Form 990: What’s New and What You Need to Know
By Natalie G. Rooney
The IRS has big changes in store for nonprofit organizations when they file their taxes in 2009. In Dec. 2007, the service released a redesigned Form 990, Return of Organization Exempt from Income Tax,
the annual return most tax-exempt organizations must use to report information about their operations. Organizations will use the redesigned form to file for the 2008 tax year (returns filed in 2009).
While the 990 itself has been finalized, the instructions are still in draft form. Currently, the IRS is evaluating public comments on the draft instructions.
Until now, the Form 990 had not been revised significantly since 1979, says CSCPA Chief Financial Officer Carol Cameron, CPA. She described the Form 990 changes as “a total overhaul.” Changes were needed to help the nonprofit sector keep pace with law changes and with the increasing size, diversity, and complexity of the nonprofit sector itself.
According to the IRS, the redesigned form is based on three guiding principles:
• enhancing transparency to provide the IRS and the public with a realistic picture of the organization;
• promoting compliance by accurately reflecting the organization’s operations so the IRS efficiently may assess the risk of noncompliance; and
• minimizing the burden on filing organizations.
Transparency is the key word.
“It’s become more important to show transparency and show you’ve done the work as opposed to just showing the fundraising ratios,” says Kay Dragon, CPA, controller for the Geological Society of America. “Historically, we didn’t post our audit on the organization’s Web site,” she said. “But now it’s there. It’s not required, but it looks better. We have nothing to hide. Nonprofits need to err on the side of transparency. There’s no reason not to.”
Be Prepared
While organizations won’t actually be using the new Form 990 until 2009, Cameron cautions against waiting until the last minute to become familiar with the document and all the changes it entails. “There may be items you need to be putting in place now to make sure you present your organization’s best public face when it’s time to file your return,” she notes.The new form requires each filing organ-ization to provide certain information regarding the composition of its board or governing body, certain of its governance policies and practices, and the means by which it is held accountable to the public by making governance and financial information publicly available.
Among other things, the new form asks:
• whether the governing body receives the Form 990 before it is filed;
• the process the organization uses to review the Form 990;
• whether the organization has a written whistleblower policy;
• whether the organization has a written document retention and destruction policy;
• whether officers, directors, or trustees, and key employees are required to disclose annually interests that could give rise to conflicts; and
• how the organization makes governing documents, its conflict of interest policy, the Form 990, the Form 990-T, financial statements, and the audit report available to the public.
Cameron says that many of the questions request information on practices or policies that are not required by federal tax law but will be used to aid the IRS in risk modeling. The IRS will develop profiles of organizations that yield “productive” audits and will use these profiles in the selection of audit targets.
According to Grant Thornton LLP's fifth annual National Board Governance Survey for Not-for-Profit Organizations, only 30 percent of survey respondents have a policy in place requiring the board or one
of its committees to review the organization’s Form 990, but this remains an emerging trend.
“Form 990 is the most public financial document available about a nonprofit organization. Many more interested parties will read a nonprofit organization’s Form 990 than will ever read its audited financial statements,” says Frank Kurre, national managing partner of Grant Thornton’s not-for-profit industry practice. “To ensure an organization’s information is presented completely and correctly, the audit or finance committee should review the Form 990 before it is filed.”
New Tools, New Approach
The draft instructions employ a comprehensive approach intended to provide specific and clear guidance for
completing the core form and each schedule. Although this approach increases the length of the instructions, the IRS hopes the new content will make it easier for organizations to complete the form.
Major changes include:
• a glossary of key terms containing 176 definitions that also are included
elsewhere in the instructions; this provides the filing organization with a quick reference guide;
• comprehensive instructions to help organizations answer questions about the activities they conduct through
disregarded entities and joint ventures;
• additional instructions for those who file group returns;
• moving educational material applicable only to certain types of organizations from the front of the instructions to the appendices;
• revised compensation instructions, including a compensation matrix, more examples, and clearer definitions, to provide more certainty and objectivity in reporting executive compensation;
• increased use of examples;
• a sequencing list to help the organization complete the form in a step-by-step
order; and
• comprehensive instructions for the form’s new reporting requirements, including governance, foreign activities, hospitals, and tax-exempt bonds.
The draft instructions contain separate guidance for each schedule. This generally limits the number of organizations that must review a particular schedule’s
instructions to those that engaged in the activity covered by the schedule.
Public Comments on Draft Instructions Invited
To ensure that the final instructions address the needs of the tax-exempt community, the IRS sought public comments on the draft instructions. The comment period was open until June 1, 2008, and the IRS plans to post the comments on the instructions on its Web site.
The IRS specifically requested comments on:
• whether certain portions of the instructions could be streamlined or eliminated;
• whether specific examples of accomplishments to be reported by organizations in a particular subsector, such as by all nursing homes, all hospitals, all colleges and universities, all social clubs, all trade associations, etc., are needed;
• whether to rely on existing activity codes or develop new codes;
• whether additional examples are needed to determine when a board member is or is not independent; and
• what special reporting implications might pertain to a filing organization’s
ownership of S corporation stock.
Special transition rules will allow many small organizations to file a Form 990-EZ instead of the new Form 990 for 2008 and 2009 tax years. The draft instructions, the 2008 Form 990, and a summary of the special transition rules for 2008 and 2009 tax years are available on the IRS Web site, www.irs.gov/eo.
To read the Form 990 Redesign for Tax Year 2008 Background Paper, visit: www.irs.gov/pub/irs-tege/background_paper_form_990 redesign.pdf.
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