The Redesigned IRS Form 990

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2 The Redesigned IRS Form 990 Greater Kansas City Community Foundation Polsinelli Shalton Flanigan Suelthaus PC Presenters: Bruce R. Hopkins Thomas J. Schenkelberg Virginia C. Gross October 4, 2007 Kansas City, MO

3 Agenda The View From The IRS Core Form Supporting Schedules Discussion

4 Revised Draft Form Overview On June 14, 2007 IRS released a redesigned draft Form 990 Redesigned form scheduled to take effect for the 2008 tax year. Planned changes are intended to provide increased transparency and facilitate comparisons between similar types of tax-exempt organizations. Open to public comment through September 14, 2007 IRS is stating that this is one of the biggest events in exempt organizations in the past 20 years. The last redesign of the Form 990 occurred in 1979.

5 Revised Draft Form Overview IRS Redesign Guiding Principles: Enhancing transparency Promoting compliance Minimizing the burden on filing organizations

6 Revised Draft Form Overview Observations: Is this the Scarlet Letter of regulatory enforcement? Is this an attempt to bypass the legislative and administratively rule-making processes? Comments note that many of the questions on the core form ask for information that goes well beyond that necessary to determine technical compliance.

7 The Form and its Schedules The redesigned form consists of a 10-page core form and 15 Schedules that should be completed based on the organization s activities. Redesign Schedule Topic Current/ New Item Filing % Estimate A Public Charity Status Current <75% B Contributors Current 30-40% C Political and Lobbying Activity New in part <10% D Supplemental Financial Statement Detail New in part 100% E Schools Current <5% F Foreign Activities New <5% G Fundraising and Gaming Current <25% H Hospitals New <5%

8 The Form and its Schedules Redesign Schedule Topic Current/ New Item Filing % Estimate I Grants Current <20% J Compensation Current <5% K Tax Exempt Bonds New <5% L Loans Current <5% M Non-cash Contributions New <20% N Termination or Significant Disposition of Assets Current <5% R Related Organizations Current <25%

9 Core Form Overview The Core Form is divided into 9 parts : Part I, Summary Part II, Compensation Part III, Governance Part IV, Revenue Part V, Expenses Part VI, Balance Sheet Part VII, General Activities Part VIII, IRS Filings Part IX, Accomplishments

10 Form 990: Part I Summary Part I, Summary Brief description of the organization s mission List of the organization s three most significant activities Various ratios and information on financial activities, compensation, governance, and operations Proposed changes

11 Form 990: Part II Compensation Expands list of individuals to include: Current Officers, Directors, Trustees, Key Employees Top-5 Highest Paid Employees with more than $100,000 of reportable compensation (W2 or 1099) Former Officers, Key Employees and Top-5 Highest Compensated Employees (going back 5 years) with more than $100,000 of reportable compensation Former Directors and Trustees (going back 5 years) who received more than $10,000 of reportable compensation Include both Reporting Organization and Related Organizations

12 Form 990: Part II Compensation Has the organization implemented the rebuttable presumption of reasonableness for executive compensation? Has any officer or employee accrued more than $100,000 of non-qualified deferred compensation? Series of relationship questions designed to identify conflicts of interest. Disclosure of Top 5 Highly Compensated Independent Contractors paid more than $100,000. Schedule J required for certain individuals listed in Part II.

13 Form 990: Part III Governance Increased Disclosure on Process and Procedure Governing Body Total number + Total independent Policies/Procedures Conflict of Interest (How many transactions) Whistleblower + Document Retention Minutes Activities of Chapters Who prepares financials? Audit committee? Disclosure of Disclosure

14 Form 990: Part III Governance Policies and Procedures Mentioned or Implied in Redesigned Form 990 Conflicts of Interest Policy Whistleblower Policy Document Retention and Destruction Policy Audit Committee Charter Policy on Compliance with Rebuttable Presumption Policy on Compilations, Reviews and Audits Policy on Investments in Disregarded Entities, Joint Ventures and Affiliated Organizations Policy Requiring Safeguarding Exempt Status with Respect to Transactions and Arrangements with Related Organizations Community Benefit Report Charity Care Policy Billing and Collections Policy Reimbursement of Travel and Entertainment Expenses Investment Policy

15 Form 990: Part IV, V,& VI Part IV: Revenues Combines prior Part I and Part VII Part V: Expenses includes natural classifications and functional allocations; adds more categories Part VI: Balance Sheet Loans on Schedule L Investments on Schedule D

16 Form 990: Part VII Part VII: General Activities Operations Outside US Fundraising Tax-Exempt Bonds Donor Advised Funds Ownership of Disregarded Entities Endowment Investments

17 Form 990: Part VIII Part VIII: IRS Filings Political Campaign Activities Lobbying Tax Shelters

18 Form 990: Part IX Accomplishments Similar to Part III of the current form. Opportunity to describe program service accomplishments. Requests a breakdown of revenue and expenses by program or activity Note: As the proposed form is organized, the taxpayer s accomplishments will be reported on the last page of the form, which may de-emphasize the importance in relation to other information on the form.

