FORM 990: WHAT SHOULD THE BOARD S ROLE BE? JODY BLAZEK CPA Blazek & Vetterling Houston, Texas

Transcription

1 FORM 990: WHAT SHOULD THE BOARD S ROLE BE? JODY BLAZEK CPA Blazek & Vetterling Houston, Texas TYREE COLLIER Attorney at Law Thompson & Knight Dallas, Texas State Bar of Texas 11 th ANNUAL GOVERNANCE OF NONPROFIT ORGANIZATIONS August 22-23, 2013 Austin CHAPTER 12

2

3 B lazek & V etterling C ERTIFIED P UBLIC ACCOUNTANTS JODY BLAZEK, CPA jody.blazek@bvcpa.com A Short Biography Jody Blazek is a partner in Blazek & Vetterling, a Houston CPA firm focusing on tax and financial services for exempt organizations and the individuals who create, fund, and work with them. BV provides tax compliance, auditing, and planning services to over 500 nonprofit organizations, including schools, churches, museums, human service organizations, business leagues, private foundations, garden clubs, fraternities, research institutes, civic associations, cultural organizations, and others. Jody began her professional career at KPMG, then Peat, Marwick, Mitchell & Co. Her concentration on exempt organizations began in 1969 when she studied and advised clients about the Tax Reform Act that completely revamped the taxation of charities and created private foundations. From 1972 to 1981, she gained nonprofit management experience as treasurer of the Menil Interests where she worked with John and Dominique de Menil to plan the Menil Collection, The Rothko Chapel, and other projects of the Menil Foundation. She reentered public practice in 1981 to found the firm she now serves. She is the author of six books in the Wiley Nonprofit Series: Revised Form 990 (2009); IRS Form 1023 Preparation Guide (2005), Tax Planning and Compliance for Tax-Exempt Organizations, 5 th Edition (2011), Nonprofit Financial Planning Made Easy (2008), Private Foundations: Tax Law and Compliance 3 rd ed. (2008) and The Legal Answer Book for Private Foundations (2001), co-authored with Bruce R. Hopkins. Jody served on the Financial Accounting and Transparency Group created by Independent Sector to support the Panel on the Nonprofit Sector reports to the Senate Finance Committee. She is past chair of the AICPA Tax-Exempt Organizations Resource Panel and a member of the 990s Task Force and 1023 Task Forces. She serves on the national editorial board of Tax Analysts' The Exempt Organization Tax Review and the AICPA Tax Advisor. She has served on the Community Service Committee of the Houston Chapter of Certified Public Accountants and is a founding director of Texas Accountants and Lawyers for the Arts and the Houston Artists Fund. She is a member of the board of the Houston Tomorrow, the Anchorage Foundations, and the Main Street Coalition Council. She is a frequent speaker at nonprofit symposia, including those sponsored by Conference of Southwest Foundations, Association of Small Foundations, AICPA, Arizona, California, Maryland, New York, Texas, Washington Societies of CPAs, The University of Texas School of Law, United Way of the Texas Gulf Coast, and Professional Education Systems, among others. Jody received her BBA from University of Texas at Austin in 1964 and took selected tax courses at South Texas School of Law. She and her husband, David Crossley, nurture two sons, Austin and Jay Blazek Crossley and their families. January Weslayan, Suite 200 Houston, Texas Fax

4

5 Tyree Collier Thompson & Knight L.L.P. One Arts Plaza 1722 Routh Street, Suite 1500 Dallas, Texas Telephone: (214) Tyree Collier is an attorney in the Dallas office of the law firm of Thompson & Knight L.L.P. His practice focuses on the representation of nonprofit organizations and their founders and contributors. Mr. Collier earned his B.B.A. from Baylor University in 1988 and practiced accounting for three years, obtaining his CPA license, before earning his J.D. from The University of Texas School of Law in Mr. Collier is a former Chair of the Section of Taxation of the State Bar of Texas. Mr. Collier serves on the boards of several nonprofit organizations and speaks and writes regularly on issues relevant to nonprofit organizations

6

7 Form 990: What Should the Board s Role Be? Chapter 12 TABLE OF CONTENTS POWERPOINT PRESENTATION Form 990: What Should the Board s Role Be? ATTACHMENTS i

