Tax

New Form 990: Challenges and Lessons Learned

Note: Articles published before January 1, 2017 may be out of date. We are in the process of updating this content.

 

 

 

By now, the fact that the Form 990 has been almost completely revised should come as a surprise to no one. However, as the Not-For-Profit (NFP) sector begins to prepare these returns, we are learning more and more about some of the nuances, shortcomings, and issues involved with the form. In this article, we will discuss some of the more common areas that have caused us and our clients the most consternation. This is based upon a fairly small universe: many organizations required to file prior to the August date of this article have extended the return so they can take a little more time to figure out how they will be disclosing various items.

Policies and Governance: This section (Part VI) has, without doubt, prompted the most discussion among organizations of all types. First and foremost for organizations to keep in mind is that none of the policies contained in this section are actually required by tax law. These are really more in the category of best practices that Congress and the IRS would like to see implemented by nonprofits. Thus, a “no” answer to any or all of these is not an admission of illegal wrongdoing. However, enough “no” answers might just cause the IRS to make a few inquiries about the organization. Also, since this is a public document, most organizations do not want to disclose a lot of information that might seem less than flattering about their governance. Therefore, we are seeing an effort by most to answer as many of these questions with a nice positive “yes.” One rude awakening for many is finding out that it is too late to implement a policy for this year. In a 990 FAQ section on the IRS Web site, it is clearly stated that, in order to answer “yes,” organizations must have implemented the policy prior to the year end of the Form 990 tax year. For example, a calendar year organization, filing an extended return in August 2009 that implemented a conflict of interest policy in July 2009, is forced to answer “no” even though it implemented the policy before it filed its return. The IRS does say the organization should explain in a note on Schedule O that it has adopted the policy subsequent to the year end.

Another question causing much confusion is the question asking if board members were given a copy of Form 990 prior to filing. This is followed by a line saying that the 990 review process, if there is one, should be explained in Schedule O. Many organizations have interpreted this to mean that the IRS would like the entire board to review and approve a draft version of the 990—a task that would be unmanageable for many nonprofits with large boards. However, the only “best practice” applicable to the entire board is that a draft be circulated to every board member—they are not required to review or approve it. The Schedule O explanation for review and approval of the Form 990 does not have any particular elements that have to be included. We feel the best practice for this review should include review by someone on the governing body—be it simply the treasurer, the audit/finance committee, or the ad hoc committee.

Disclosure Questions: Part VI concludes with several questions about public disclosure. It asks how the 990, 990-T (if a charity), and exemption application are made public. One of the choices is “another’s website.” Some organizations have asked if the public posting on Guidestar qualifies as “another’s website.” The IRS has said no because an organization cannot know if the posting is timely enough and Guidestar does not post exemption applications or Forms 990-T.

Mission and Activities: On page 1, Part I, the nonprofit is asked to describe its mission or most significant activities and then is required to describe its mission on page 2, Part III. In order to maximize favorable information about the organization, it would seem advantageous to list significant activities in Part I and then to describe the mission in Part III. Otherwise, exactly the same thing is being said twice. A software note: Most organizations tend to say more than the space on the form allows for both of these items and most tax software will continue these statements in Schedule O at the back of the return without indicating a continuation. Some manual editing can make this read a little better (i.e., inserting the word “continued” at the break point).

Number of Employees: Part I asks how many employees the organization has and says to use the number of W-2’s reported on Part V. This can cause a number of problems. For example, all of an organization’s employees may be paid by a related organization or, in some cases, may be paid in non-U.S. countries that do not have W-2’s. This would lead the reader to wonder how the organization operates without personnel. Many nonprofits are adding a note in Schedule O to describe the payroll arrangement and how many staff they really employ.

Program Service Revenue: Something new has been added in Part III: the Statement of Program Service Accomplishments. 501(c)(3) and (c)(4) organizations have to report revenue for each program in addition to the total expenses and grants paid by the program that was required on the old 990. The IRS has made it clear that they are not looking for contributions or grants by program (a real nightmare to report). What should be reported here are any fees the program may charge participants. For example, tuition, conference registration, and dues would be reported here.

Yes or No—the Only Options: Most of the questions on the new 990 only allow for a yes or no answer. In some cases, especially in Part V, “not applicable” would clearly be the best choice. Since this is not an option, explanations will be required in Schedule O.