19 Schedule A: Supplementary Information Inquires about the reason for public charity status Moves supporting organization information up Five years of information Note private foundation boxes on line 20

20 Schedule B: Schedule of Contributors No change from existing Schedule B Requests information on contributors (name, address, contribution amount, and source (cash, non-cash, or payroll)

21 Schedule C: Political Campaigns & Lobbying Activities Part I-A - Detailed information on direct and indirect political campaign activities Part I-B - Information on excise taxes incurred and paid Part I-C (not applicable to Sec. 501(c)(3) organizations) Information regarding 527exempt function activities Part II-A Sec. 501(h) election. Lobbying activities, including lobbying expenditures during 4-year averaging period. Part II-B Substantial part test. Direct and indirect lobbying expenditures for the year.

22 Schedule D: Supplemental Financial Statements Consolidates in a single schedule much of the information currently provided in various whitepaper attachments to the Form 990. Requires detailed information on investments (securities, buildings, equipment, etc.) Requests detailed information on other assets, other liabilities, and conservation easements Information must also be provided on donor advised funds and other similar accounts Taxpayer must report role as an agent, trustee, custodian, or other intermediary for contributions or other assets not included on Form 990

23 Schedule D: Supplemental Financial Statements Cont... Taxpayers also must provide information on endowment funds Reconciliation of revenue/expense amounts on audited financial statements with amounts listed on return Several questions related to maintaining collections of art, historical treasures, and other assets Significant new reporting item: Text of the footnote to the organization s financial statements that reports the organization s liability for uncertain tax positions under FIN 48

24 Schedule E: Schools Schools must respond to various questions regarding school policies on racial discrimination. Is nondiscrimination policy stated in governing documents or in resolution approved by governing body? Is nondiscrimination policy publicized in brochures, catalogues and other written communications? Does the organization maintain: Records regarding racial composition of student body Documenting that financial aid is awarded in nondiscriminatory manner Copies of brochures, catalogues and other written communications Copies of fundraising solicitations Does the organization discriminate by race with respect to: rights or privileges, admissions, employment, financial aid, educational policies, use of facilities, athletic programs.

25 Schedule F: Statement of Activities Outside the US Taxpayers asked to provide a detailed report of: Activities and accounts outside the U.S. Grants and other assistance to organizations/entities and individuals outside the U.S. Issues and Observations Captive Insurance Companies Political Activities Outside of US Many comments have raised issues with the information requested suggesting that it may put foreign aid workers at risk.

26 Schedule G: Supplemental Information Regarding Fundraising Activities. Complete if organization has $10,000 or more in revenue from special events or paid a professional fundraiser $10,000 or more. Organizations must provide detailed information on fundraising activities Method of fundraising Geographical size of fundraising campaigns Breakout by Event/Campaign Also must provide information and respond to questions on gaming activities Could require detail reporting on galas, golf outings and other fundraising events. Observation: Raffles and other games of chance are considered gaming and may need to be reported.

27 Schedule H: Hospitals Line 9 in Part VII of the core form directs organizations that operate or maintain a facility to provide hospital or medical care to complete Schedule H. Hospitals Facilities that provide medical care Outpatient clinics Ambulatory surgery centers Skilled nursing facilities Drug and alcohol treatment facilities Faculty practice plans

28 Schedule H: Hospitals Schedule H requires filers to categorize charity care and community benefit expenditures separately. Charity care is to be classified and reported as follows: Charity care at cost (determined pursuant to either a cost accounting system or a cost-to-charge ratio) Unreimbursed Medicaid Unreimbursed costs from other government programs (just means-tested programs?)

29 Schedule H: Hospitals Community Benefit is to be classified and reported as follows: Community health improvements services and operations; Health professions education (direct and indirect costs); Subsidized health services; Research; and Cash and in-kind contributions to community groups.

30 Schedule H: Hospitals Additional Schedule H Questions: Whether the hospital prepares an annual community benefit report; Whether the hospital has adopted a charity care policy, and if so, how it is communicated to patients; Billing and collection information Whether the hospital has a written debt collection policy; Information regarding management companies and joint ventures; A description of emergency room policies and procedures, including hours of operation.