8

9 Form 990: What Should the Board's Role Be? Chapter 12 Form 990: What Should the Board s Role Be? Jody Blazek CPA Blazek & Vetterling Houston Texas Tyree Collier Attorney at Law Thompson & Knight Dallas Texas Fiduciary Duties Duty of loyalty Duty of care Duty of obedience Blazek & Vetterling 2 1

10 Form 990: What Should the Board's Role Be? Chapter 12 Fiduciary Duties Duty of loyalty Act in best interest of organization Avoid self-interest Corporate opportunities Comply with conflict of interest policy Disclosure Recusal Blazek & Vetterling 3 Fiduciary Duties Duty of care Exercise care of an ordinarily prudent person Stay reasonably informed of the organization s activities and finances Regularly attend meetings Be prepared and participate Ask questions Blazek & Vetterling 4 2

11 Form 990: What Should the Board's Role Be? Chapter 12 Fiduciary Duties Duty of obedience Comply with the organization s Bylaws and Certificate of Formation Comply with applicable federal, state, and local laws Comply with governance policies adopted for the organization Blazek & Vetterling 5 Fiduciary Duties Form 990 helps directors stay informed and comply with duty of care Form 990 financial statements easier to understand than GAAP financial statements Significant information regarding policies, governance, related party transactions, and compliance with tax requirements Blazek & Vetterling 6 3

12 Form 990: What Should the Board's Role Be? Chapter 12 Fiduciary Duties Filing accurate Form 990 is legally required duty of obedience Failure to file for 3 consecutive years results in loss of FIT exemption Penalties for late or inaccurate filings Form 990 highlights most tax rules applicable to organization Blazek & Vetterling 7 Fiduciary Duties Important source of public disclosure Form 990 available to public and easily accessible Form 990 carefully reviewed by foundation grantors and many large contributors Used by IRS and Texas AG for enforcement purposes Blazek & Vetterling 8 4

13 Form 990: What Should the Board's Role Be? Chapter 12 Tax Compliance Issues Nonprofit organizations recognized as exempt under most 501(c) categories must meet an Organizational test. No profit motive No private ownership Conduct exempt activities Blazek & Vetterling 9 Tax Compliance Issues Secondly, they must operate exclusively for exempt purposes. Conduct charitable, agricultural, professional, social welfare, or other exempt purpose. Cannot devote itself to benefiting private individuals or do what the tax rules call provide private inurement. Blazek & Vetterling 10 5

14 Form 990: What Should the Board's Role Be? Chapter 12 Tax Compliance Issues The IRS significantly redesigned the Form 990 in 2007 to: Enhance transparency Promote tax compliance with two tests Minimize filing burden (Ha!) Blazek & Vetterling 11 Tax Compliance Issues 990 return preparation team should include CEO, CFO, COO, VP Human Resources, VP Development, Board Treasurer or Finance Chair, and possibly others. Blazek & Vetterling 12 6

15 Form 990: What Should the Board's Role Be? Chapter 12 Parts of Form 990 for Board Focus Parts of the return to focus on include: Part I does this snapshot paint a good picture? Part III does description accurately convey mission and accomplishments? Part V is organization in compliance with other filings and tax obligations? Blazek & Vetterling 13 Parts of Form 990 for Board Focus Parts of the return to focus, continued: Part VI Is good governance reflected? Part VII & Sch. J is compensation high? Parts VIII and IX do revenue and expense reports comport with audited financials? Part X does balance sheet reflect audit? Schedule L are insider transactions reported? Blazek & Vetterling 14 7

16 Form 990: What Should the Board's Role Be? Chapter 12 Part I Summary Front page 1 presents a snapshot of the organization. Three lines to describe the mission or significant activities. Key governance questions about # of independent board members in relation to total board members should be coordinated with Part VI. Blazek & Vetterling 15 Part I Summary IRS hot button issues appear here: Ratio of gross unrelated business income compared to net taxable UBI Revenues compared to professional fundraising fees Broad categories of revenue and expense this year vs. prior year Blazek & Vetterling 16 8

