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Form 990: The Impact on Tax-Exempt Organizations

The major redesign of Form 990, Return of Organization Exempt from Income Tax, which must be filed with the Internal Revenue Service by most organizations that are exempt from federal income tax, will have a significant impact, not only on those who prepare Form 990, but also on those who manage, advise and serve on the boards of directors of exempt organizations.

Given that the Service made its last significant revision to Form 990 in 1979, nearly three decades ago, it almost goes without saying that all people involved with tax-exempt organizations should take some time to become familiar with these changes – at a minimum from a 10,000-foot perspective.

The Service’s view is that Form 990 has failed to keep pace with changes in the tax law and with the increasing size, diversity, and complexity of the exempt sector. In this regard, the Service has undertaken a major redesign of the format and content of Form 990, based on three guiding principles: enhancing transparency, promoting tax compliance, and minimizing the burden on the filing organization. Let’s see how they did.

No changes to EZ … yet

Initially, it should be noted that the Service essentially maintained the two-page Short Form 990–EZ, which certain smaller exempt organizations may file in lieu of Form 990, in its present form. So, for those exempt organizations qualified to file Form 990–EZ, their filing obligations will not change in the near term. However, over a three-year period, the threshold amounts of gross receipts and total assets required to qualify to file Form 990–EZ will decrease substantially.

For the 2008 tax year (returns filed in 2009), an organization with gross receipts of less than $1 million and total assets of less than $2.5 million may file Form 990–EZ; however, these thresholds decrease to gross receipts of less than $200,000 and total assets of less than $500,000, beginning with the 2010 tax year. Previously, an entity with gross receipts of no more than $25,000 did not have to file; however, beginning with the 2007 tax year (to be filed this year in 2008), such an entity must file an electronic postcard Form 990-N to advise the Service of its name, contact information and the amount of its gross receipts.

Significant changes to 990

In comparison, the Service made significant changes to Form 990. The 2007 version of Form 990 was nine pages long, with two supplemental schedules that may, or may not, be required to provide additional detail. The draft revised Form 990 for the 2008 tax year, as of Dec. 19, 2008 (instructions for which are expected to be released in the spring of this year), is 11 pages long with 16 supplemental schedules. To state the obvious, this is a dramatic increase in the length of the form, particularly when the schedules are taken into consideration.

The devil’s in the details, so let’s take a look at the core of the revised Form 990 which begins with summary information - a new addition. Page one of the revised Form 990 has a summary of the exempt organization’s identifying information, operating and governance information, as well as a two-year comparison of summary revenue, expenses and balance sheet (assets and liabilities) information for the periods. Of course, as with all federal income tax returns, there is a signature block for an officer of the organization and paid preparer to sign the return under penalties of perjury, to declare that the Form 990 is true, correct and complete.

The revised Form 990 requires an exempt organization to include a statement of program service accomplishments, including a brief description of the exempt organization’s mission and its three largest program services as measured by expenses. This retains a schedule required on the current Form 990 and expands on it.

Next, the revised Form 990 has a checklist of required schedules. As stated, the redesigned Form 990 has 16 schedules – quite an increase over the current two. The IRS converted the current Form’s unstructured attachments into six schedules: Schedule D, Supplemental Financial Statements; Schedule G, Supplemental Information Regarding Fundraising or Gaming Activities; Schedule I, Supplemental Information on Grants and Other Assistance to Organizations, Governments, and Individuals in the United States and a Continuation Sheet; Schedule J, Compensation Information; Schedule L, Transactions with Interested Persons; and, Schedule N, Liquidation, Termination, Dissolution, or Significant Disposition of Assets.

Some of the new Schedules result from the Service separating existing parts of Form 990 or current Schedule A into four separate schedules: Schedule A, Public Charity Status and Public Support; Schedule C, Political Campaign and Lobbying Activities; Schedule E, Schools; and, Schedule R, Related Organizations and Unrelated Partnerships.

The Service also requires new information reported in five Schedules: Schedule F, Statement of Activities Outside the United States; Schedule H, Hospitals; Schedule K, Supplemental Information on Tax Exempt Bonds; Schedule M, Non-Cash Contributions; and, Schedule O, Supplemental Information to Form 990.

The revised Form 990 also requires an exempt organization to make statements regarding other tax filings and tax compliance. For example, an exempt organization must provide information regarding the filing of information returns (Form 1096) and wage and tax statements (Form W-3). It also requires an exempt organization to provide information regarding its governing body and management, as well as its policies, such as written conflict of interest, whistle blower, and document retention and destruction policies.

The core Form goes on to require information regarding the compensation of officers, directors, trustees, employees, highest-compensated employees, and independent contractors which must match Forms W-2 and Forms 1099 and thus, would presumably need to be provided on a calendar-year basis. The Form also requires a statement of revenue, statement of functional expense and balance sheets, as well as information regarding accounting methods and the use of independent auditors to prepare financial statements.

More information required

A few observations may be made from the Service’s redesign. First, much of the information which is requested on the redesigned form has been requested on the current form, such as statements regarding compensation, revenues, functional expenses, and balance sheets. However, the redesigned form also digs into the details of an exempt organization’s governance, management and internal policies.

So, in anticipation of the new reporting requirements, exempt organizations should review their policies with an eye towards the information required on the form. For example, an exempt organization may wish to review its conflict of interest, whistle blower, and document retention and destruction policy or consider adopting such policies. The Service’s rationale for asking governance questions is that it believes that well governed tax-exempt entities are more compliant taxpayers.

Significantly, the new Form 990 will require much more information than the current form, and the extensive standardized schedules will require exempt organizations to adapt information previously provided on unstructured attachments to standardized forms, which may be more readily compared with other exempt organizations. In this regard, tax-exempt organizations should begin to develop systems to accumulate this information now, rather than wait until the 2009 filing season.

Is the revised Form 990 consistent with the Service’s guiding principles? It would seem that the revised Form 990 certainly will enhance transparency and is also geared toward promoting tax compliance as well. Conversely, given the additional and substantial time and effort which will be required by the expanded reporting responsibilities, it would be difficult to say that the revised Form 990 minimizes the burden on the filing organization.

In sum, the redesign of Form 990 is significant and exempt organizations should take action now to get up to speed.

About the author: Mark A Loyd, Esq., CPA, is an associate in thetax and finance practice group of Greenebaum Doll & McDonald in Louisville. He is a member of the KyCPA Board of Directors, Editorial Board and Industry Task Force; and former chair of the Taxation Committee. He can reached at mal@gdm.com; 502.587.3552.

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