Is Your Organization Prepared for the New IRS Form 990?

By Mitchell L. Kalkhof, CPA, CFE

Malin, Bergquist and Company, LLP

There has been growing concern in the United States over the governance and business practices of tax-exempt organizations. Some recent scandals have shaken the public's confidence and triggered a demand for more information and increased transparency.

The Internal Revenue Service (IRS) has responded by implementing the first major change to the information reporting for tax-exempt organizations in 30 years, more notably the Form 990. The IRS stated on its website "Form 990 has not been significantly revised since 1979, and it is universally regarded as needing major revision.  It has failed to keep pace with changes in the law and with the increasing size, diversity, and complexity of the tax-exempt sector.  As a result, the current form fails to meet the Service’s tax compliance interests and the transparency and accountability needs of the states, the general public, and local communities served by the organization."

To allow time to adjust, the IRS has provided for a three-year transition period that allows smaller organizations to file a Form 990-EZ instead of the complete Form 990. Furthermore, organizations with less than $25,000 in gross receipts are allowed to file an even shorter Form 990-N until the 2010 tax year, when this threshold increases to $50,000. The chart below details the filing requirements during the transition period for organizations with greater than $25,000 in annual gross receipts. Organizations exceeding the thresholds below must file the full Form 990 (with all the applicable attachments).

The new Form 990 consists of 11 pages of information in the standard form. The answers to the 37 questions on pages 3 and 4 will determine which of the 16 additional Schedules an organization must include with their annual filing. Many of these schedules are completely new or require expanded information when compared to previous years. Organizations should review these two pages to determine which of the schedules should be completed. The applicable schedules and related instructions should be reviewed to obtain an understanding of the information to be disclosed and identify any additional record keeping needed.

Probably the most significant change will be Part VI of the new form titled Governance, Management, and Disclosure (page 6 of the Form 990). This Part VI includes 20 detailed questions about the board structure, policies, and practices in place at the tax-exempt organization. Some of these questions include whether your organization has written policies covering conflicts of interest, whistleblower, and document retention and destruction. It also asks if the Form 990 is posted on the organization's website, whether there was an annual compensation review for key employees by independent persons using comparable salary data or other factors, and whether or not the board of directors has reviewed the Form 990 before it was filed. Several of these questions if answered yes require the organization to describe the process or policy in narrative format on the new Schedule O.

Many organizations will need to adopt or amend policies to answer certain questions in the affirmative. While not required, these policies are generally considered best practices in the industry. With the current downturn in the economy, competition for charitable donations becomes critical to the success of organizations that depend on public donations. Keep in mind that an organization’s Form 990 is open for public inspection and since the advent of GuideStar and other nonprofit watchdog groups, the information is easily accessible online by stakeholders and potential donors.

Some of the other major changes to the new Form 990 include:

• Part V (page 5) - A dozen mostly new questions requiring statements regarding other IRS filings and tax compliance.
• Part VII (pages 7 and 8) - Much of the information on compensation of officers, directors, trustees, key employees, highest compensated employees and independent contractors is similar to the prior form. There are several differences with which to be familiar, including the required disclosure of compensation received from related organizations.
• Additional Schedules (16 in all) mentioned above, many of which are new.

The IRS has several items available to assist organizations in navigating the various questions that arise when preparing their new form. The Instructions for Form 990 includes a glossary of terms that is very helpful. The IRS has also recently published Form 990 Redesign for Tax Year 2008 (Filed in 2009) Frequently Asked Questions. These two items and many others including the new form and instructions can be accessed on the IRS website (http://www.irs.gov/charities/).

Rather than seeing these additional reporting requirements as a burden, organizations should consider this an opportunity to distinguish themselves to potential donors. Organizations should especially take an active role in preparing Part III Program Service Accomplishments (page 2) and the narrative opportunities in Schedule O. This information can be an effective tool in highlighting the organization's fiscal responsibility and to provide specific details of the essential services being provided to their local communities.

Mitchell L. Kalkhof, CPA, CFE is a member of the Not-for-Profit Group of Malin, Bergquist & Company, LLP, one of Western Pennsyvlania’s largest and fastest-growing certified public accounting firms. Contact him at mkalkhof@malinbergquist.com.

This article was published in the March 2009 edition of Duquesne University's Non-Profit Leadership Institute E-Newsletter.