17 Form 990: What Should the Board's Role Be? Chapter 12 Part III Programs FUNDERS study this part!!! Information about accomplishments, donated services not reportable elsewhere, # of clients served, reports issued, and other nonfinancial evidence of achievements should be clearly disclosed avoiding Schedule O wraps. Blazek & Vetterling 17 Part III Programs Mission as articulated in documents or as adopted by EO s governing body is described UNLESS board has not approved a mission. Questions about changes in program service activity described in Schedule O. Submission will not trigger IRS approval for the changes and requests are not welcome. Blazek & Vetterling 18 9

18 Form 990: What Should the Board's Role Be? Chapter 12 Part IV Areas IRS Scrutinizes Parts IV and V contain an exhaustive list of tax compliance issues and prompts attachment of details. Troublesome questions include: Loans to insiders (Sch. L) and comp. policies (Sch. J & L) Lobbying or political activity Easements Investments Off-shore activities Amounts paid to outside fundraisers Tax-exempt bond compliance Excess compensation Donor disclosures Blazek & Vetterling 19 Part V Required IRS Compliance Part V discloses compliance with filing requirements for: Employees vs. independent contractors Unrelated business income Prohibited tax shelter transaction Non-deductibility disclosures for donors Excess business holdings for supporting organizations and donor advised funds Special limits for social clubs, certain insurance programs, and charitable trusts. Blazek & Vetterling 20 10

19 Form 990: What Should the Board's Role Be? Chapter 12 Part VI Governance, Mgmt, and Disclosures IRS tries to force fiduciary responsibility practices here though not required by code. Board relationships and independence Management by outside company Minutes of meetings Conflict of interest policy Compensation and whistleblower policies Joint ventures Disclosure of information to public Blazek & Vetterling 21 Part VI Governance, Mgmt, and Disclosures Independent Board Members A member of the governing body is considered independent only if all three of the following circumstances applied at all times during the organization s tax year: 1. Member was not compensated as an officer or other employee of the organization or of a related organization (see Schedule R instructions), except as provided in the religious exception discussed below. 2. Member did not receive total compensation or other payments exceeding $10,000 during the organization s tax year from the organization or from related organizations as an independent contractor, other than reimbursement of expenses under an accountable plan or reasonable compensation for services provided in the capacity as a member of the governing body. For example, a person who receives reasonable expense reimbursements and reasonable compensation as a director of the organization does not cease to be independent merely because he or she also receives payments of $7,500 from the organization for other arrangements. 3. Neither the member, nor any family member of the member, was involved in a transaction with the organization (whether directly or indirectly through affiliation with another organization) that is required to be reported in Schedule L for the organization s tax year, or in a transaction with a related organization of a type and amount that would be reportable on Schedule L if required to be filed by the related organization. Blazek & Vetterling 22 11

20 Form 990: What Should the Board's Role Be? Chapter 12 Part VI Governance, Mgmt, and Disclosures Example of non-independence: Member X votes on both related Org. A and Org. B s boards. His daughter works for A and receives >$10,000 of compensation. B is not independent as it regards A or B. This relationship must be reported in Schedule L for A. Blazek & Vetterling 23 Part VI Governance, Mgmt, and Disclosures Question 2 has been asked since 2005, but the definition of business relationships has been specifically defined and supposedly simplified. Unanswered question at this time is what is the consequence of having board members that are related parties. Blazek & Vetterling 24 12

21 Form 990: What Should the Board's Role Be? Chapter 12 Part VI Governance, Mgmt, and Disclosures Example of reportable business relationships: Member B and C are on board. C buys car from dealership owned by B for normal price. This is NOT a reportable relationship. B and C are CFO and CEO of separate forprofit corporations and each serve on the other company s board. This is a reportable business relationship. Blazek & Vetterling 25 Part VI Governance, Mgmt, and Disclosures Filing entity need not engage in more than a reasonable effort to obtain the necessary information to determine the independence of members of the governing body and may rely on information provided by such members. Annual questionnaire with name, title, date, and signature of each person sent any time during year is acceptable. Blazek & Vetterling 26 13