Compensation—Part VII and Schedule J: We could do a whole seminar on these sections. A few of the problems/clarifications:

  • All officers (among many others) are required to be listed on Part VII. Per the instructions, this includes any organizational officers as defined in organizational documents but also automatically includes the top management official and the top financial official –regardless of salary level.

  • The “trigger” amount for several listings on Part VII, such as highest compensated employees, key employees, and former officers, etc., is reportable salary on W-2. However the trigger for the most common listing on the more detailed Schedule J is total compensation—W-2 plus all other compensation.

  • Read the instructions! There is a good table showing a wide variety of situations and where to report these individuals. You may still run into situations that are unclear. Document and explain in Schedule O.

Statement of Revenue—Part VIII: The contributions area of this expanded statement has caused some confusion in two areas:

  1. There is a line for membership dues (1b)—which for most organizations are considered program services revenue. The only “dues” that belong here are dues for which the “member” does not receive a substantial return benefit. For example, membership in a public radio or TV station typically is a contribution because the only return benefit is perhaps a station guide. Membership dues for trade associations, on the other hand, provide significant benefit for members and belong in the program service revenue area.

  2. There is also a line (1c) for fundraising events and another section in “other revenue” for fundraising event breakdown. The only portion of fundraising gross revenues that belongs in the contribution section is that portion which is greater than the fair market value of the return benefit received (e.g., if a gala ticket says the fair market value of the benefit received is $60 dollars and cost is $100, then $40 belongs in contributions line 1c).

 

Financial Statements Question—Part XI: A fairly innocuous question in this section has caused a lot of pain for many organizations. The question asks if the organization received audited financial statements. Sounds simple enough until one reads the instructions which state, “organizations who are part of consolidated financial statement audits must answer “no” to this question.” Many very large, high-profile organizations are audited on a consolidated basis and are obviously not happy at all to report that they don’t have an audit performed. The only solution for 2008 (outside of getting separate opinions for each entity) is to answer “no” and then to explain in Schedule O that the organization received a consolidated audit.

A high-level IRS official has announced that the IRS is aware of the problem and assured there will be a fix for it in 2009. The form of this “fix” has not been disclosed.

 

Public Support--Schedule A: In the past, this schedule had to be prepared on the cash basis. On the new form, organizations have to fill this in on the same basis of accounting that the 990 is prepared upon—in many cases, accrual. This is easy enough for the current year but this schedule has a four-year look back. Not only do the total lines have to be adjusted for accruals, but the details of “disqualified” support will have to be adjusted for accrual basis.

 

Foreign Activities—Schedule F: One portion of this new schedule requires disclosure of the total expenditures in foreign countries broken down by region. The expenses to be reported here should be limited to those actually expended in the foreign country—not expenditures in the U.S. that support foreign activities.

 

Transactions with “Interested Persons”—Schedule L: This section requires reporting of loans to/from interested persons, grants to interested persons, and business transactions with these parties. There has been a lot of confusion of exactly who is an interested person—with a certain amount of gray area involved. The instructions are fairly good with definitions and an analysis should be done on a case–by-case basis. The IRS has said organizations must make a reasonable effort to determine these types of transactions; questionnaires distributed at board meetings can be relied upon as constituting reasonable effort.

 

Tax Software Issues: Commercial tax software companies had to almost start from scratch to develop programming for the new Form 990. And, as expected, most of the products have glitches; some more significant than others. It is important to report these problems to vendors as soon as they are discovered so fixes can be made to later versions of the software or “work-around” solutions can be devised. The IRS is aware that software may cause a few problems this year and has said it will be a little more forgiving of mistakes on returns caused by software errors for 2008.

 

Resources: Start with the instructions. Although they are very lengthy, they are very inclusive, with many good examples and a great glossary of terms. The IRS Web site, www.irs.gov, has a lot of 990 information and an ever-growing list of frequently asked questions. The AICPA has a nonprofit tool box on its Web site containing a comprehensive checklist. Lastly, the PPC 990 Deskbook is a must for anyone preparing more than a few 990’s.

 

Next Year: According to the IRS, we should not expect any major changes for 2009. Other than fixing the consolidated issue (see above), changes will be limited to minor technical corrections. Should you discover any technical errors with the Form or have any suggestions for improvement, you are encouraged to send comments to the IRS at Form990Revision@irs.gov.

 

Conclusion: This is obviously the shakedown cruise for the new Form 990. Organizations and their outside accountants have their work cut out for them in this challenging year. It will clearly pay to stay abreast of developments from the IRS and collaborate on best practices with other organizations and preparers.