IRS Form 990: Who Sees it Besides the IRS?

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2 IRS Form 990: Who Sees it Besides the IRS? State Tax Authorities. Attorney General. Public Inspection. Newspapers and Media. Donors. Anyone! 2

3 Purpose of New IRS Form 990 Enhance Transparency and Promote Tax Compliance. IRS says: The Internal Revenue Service believes that a well-governed charity is more likely to obey the tax laws, safeguard charitable assets, and serve charitable interests than one with poor or lax governance. A charity that has clearly articulated purposes that describe its mission, a knowledgeable and committed governing body and management team, and sound management practices is more likely to operate effectively and consistent with tax law requirements. And while the tax law generally does not mandate particular management structures, operational policies, or administrative practices, it is important that each charity be thoughtful about the governance practices that are most appropriate for that charity in assuring sound operations and compliance with the tax law. As a measure of our interest in this area, we ask about an organization s governance, both when it applies for tax-exempt status and then annually as part of the information return that many charities are required to file with the Internal Revenue Service. 3

4 Purpose of New IRS Form 990 Exempt Purpose and Activities vs. Activities that are Unrelated. Unrelated Business Taxable Income. 4

5 Purpose of New IRS Form 990 Private Benefit. Joint Ventures. Contracts. Private Inurement. Executive Compensation and Benefits. Executive Loans. Self-Dealing Transactions and Conflicts of Interest. 5

6 Purpose of New IRS Form 990 No Campaign Activities. For or Against. Limited Lobbying Activities. 501(h) election. 6

7 Purpose of IRS New Form 990 Gather Information with Respect to Areas of Abuse: Hospitals. Joint Ventures. Donor Advised Funds. Endowment Funds. 7

8 Purpose of New IRS Form 990 Monitor Corporate Governance. Appropriate Board Composition and Committees. Policies. Conflict of Interest. Compensation. Whistleblower. Document Retention. 8

9 When Does the New IRS Form 990 Apply? For calendar or fiscal years beginning in 2008, most organizations with gross receipts of less than $1,000,000 and total assets less than $2,500,000 may choose to file either the new Form 990 or the Form 990-EZ. For calendar or fiscal years beginning in 2009, most organizations with gross receipts of less than $500,000 and total assets less than $1,250,000 may choose to file either the new Form 990 or the Form 990-EZ. For calendar or fiscal years beginning in 2010, most organizations with gross receipts of less than $200,000 and total assets less than $500,000 may choose to file either the new Form 990 or the Form 990-EZ. 9

10 IRS Published Guidance. New IRS Form 990 along with background information and instructions can be found at: 10

11 Part VI Focus on Governance Part VI of revised IRS Form 990 asks 20 questions about the organization s governance, management and disclosure. Generally calls for yes or no answers. Requests information about policies not required by the Internal Revenue Code. If not required, then why comply? 11

12 Schedule O Must explain certain answers on Schedule O Explaining an answer is often more difficult than adopting a policy. The IRS cannot review every Form 990, but others will members, funding sources, press Disclosure motivates compliance (and motivates you to attend this webinar) 12

13 Board Independence Part VI - Question 1 How many voting members are on the governing body? How many voting members are independent? Part VI - Question 2 Did any officer, director, trustee or key employee have a family relationship or business relationship with any other officer, director, trustee or key employee? 13

14 An independent director is a person: Who is not compensated as an officer or employee of the organization or a related organization Who does not receive payments as an independent contractor of the organization or a related organization exceeding $10,000 Who is not (and whose family members are not) involved in an interested person transaction with the organization reportable on Schedule L (or that would be reportable if Schedule L was filed) $100,000 in the aggregate $10,000 or 1% of revenue (greater of) in a single transaction $10,000 to family member 14

15 Exceptions Being a donor to the organization is OK Receiving financial benefits by virtue of being a member of a charitable class is OK Reimbursement of reasonable expenses and reasonable compensation of a director is OK Compensation from a religious organization after taking a vow of poverty is OK 15

16 Reasonable Effort The organization need not engage in more than a reasonable effort to obtain the information necessary to determine independence. Reliance on a questionnaire is strongly encouraged. A questionnaire is a useful planning tool to identify potential independence issues before they arise. 16

17 Relationships Family relationship means spouse, ancestors, brothers and sisters (whether whole or half blood), children (whether natural or adopted), grandchildren, great grandchildren, and spouses of brothers, sisters, children, grandchildren, and great grandchildren Business relationship means employment, business transaction (in excess of $10,000) or common ownership Business relationship includes direct or indirect relationships. Business relationship excludes ordinary course transactions on same terms offered to public 17

18 Reasonable Efforts The organization need not provide information about relationships if it is unable to secure the information after a reasonable effort. Reliance on a a questionnaire is strongly encouraged. A questionnaire is a useful tool to identify relationships before they are established. 18

19 Practice Points Interested directors are not prohibited. Relationships are not prohibited. There could be very good reasons for a particular relationship. Describe the reasons on Schedule O. 19

20 Conclusions For Part VI, there are no right or wrong answers, but clearly some answers are better than others. Thinking about the questions in advance should help your organization achieve better answers. Ultimately, the focus should be on good governance, not just the answers to 20 questions. Independent directors more likely to provide proper oversight and accountability for the organization, which is key to achieving the organization s goal. 20