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Revised Form 990: A Line-by-Line Preparation Guide

Revised Form 990: A Line-by-Line Preparation Guide

by Jody Blazek

ISBN: 9780470446478

Publisher Wiley

Published in Law/Taxation, Business & Investing/Accounting, Business & Investing/Taxation

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Chapter One

Redesigned Form 990

The responsibility of the IRS to grant, or approve, qualification for tax-exempt status for all ?501(c) organizations, which includes charities designated as ?501(c)(3)s, civic associations (c)(4)s, labor unions (c)(5)s, business leagues (c)(6)s, social clubs (c)(7)s, and more than 30 other types of tax-exempt organizations, is accompanied by the burden to evaluate continued qualification. The 990 series of tax returns serves this purpose. The challenge in designing a form suitable for overseeing and scrutinizing ongoing qualification for the diverse types of organizations qualifying under ?501(c) is evidenced by the ever-expanding girth of the form, culminating with the 2008 version, which has a Core Form with 11 pages plus 16 schedules to be completed when applicable. The fact that the form has been available for inspection by anyone that asks to see it since 1987 has made this form the most accessible source of information about a tax-exempt organization. Form 990 for ?501(c)(3) organizations (and others) is also available on the Internet at www.guidestar.org. Therefore, its redesign has an impact on all those involved in the nonprofit sector.

The various Forms 990 are designed to accomplish many purposes that go far beyond simply reporting to the Internal Revenue Service (referred to in this book as the IRS). Accurate and complete preparation of the forms should be given top priority by a nonprofit organization. The forms are part of the electronic age; many are accessible to one and all on the Internet. An organization's public reporting responsibilities are beyond the form's physical dimension and deserve careful attention. Since March 1997, when the IRS contracted with the Urban Institute of Washington, D.C., to receive and place the forms for the years 1996 through 2001 on CD-ROMs, the Forms 990 have been made available on the Internet. In a coordinated effort, Philanthropic Resources, Inc. began in 1998 to digitize the information so that it could be sorted and searched. Information from prior 990s of some 40,000 public charities was originally entered. The Guidestar site also provides an abstract of the information they glean from the forms, and it also posts the complete form; the site can be accessed at http://www.guidestar.org. The IRS has also begun to implement an electronic filing system for 990s to eliminate the paperwork altogether and allow them to more effectively monitor exempts in a statistical and focused fashion. As of December 2008, the IRS has not yet worked out a system to transmit Forms 990 submitted electronically into a format suitable for posting on Guidestar's website, so organizations filing electronically may not see their returns on Guidestar for some years. Such organizations can voluntarily submit their return and other documents to Guidestar.

In essence, Form 990 is designed to be, and in fact, is a public document. Yet another reason for a tax-exempt organization to pay careful attention to completion of the forms is the requirement that copies of the three most recent year's returns, now including Forms 990-T of ?501(c)(3) entities, must be given upon request to those that pay a modest fee. Between 1984 and 1997, an organization had to allow anyone who knocked on its door a look at its Forms 990 and 1023 or 1024 in its office. Beginning June 8, 1999, a copy of the forms must be furnished for a fee as discussed in ?1.12. Forms 990 are also used for a wide variety of state and local purposes. In many states, an exempt organization can satisfy its annual filing requirement by furnishing a copy of Form 990 to the appropriate state authority. Many grant-making foundations request a copy of Form 990 in addition to, or in lieu of, audited financial statements, to verify an organization's fiscal activity. The open-records standards applicable in many states also require all financial reports and records to be open to the public.

Form 990 provides a wealth of information. An organization's basic financial information-revenues, expenses, assets, and liabilities-is classified into meaningful categories to allow the IRS to evaluate a nonprofit's ongoing qualification for federal tax exemption under Internal Revenue Code ?501 (hereinafter code section numbers are simply identified with the symbol "?"). The revised 990 contains a wide range of questions and information regarding governance policies, other tax compliance filings, and for those that must file the new schedules, significantly enhanced details about activities and accomplishments. The returns are also used by funders, states, and other persons to evaluate the scope and type of a nonprofit's activity. Information pertaining to the accomplishment of the organization's mission is presented-how many persons are served, papers researched, reports completed, students enrolled, and the like. Extensive details are furnished for grants paid to support other organizations and disbursed as aid to the poor, sick, students, and others in need. Details are furnished to reflect overall compensation for services and loans (if any) to or from persons who run and control the organization. The program accomplishment reports should particularly be prepared with a view to presenting the organization to funders and other supporters. Some use the information to compare nonprofit organizations statistically.