22 Form 990: What Should the Board's Role Be? Chapter 12 Part VI Governance, Mgmt, and Disclosure Has a diversion of assets occurred? Yes, if lesser of (1) $250,000 or (2) 5% of org s gross receipts for year or total assets at year end is disposed of, including but not limited to theft or embezzlement. Description in Schedule O is required. Shouldn t be a problem if the entity is downsizing. Take care to describe that no private benefit occurred is needed. Blazek & Vetterling 27 Part VI Governance, Mgmt, and Disclosure Board and committee minutes are expected to be maintained contemporaneously, or within 60 days of a meeting. A No answer to Question 8 a or b will indicate the EO is not meeting IRS expectations. The consequence is yet unknown. Remember it is important that minutes reflect the exempt purpose and nature of proposed and ongoing activities. Blazek & Vetterling 28 14

23 Form 990: What Should the Board's Role Be? Chapter 12 Part VI Governance, Mgmt, and Disclosure Question 11a asks if a copy of 990 (as ultimately filed) has been provided to members of governing body prior to its filing. It does not ask if they all approved of it! 11b does ask who (such as officers, directors, trustees, board committee or management) did review it. ALL filers must explain in Schedule O specifics of who, when, and how the 990 was reviewed. Blazek & Vetterling 29 Part VI Governance, Mgmt, and Disclosure The conflict of interest policy question was added to the 990 in 2005 evidencing high IRS regard for this governance tool. The process for disclosing conflicts inherent in proposed and ongoing transactions with interested parties through a questionnaire and documentation and persons involved is requested in Schedule O. Blazek & Vetterling 30 15

24 Form 990: What Should the Board's Role Be? Chapter 12 Part VI Governance, Mgmt, and Disclosure A Yes answer to Question 15 indicates EO s officials are protected by rebuttable presumption rules for reasonableness of compensation based on data showing comparable salaries, approval process, and documentation for process and data. Excessive salaries must be returned, the recipient is penalized, details disclosed on Schedule L, and exemption might be questioned. Blazek & Vetterling 31 Part VI Governance, Mgmt, and Disclosure Lines seek info to evaluate how the EO makes its public disclosures. It is important to note that while a copy of the return must be provided if someone asks for it, it need not be posted on a website. Also governing documents, conflict of interest policy, and financial statement are also NOT required to be made public by existing tax rules. Blazek & Vetterling 32 16

25 Form 990: What Should the Board's Role Be? Chapter 12 Part VII - Compensation A tax-exempt organization may pay compensation and have other financial transactions with members of its board and key employees, so long as the amounts paid are reasonable. Intermediate Sanctions can be imposed on disqualified persons that receive excess payments and those that approved the comp). Penalty =25% of excess payments due and excessive pay must be returned. Applies to 501(c)(3) or (4) entity. Rebuttable presumption created by like, like, like info, retention of proof of reasonableness, and independent approval. Blazek & Vetterling 33 Part VII - Compensation Everybody hates this Part of Form 990 because total comp taxable and non-taxable - paid by organization and related entities is reported. Use Schedule R to identify related entities. Officers, Directors, Trustee, Key Employees, Highest Compensated persons are reported whether paid by EO, related Eos, or a common paymaster. Blazek & Vetterling 34 17

26 Form 990: What Should the Board's Role Be? Chapter 12 Part VII - Compensation Part VII and Schedule J reflect amounts paid on calendar year basis even if EO has non-calendar yr. Officers, directors or trustees are reported if they served in that role at any time during period of the return. Payments to former officials reported during a 5-year look back period. Blazek & Vetterling 35 Schedule J - Compensation Part III explanation required for checked boxes to say if benefits reported as compensation, or if not, why benefit is necessary, i.e. First-class allowed only for cross country/overseas travel. Part II essentially provides more details for >$150,000 comp. recipients for both the filer and related organizations. Blazek & Vetterling 36 18

27 Form 990: What Should the Board's Role Be? Chapter 12 Schedule J - Compensation Question 4 asks about severance or change of control payments, supplemental nonqualified retirement plans, equity based compensation plans. Questions 5-8 quiz filer for details about incentive compensation contingent on revenues or net earnings (of either the organization or a related organization) or any plan that includes non-fixed payments. Blazek & Vetterling 37 Sch. L Trans. with Interested Persons Pay close attention to details in this part. For Parts I, II and III, all transactions are reported regardless of amount. Individual and aggregate reporting thresholds below which reporting is not required with respect to an interested person are provided for Part IV. Blazek & Vetterling 38 19

