IRS REDESIGN FORM 990

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1 January 10, 2008 EXECUTIVE SUMMARY IRS REDESIGN FORM 990 The IRS released the redesigned Form 990, Return of Organization Exempt from Income Tax, the IRS form filed annually by state chartered credit unions. The IRS expects to release the Instructions to the form in the early part of this year. Based on comments the IRS received from CUNA and others, Group 990 filings will still be permitted. The general content and structure of the draft form has been retained, including a core form that all organizations must complete and schedules to be completed depending on an organization s type and activities. A new Schedule O, Supplemental Information to Form 990, has been added to allow organizations to supplement information that is reported elsewhere on the form. There will be transition relief for smaller organizations by a phase-in requirement to file the new form over a three year period. Organizations would be required to report summary information about the compensation of officers, directors, trustees, and certain other employees in the core form. Detailed compensation information would be reported on Schedule J and would be completed only by those organizations with highly compensated individuals and particularly those individuals with complicated compensation arrangements. Information on the composition of an organization s board, governance and financial statement practices would be required on the core form.

2 The new form will be used for the 2008 tax year, filed in If you have questions or need a copy of the new IRS Form 990, please feel free to contact Assistant General Counsel Lilly Thomas by at LThomas@cuna.com or by telephone at (800) , extension You may also access the form here BACKGROUND IRS Form 990 Return of Organization Exempt from Income Tax is an annual return required to be filed by tax-exempt organizations to report information about their operations. It is a public document and is relied on for information about the organizations that file (filing organizations). All state chartered credit unions are required to file Form 990 with the IRS annually. Federal credit unions are not required to file Form 990, since they are not subject to unrelated business income taxes. The IRS believes that the current form, which was redesigned in 1979, neither adequately describes the filing organization nor provides a basis for comparing an organization with its peers. The current redesign is based on three guiding principles: Enhancing transparency to provide the IRS and the public with a realistic picture of the organization, along with the basis for comparison to other organizations; Promoting tax compliance by accurately reflecting the organization s operations so the IRS may efficiently assess the risk of noncompliance; and Minimizing the burden on filing organizations. DISCUSSION The IRS released the new redesigned Form 990, Return of Organization Exempt from Income Tax, the form filed annually by state chartered credit unions. The new form will be used for the 2008 tax year, filed in The IRS expects to release the Instructions to the form in the early part of this year. Based on comments the IRS received from CUNA and others, Group 990 filings will still be permitted, at least for the time being. The IRS is concerned about the lack of transparency resulting from the group return process and has experienced administrative difficulties monitoring whether group returns include all elected subsidiaries. CUNA has offered to work with the IRS to address its concerns, and the IRS stated it will work with interested parties to study changes to the group return filing processes and requirements. 2

3 While several changes have been made, the general content and structure of the draft have been retained, including a core form that all organizations must complete and schedules to be completed depending on an organization s type and activities. The core form includes a summary page (Part I), and ten additional Parts. The summary page includes the organization s identifying information and a snapshot of the organization s key financial, compensation, governance, and operational information. The summary page will include a breakdown of the organization s revenues, expenses, assets, liabilities, and net assets, which will highlight the size and key financial measures of the organization. Additionally, a new Schedule O, Supplemental Information to Form 990, has been added to allow organizations to supplement information that is reported elsewhere on the form. There will be transition relief for smaller organizations by a phase-in requirement to file the new form over a three year period. This will be accomplished by increasing filing thresholds for the Form 990-EZ to allow smaller organizations the option to file either the new Form 990 or the Form 990-EZ for 2008 and 2009 tax years. For those years, an organization may opt to file a Form 990-EZ if it satisfies both the gross receipts and assets tests in the table below. May file 990-EZ for: If gross receipts are: If assets are: 2008 tax year (filed in 2009) > $25,000 and < $1 million < $2.5 million 2009 tax year (filed in 2010) > $25,000 and < $500,000 < $1.25 million 2010 and later tax years > $50,000 and < $200,000 < $500,000 OVERVIEW OF CHANGES Summary Page The agency requested several percentage ratios on the draft summary page, such as the request for executive compensation information as a percentage of service expenses. These percentages provided an incomplete picture, which could be subject to manipulation or misinterpretation by filers and users. As a result, the revenue and expense percentage column in the draft form was replaced with a column displaying the revenue and expense data from the prior year, which would report a two-year comparative financial data on the summary page. Additionally, the summary page was amended to be more relevant for noncharities. It no longer includes, for example, reporting expenses by functional type, which is only required for charitable organizations (501(c)(3) and 501(c)(4) organizations) and adds additional options for organizational type. However, the agency added a line on the form for organizations to enter the number of volunteers they have. To minimize burden, organizations may estimate this number. 3

4 Compensation Information Organizations must list each officer, director, trustee, or key employee on the core form. The draft required disclosing individuals personal addresses, which prompted safety and soundness concerns because of the public nature of the form. The new form eliminated the requirement to include individuals personal addresses and will permit the organization to provide an alternative mailing address or physical location for those individuals who cannot be reached at the organization s address. The form maintained the requirement to report summary information about compensation, based on Form W-2 reporting for employees, and Form 1099 reporting for directors and other independent contractors. Like the current form, compensation paid by related organizations must be reported separately. The new form restores reporting of other compensation which would include retirement plan benefits and other compensation from related organizations. However, organizations may now estimate other compensation to reduce administrative burden. Some filers will be required to complete Schedule J, Supplemental Compensation Information, which breaks down the reporting of an individual s executive compensation. The IRS intends that it be completed only by those organizations with highly compensated individuals and particularly those individuals with complicated compensation arrangements. The thresholds for reporting an individual s compensation on Schedule J have been retained, and IRS guidance includes thresholds of reportable compensation greater than $150,000 or more than $250,000 of total compensation, nontaxable fringe benefits and expense reimbursements. However, the new Schedule J eliminated the reporting of de minimis fringe benefits and nontaxable expense reimbursement amounts, which makes the guidance inconsistent with the schedule s requirements. CUNA has contacted the IRS for clarification. Additionally, Schedule J must be completed for individuals listed in Form 990 who: Are former officers, key or highest compensated employees who received more than $100,000 and former directors or trustees that received more than $10,000 of reportable compensation from the organization and any related organizations; Who received or accrued compensation from any source, other than the organization, for services rendered to the organization. Schedule J was also amended to eliminate the double counting of deferred compensation benefits, which is reported for multiple years. By reporting the same compensation dollars for multiple years, an individual s compensation may appear greater than it actually was. The schedule now includes a new column to report amounts that are in current year amounts, but that were also reported in a prior year. 4

5 Corporate Governance The new Form 990 maintains the requirement for detailed information on corporate governance issues. However, because of comments from CUNA and others, questioning the IRS authority to regulate management practices, various statements have been added to clarify that certain sections request information about policies not required by the Internal Revenue Code. Other changes to the Board Governance section of the Core 990 Form include: Revising questions to include who elects directors and whether board s decisions are subject to approval by members or others; Deleting the question about whether an officer, director, trustee, employee or volunteer prepares the financial statements; Adding the question about whether the organization has stockholders or members; Eric Richard General Counsel (202) erichard@cuna.com Mary Mitchell Dunn SVP & Deputy General Counsel (202) mdunn@cuna.com Jeffrey Bloch Senior Assistant General Counsel (202) jbloch@cuna.com Lilly Thomas Assistant General Counsel (202) lthomas@cuna.com 5