A long list of questions and financial details fish for failures to comply with the federal and to some extent, state, requirements for donor and member disclosures, political and lobbying activity, transactions with nonexempt organizations, insider transactions, and more. In sum, the returns are designed to show that a nonprofit organization is entitled to maintain its tax-exempt status and also to provide a wealth of other information of interest to funders, constituents, and regulators. Questions that can be answered with information on the forms follow:

Do the organization's activities focus on an exempt purpose as reflected on the first page of the Core Form and as detailed in Part III?

Do the fundraising costs shown on Part IX, line 25 (with details in column (D)) equal too high a percentage of the total expenses indicating the nonprofit fails the commensurate test? Notice input of professional fundraising expenses as a single item on the front page, line 16a.

Does Part I, line 7 (on the Core front page) and column (c) of Part VIII show a high percentage of unrelated business revenues in relation to the total revenues, indicating the organization is devoted to business interests rather than exempt purposes?

Do amounts reported in Part VII and Schedule J reflect significant compensation payments to officials and related parties, particularly in relation to overall expenses?

Is the amount a public charity reported on Schedule C, Part II-A or B for lobbying expenditures excessive (private foundations can spend none and some nonprofits exempt in categories other than ?501(c)(3) can spend an unlimited amount)?

Does the calculation of a public charity's sources of support shown on Schedule A indicate it receives at least 33 1/3 percent of its support from the public so it continues to be classified as a public charity under ?509(a)(1) or (a)(2)?

Are there "No" answers to governance Questions 8, 10, 12, 13, 14, and 15 in Part VI indicating the organization has not adopted policies and procedures recommended by the IRS (though not technically required by the tax code)?

Are "Yes" answers in Part V (a) questions followed by "Yes" answers for (b) indicating the organization has complied with the tax rule asked in the question? Some (but not all) "No" answers in this part indicate noncompliance).

It is extremely important by way of introduction to remind readers that tax-exempt organizations are taxpayers. Though certain types of revenues they collect may not be subject to income tax under ?501(c), they are subject to all of the sections contained in the Internal Revenue Code and the tax rules imposed by the states in which they operate. Many of the problems nonprofits ask the authors to solve stem from lack of awareness of this fact. Matters that deserve attention include federal payroll taxes, gift and estate taxes, donor and dues deductibility rules that impact persons who provide the revenues, and other federal issues, such as labor laws and employee retirement plans (ERISA rules).

Lastly, representatives of federally tax-exempt organizations must also inform themselves of the wide variety of state and local tax collection, compliance, and filing requirements-beyond the scope of this guide-to which the nonprofit may be subject. Due to the increasing globalization of activity fostered by the Internet, readers must pay close attention for developments in this regard. Professional help should be sought; CPA and Bar Association referral services should be able to recommend persons with nonprofit-organization experience. For those organizations that cannot afford to pay, a nonprofit management assistance program can be found. Many civic-minded CPAs, lawyers, and business people volunteer their time through local Bar and CPA societies, United Ways, associations of retired executives, and others.

? 1.1 HISTORY OF REDESIGN PROJECT

The Form 990 revision project was undertaken by the IRS in response to the changes in the tax-exempt sector over the quarter century since it was last overhauled. "We need a Form 990 that reflects the way this growing sector operates in the twenty-first century. The new 990 aims to give both the IRS and the public an improved window into the way tax-exempt organizations go about their vital mission."

The forms have evolved slowly over the years through cooperative efforts between the IRS, the American Institute of Certified Public Accountants (AICPA), and the American Bar Association (ABA). Congress people, state officials, along with non-profit organizations such as Independent Sector, have also contributed to the effort to achieve adequate disclosure of the financial and program activities of tax-exempt organizations. The new Form 990 grew from a modest five pages in 1988 that was expanded in 1989 to add, in response to a Congressional mandate, page 6 to identify the related and unrelated nature of an organization's revenues. In 1995, parts were added to reconcile the numbers reported on the 990 to an organization's financial statements issued in accordance with reporting methods required by the Financial Accounting Standards Board. The form grew another two pages in 2005 when it first contained governance questions and disclosed compensation of former officials and key employees. In 2007, a page reflecting "information regarding transfers to and from controlled entities" brought the total to nine pages. Now, we have eleven pages resulting from a full page of governance questions (new Part VI) and other questions.