28 Form 990: What Should the Board's Role Be? Chapter 12 Sch. L Trans. with Interested Persons Parts III and IV contain separate reasonable effort instructions, which essentially expect the organization to make annual inquiries to its officials in a best effort to identify relationships and which the organization may rely on to satisfy reporting requirements for those Parts. There is a separate definition of interested person for each Part of the Schedule, so a person who is an interested person for one Part may not be an interested person for other Parts of the Schedule. Blazek & Vetterling 39 Sch. L Trans. with Interested Persons This schedule consolidates information previously requested in multiple parts of the old 990 regarding excess benefit transactions, loans with interested persons, and business relationships with interested persons. Excess benefit transactions, name of disqualified person involved, and amounts of Intermediate Sanction tax goes in Part I. Blazek & Vetterling 40 20

29 Form 990: What Should the Board's Role Be? Chapter 12 Sch. L Loans to Interested Persons Loans to and from interested persons that are outstanding at year end are reported. Loans with third parties that were transferred and became loans between the organization and an interested person are included. Details not a Balance Sheet attachment for Part X. Lines 4, 5, and 22 prompt details be reported in Part II of Schedule L. Blazek & Vetterling 41 Sch. L Loans to Interested Persons Interested persons for purposes of reporting loans on Schedule L, Part II include: Current or former officers, directors, trustees, key employees, and the five highest compensated employees listed in Part VII, Section A of Form 990 Disqualified persons essentially those above plus relatives Blazek & Vetterling 42 21

30 Form 990: What Should the Board's Role Be? Chapter 12 Loans Action Items View all loans to determine reporting requirements and modifications, if any, that should be considered: Ensure arrangements are in writing Require Board approval of all existing loans and future loans to/from interested persons Monitor any loans/advance balances to determine whether they can be eliminated prior to year-end Communicate with interested persons regarding disclosures that will be required. Blazek & Vetterling 43 Sch. L Grants to Interested Persons Part III requires organizations to report each grant (scholarships, fellowships, internships, prizes, awards, etc.) or other assistance (provision of goods, services, or use of facilities) provided by the organization to any interested person, regardless of amount. Blazek & Vetterling 44 22

31 Form 990: What Should the Board's Role Be? Chapter 12 Sch. L Grants to Interested Persons Interested persons for purposes of reporting grants on Schedule L, Part III include: Current or former officers, directors, trustees, and key employees Substantial contributors Persons related to those above Blazek & Vetterling 45 Sch. L Grants to Interested Persons Related persons include: Members of the organization s grant selection committee Family members (includes brothers & sisters and everybody s spouses) of officers, directors, trustees, key employees, substantial contributors, or members of the organization s grant selection committee Blazek & Vetterling 46 23

32 Form 990: What Should the Board's Role Be? Chapter 12 Sch. L Grants to Interested Persons A 35% controlled entity of an officers, directors, trustees, key employees, substantial contributors, or members of selection committee Employees of substantial contributors or of a 35% controlled entity of a substantial contributor if the employee received the grant or assistance due to the advice of the substantial contributor or 35% controlled entity or pursuant to a program funded by the substantial contributor primarily to benefit such employees. Blazek & Vetterling 47 Sch. L Bus. Trans. with Int. Persons Part IV requires organizations to report business transactions for which payments were made during the organization s tax year between the organization and an interested person if the payments exceed one of the reporting thresholds and regardless of when the transaction was entered into between the parties. Blazek & Vetterling 48 24

33 Form 990: What Should the Board's Role Be? Chapter 12 Sch. L Bus. Trans. with Int. Persons Reporting thresholds: All payments during the year between the organization and the interested person exceed $100,000 All payments during the year from a single transaction exceed the greater of $10,000 or 1% of the filing organization s total revenues Blazek & Vetterling 49 Sch. L Bus. Trans. with Int. Persons Reporting Thresholds, Continued Compensation payments paid by the organization to a family member of a current officer, director, trustee, or key employee exceeds $10,000 Blazek & Vetterling 50 25

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62