31 Schedule H: Hospitals Issues and Observations Modified CHA Format Community Building Activities Hospital versus providing medical care Optional aggregation/separation of multiple facilities Medicare Loss Bad Debt (Will IRS endorse HFMA #15?) Persons Served Billing and Collection statistics Management Companies and Joint Ventures Charity Care Policies Charitable Expenditure Budget Caps Emergency Room Policies

32 Schedule H: Hospitals This schedule will now require organizations to capture more information than has previously been captured in a centralized manner. A significant amount of time may be required to implement the appropriate reporting systems in order to comply with this schedule. Several organizations have estimated additional time commitments ranging from 160 hours to an additional FTE The form is completed based upon the reporting organization s activities. This may create challenges for a healthcare system.

33 Schedule I: Supplemental Information on Grants and other Assistance to Organizations, Governments and Individuals in the US US Requires taxpayer to provide detailed information on grants and other assistance provided to governments, organizations and individuals in the U.S. Grant and assistance amounts Recipients/Donee name, address, and EIN Purpose Includes scholarships or grants to nursing or other medical students Note: The redesigned form asks questions intended to determine whether recipients are related to certain parties within the organization, including the donor. Implementing reporting systems that could identify potential relationships between the organization and recipients could prove burdensome.

34 Schedule J: Supplemental Compensation Information Schedule J must be completed for individuals listed in Form 990, Part II Including: Former officers, directors, trustees, key or highest compensated employees Current officers, directors, key or highest compensated employees with: reportable compensation in excess of $150,000 from the organization and any related organizations; reportable compensation plus other benefits (e.g., deferred compensation and fringe benefits) in excess of $250,000; Received or accrued compensation from any source, other than the organization or related organization for services rendered to the organization.

35 Schedule J: Supplemental Compensation Information Must include the following amounts: A breakdown of W-2 compensation into base compensation, bonus and incentive compensation, severance or change of control payments, and other forms of compensation (e.g., taxable benefits); Nonqualified deferred compensation; Supplemental nonqualified retirement plans; Non-taxable fringe benefits; Non-taxable expense reimbursement; Equity-based compensation. Interestingly, qualified plan contributions are not reported.

36 Schedule J: Supplemental Compensation Information Must Answer the Following Questions: Did the organization have a policy regarding T&E reimbursement? Did the organization pay for first-class travel, club dues, or use of personal residence? Did the organization pay compensation based in whole or in part on revenues or net earnings? Did the organization provide any non-fixed payments? Did the organization make any payments subject to a contract that was subject to the initial contract exception?

37 Schedule J: Supplemental Compensation Information Issues and Observations Potential for double counting deferred compensation (when earned and when paid) Non-taxable expense reimbursement Valuing deferred compensation Club dues? First class travel?

38 Schedule K: Supplemental Information on Tax Exempt Bonds Designed to address: - Noncompliance with recordkeeping and record retention. - Investments of proceeds and arbitrage rebate requirements. All bond issues > $100,000 including: - Use and investment of bond proceeds - Disclosure of private use and/or compensation of third party service providers

39 Schedule L: Supplemental Information on Loans Loans from organization to officers, directors, trustees, key employees, highly compensated employees, and disqualified persons. Loans from same individuals to the organization.

40 Schedule M: Non-Cash Contributions Taxpayers that report more than $5,000 in noncash contributions must provide detailed information on contributions received. All types of property are required to be disclosed

41 Schedule N: Liquidation, Termination, Dissolution or Significant Disposition of Assets New schedule Captures Life Events Expands disclosure to also include asset dispositions (more than 25%) Includes transfers to JV and subs

42 Schedule R: Related Organizations Requests information on each of taxpayer s related disregarded entities, taxable entities, and tax-exempt entities: Name Address EIN Nature of Activities Location Total Revenue End-of-year-assets Tax Status (Exempt, Public Charity, C-Corp, S-Corp, Trust, Partnership) Direct controlling entity Disproportionate Allocations UBTI

43 Schedule R: Related Organizations With Respect to: Disregarded entities Related tax-exempt entities Related partnerships and LLCs Related taxable corporations and trusts Report Every: Gift, grant or capital contribution to or from the entities Loan or guarantee to or from the entities Sale to or purchase from the entities or other exchange or lease of assets between the entities Service performed by one entity for another (including fundraising and membership services) Sharing of facilities, equipment or personnel between the entities Reimbursement of expenses paid to or from the entities Transfer of cash or property between the entities

44 Questions?