The draft of the revised Form 990 released by the Internal Revenue Service on June 14, 2007, materially expanded the information submitted annually by tax-exempt organizations. The initial draft inspired over 7,000 e-mails and letters, with some 3,000 pages of suggestions during a 90-day comment period. The authors were gratified that the IRS accepted several of our suggestions, particularly showing a synopsis of prior- and current-year financial data on the front page, removing metrics (many called for this change), and reordering of the compliance questions now contained in Parts IV and V.

The redesign has features intended to foster the enhanced transparency requested by Congress, the Independent Sector's Panel on the Nonprofit Sector, and many others. In order to achieve this goal, however, the job of gathering the information and preparing Form 990 for filing will be much harder for most. Lois G. Lerner, Director of the IRS's Exempt Organizations division, disagrees and, as the draft was released, said in the announcement of the draft, "Most organizations should not experience a change in burden. However, those with complicated compensation arrangements, related entity structures and activities that raise compliance concerns may have to spend more time providing meaningful information to the public." The authors and those that submitted the more than 3,000 pages of e-mail comments respectfully disagreed.

The second, and final, draft issued December 20, 2007, reflected some changes in response to public comments. For history buffs, the June 2007, draft of the Core Form is illustrated in Appendix 1A. Our suggestion for redesign of the first page is shown in Appendix 1B. One will notice that the right-hand column reflecting metrics was removed and replaced with a column that displays prior year financial information for comparison purposes. Many objected to the metrics and agreed with the authors' comments to the IRS that "a comparison of functionally allocated expenses to total expenses without room for an explanation is prejudicial against organizations with special circumstances and should be eliminated. A more informative comparison would be between current year totals and last year's totals." Indeed this change was adopted in the final form.

When the final draft of new Form 990 was released, the Commissioner of Tax Exempt/Governmental Entities, said: "When we released the redesigned draft form this past June, we said we needed a Form 990 that reflects the way this growing sector operates in the 21st century. The public comments we received in response to our draft form helped us develop a final form consistent with our guiding principles of transparency, compliance and burden minimization. Tax-exempt organizations provide tremendous benefits to the people and the communities they serve, but their ability to do good work hinges upon the public's trust. The new Form 990 will foster this trust by greatly improving transparency and compliance in the tax-exempt sector."

? 1.2 HIGHLIGHTS OF REVISED FORM 990

The new Form 990 has been significantly redesigned and consists of an 11-page Core Form and a series of 16 schedules designed to require reporting of information only from those organizations that conduct particular activities. What the IRS calls the "Core Form" is in some respects similar to its predecessor, except for the new first page, Part IV, "Checklist of Required Schedules," and Part VI, "Governance, Management and Disclosure." Significantly, the form no longer asks for attachments that the filer is free to design. Instead, schedules with specific columns and directions must be submitted to provide required additional details. Schedule D, in its five pages as an example, illustrates both the extensive details that are requested in order to reveal an organization's type of assets and funds, but also the requirement that the information be submitted in the format provided by the IRS.

What may be the most challenging to the IRS in terms of reviewing the forms once they are all electronically filed is the new, unformatted, Schedule O. The form has many questions that require an explanation in Schedule O when the answer is "Yes." Schedule O may become the first page viewers go to in studying the forms in the future. The other features that will cause some confusion and mistakes are the dollar thresholds for submitting the schedules. Part IV, "Checklist of Required Schedules," contains an array of thresholds ranging from $5,000 to $100,000. To compound the matter, the attachment of some schedules has no threshold, but is simply prompted by the existence of, for example, donor-advised funds or conservation easements without regard to the associated dollar amounts.

The IRS worked long and hard to redesign the form and also to provide instructions and helpful information to aid in preparing the form. Indeed the Core Form instructions have 40 pages. An amazing 14-page glossary contains detailed definitions of terms used in the instructions and on the form. "TIP" suggestions and "NOTE" ideas appear throughout the instructions. A 19-page appendix rounds out the 75 pages of instructions for the core and contains the following information:

A. Exempt Organizations Reference Chart

B. How to Determine Whether an Organization's Gross Receipts Are Normally $25,000 (or $5,000) or Less

C. Special Gross Receipts Test for Determining Exempt Status of ?501(c)(7) and ?501(c)(15) Organizations

D. Public Inspection of Returns

E. Group Returns: Reporting Information on Behalf of the Group

(Continues...)

Excerpted from "Revised Form 990: A Line-by-Line Preparation Guide" by Jody Blazek. Copyright © 0 by Jody Blazek. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher. Excerpts are provided solely for the personal use of visitors to this web site.
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