, such as taking an aggressive position on expenses used to offset unrelated business income on Form 990T. We certainly hope we don’t have any clients required to report aggressive tax positions.

Schedule E is required of all private schools exempt for tax purposes. Various questions are asked regarding the school's nondiscriminatory policies. Other information to be provided includes details regarding financial aid or assistance from governmental agencies.

Schedule F is required to report activities outside the United States. Details must be provided for grants of $5,000 or more to organizations and individuals located outside the United States.

Schedule G is used to report information about fundraising and gaming activities with gross receipts of at least $15,000. The organization is required to disclose a list of fundraising activities, details on agreements with paid fundraisers and net income detail on each fundraising event. Similar information is required for gaming activities (i.e. bingo) including additional disclosures regarding the organization's gaming license.

Schedule H is required by all organizations that operate at least one facility that is, or is required to be, licensed, registered, or similarly recognized by a state as a hospital. In 2008, organizations will be required to complete Part V, Facility Information and may complete the other parts of the schedule; however, other than Part V no other parts of this schedule are required until 2009. Please consult your tax preparer if this schedule is applicable to your organization.

Schedule I is used to provide information on grants and other assistance of $5,000 or more made to organizations, governments and individuals in the US. The organization must also report activities conducted by the organization either directly or indirectly through a disregarded entity or through a joint venture treated as a partnership. Grants and other assistance include awards, prizes, allocations, stipends, scholarships, fellowships, research grants and similar payments and distributions.

Schedule J is used to report compensation information for certain officers, directors, trustees, key employees and highest compensated employees. It is also used to report on certain compensation practices of the organization. Please refer to our website for other tax tips on compensation.

Schedule K is used by an organization to report information on outstanding liabilities associated with tax-exempt bonds issues with an outstanding principal amount in excess of $100,000 at year-end. Additional information may be required to be disclosed describing certain assumptions made on Schedule K

Schedule L is used to provide information on financial transactions between the organization and interested persons. An interested person is defined as a current or former officer, director, trustee, key employee, highly compensated employee or a certain major donors. Information must be provided, regardless of amounts, on the following: (1) excess benefit transactions, (2) loans to/from interested persons and (3) grants and/or assistance benefiting interested persons.

Schedule L is also used to document members of the governing body who are not considered to be independent of the organization. Caution: Answers here will impact previous answers given in Form 990 regarding the governing body (Part VI of Form 990).

Schedule M is used to report non-cash contributions received. An organization that received more than $25,000 in aggregate noncash contributions or that received contributions of art, historical treasures or conservation easements must complete Schedule M. The schedule requires reporting of the quantity and the amount of non-cash contributions by type of property received. Organizations must report non-cash contributions even if sold immediately after receipt. Do not include non-cash contributions received in a prior year, donations of services, or the use of facilities.

Schedule N is used to provide information relating to going out of existence through liquidation, termination or dissolution and ceasing of operations. Schedule N is also used to report the disposition of more than 25% of an organization's net assets in any given year.

Schedule O is used to provide the IRS with narrative information required for responses to specific questions on Form 990, or to explain the organization’s operations or responses to various questions within Form 990.

Schedule O can also be used voluntarily by the organization to better tell their story. Remember that potential donors can and will look at your Form 990 online via GuideStar; this may be your organizations only chance to capture the attention of these donors. We strongly encourage all organizations to take advantage of this unique feature of the Redesigned IRS Form 990.

Schedule R is used to provide information on related organizations, on certain transactions with related organizations, and on certain unrelated partnerships through which the organization conducts significant activities.