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Row you boat through compliance with the new irs 990 form. 2009 National Leadership Conference. Effective Dates & Transition. Form effective for 2008 filings (first due date 5/15/09) – FY 12/312008 – FY 6/30 & 9/302009 – Small organization phase-in (less than $1m in
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Row you boat through compliance with the new irs 990 form 2009 National Leadership Conference
Effective Dates & Transition • Form effective for 2008 filings (first due date 5/15/09) – FY 12/312008 – FY 6/30 & 9/302009 – Small organization phase-in (less than $1m in receipts and $2.5 assets) • Trade Associations and Professional Societies will “tend to extend” to put off public disclosure and related impact of compensation and governance information • Contribution-based organizations and particularly those relying on national and federated fund-raising strategies will not have this luxury
IRS Objective #3 Reducing The Filing Burden! • The new form consists of an 11 page “core” form and 16 schedules (A-R, no PQ) designed to require information reporting for certain types of entities engaged in specific activities and thresholds • Current Form 990 is 8 pages. For 501(c)(3) groups filing Schedules A&B, before attachments the form typically runs 30-40 pages • If you were to file all forms and schedules connected with the new 990 it would be 80 pages long!
New Form 990 Will Actually (or Effectively) Require Organizations • To delineate all elements of reportable compensation for current and former (5 year look back) officers, directors, key employees and other highly compensated employees • To defend your compensation levels and process to members, donors, staff and the press • To identify the nature and terms of all transactions with “related organizations” and “interested persons” • To disclose “material” diversions of assets
New Form 990 Will Actually (or Effectively) Require Organizations • To define and track outcome measures and correlate time frames associated with your major program accomplishments in achieving your exempt purpose • To make public your audited financial statements, governing documents and conflict of interest policies • To track and document the nature and amounts of transactions for certain family or business relationships among your Officers, Directors, Trustees and Key Employees
New Form 990 Will Actually (or Effectively) Require Organizations • To ensure documented governance review of Form 990 before filing • To establish or enhance policies to ensure chapters and other affiliate groups are consistent with the organization • To define “volunteers” and track/estimate their hours on a reasonable basis • To provide detailed reporting for fund-raising events if total revenue or professional fund-raiser expenses exceed $15K a year
What You Need To Do Now • Enact the necessary policies, procedures, accounting and data collection changes to address the disclosures required to present your organization accurately and in the best possible light • Educate volunteers, top management, staff, members, donors and other key stakeholders how these changes will impact the organization when this public form is complete and available
Caution-Do Not Use Logic! Use Sequencing List Part IV “Checklist of Required Schedules” is there to make sure you don’t miss anything but not the order for completing the form • Complete page 1 masthead items A-M (except line G see step 4 below)-No significant changes 2. Determine Related Organizations and the need to file Schedule R including Disregarded Entities and JointVentures (see Appendix F to instructions for definitions) 3. Complete Parts VIII (Statement of Revenue), IX (Statement of Functional Expense) and X (Balance Sheet) 4. Complete line G on Page 1 (Gross Receipts For The Year-cash or accrual based on your filing basis)
Caution-Do Not Use Logic!Use Sequencing List • Complete Parts III (Statement of Program Service Accomplishments), V (Statements Regarding Other IRS Filings and Tax Compliance), VII (Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors), XI (Financial Statements and Reporting) • Complete Schedule L Transactions With Interested Parties (if required) • Complete Parts VI (Governance, Management and Disclosure) • Complete Part I (Summary) and IV (Checklist of Required Schedules) • Complete remaining Schedules indicated by “Yes” answers to Part IV • Complete Part II (Signature Block)
Our Focus Today: Key Areas & Definitions • Governance, Management & Disclosure • Compensation-Including an Example • Other Schedules & Fun Facts • For detailed presentations, discussion and copies of all forms, schedules, instructions and glossary see: LarsonAllen New Form 990 Toolbox • LarsonAllen New Form 990 Toolbox
Governance, Management and Disclosure (Part VI) Acknowledging a lack of legislative authority to ask for certain governance information, IRS Exempt Organizations Commissioner Steven Miller recently stated: “The effects of good and bad governance show up in everything we do.” IRS will “continue to encourage, and indeed irritate” in the area of governance by scrutinizing the compensation and independence of an organization’s board, its controls, key employees, governance, foreign activities, disregarded entities and joint ventures and hospitals (ASAE Inroads April 24, 2008, Volume 23, Number 17)
Governance, Management and Disclosure (Part VI) • Governing body questions limited to “voting” members • Instructions address who is considered an “independent” governing body member • Four prong test determines “independence” 1. The member was not compensated as an officer or other employee; and 2. The member did not receive total compensation or other payments exceeding $10K except for reasonable expense reimbursements in connection with service on governing body, and 3. The member did not otherwise receive material benefits from the organization or a related organization ($50K or more is per se “material”); and 4. The member did not have a family member that received compensation or other material benefits from the organization or a related organization
Governance, Management and Disclosure (Part VI) • A member of a governing body is not considered to lack of independence because of the following circumstances: • The member is a major donor 2. The member receives compensation as an agent of a religious order under specific circumstances 3. The member receives financial benefits from the organization solely in the capacity of being a member of a charity or other class served by the organization in the exercise of its exempt function, such as being a member of a section 501(c)(6), so long as the financial benefits comply with the organization’s terms of membership (Thanks ASAE!)
Governance, Management and Disclosure (Part VI) Material Diversions of Organization Assets • Did the organization become aware of a “material” diversion of organizational assets current or prior years? • Instructions define “material” as the lesser of $250K or 5% of the organization’s gross receipts for filing year or its total assets at the end of the filing year. If “Yes”, explain the nature of the diversion, amounts or property involved, corrective actions taken and pertinent circumstances on Schedule O (no names required) Note: $250K is 5% of $5 million so if $2 million in revenue the threshold is $100K, maybe less depending on year end assets
Governance, Management and Disclosure (Part VI) • Did any officer, director, trustee or key employee have a family relationship or a business relationship with any other officer, director, trustee or key employee? • Do you have a process to track and report this?
Key Definition From Draft Instructions Family Relationship includes: • Spouse • Ancestors • Brothers and sisters (whole or half blood) • Children (natural or adopted) • Grandchildren • Spouses of bothers, sisters, children and grandchildren
Key Definition From Draft Instructions Business Relationship includes: 1. One person is employed by the other where the other is a trustee, director, officer, key employee or greater than 35% owner 2. One person is transacting business with the other, directly or indirectly, in one or more contracts of sale, lease, license, loan, performance of service, or other transaction involving transfers of cash or property valued in excess of $5,000 for the filing year. Indirect transactions are transactions with an organization with which the one person is an trustee, director, officer, key employee or greater than 35% owner 3. The two persons are each a director, trustee, officer or greater than 10% owner in the same business or investment entity
Governance, Management and Disclosure (Part VI) Other Policies & Disclosures – Conflicts of Interest Policy *Is there a written policy *Is annual disclosure of potential conflicts required *Does the organization regularly monitor and enforce compliance *Is the policy made available to the public? – Is there a Whistleblower Policy? (SOX) – Is there a Document Retention and Destruction Policy? (SOX)
Governance, Management and Disclosure (Part VI) Other Policies & Disclosures (continued) – Is there a process for setting and benchmarking compensation for officers, key employees and other highly compensated? (i.e., Rebuttable Presumptions to defend against defacto excess benefit/private inurnment) – Does the organization keep minutes of board and committee meetings? – Is the governing body provided with Form 990 before filing; who, when and what level of review is performed? – Are their policies and procedures for chapters and affiliates to ensure consistency with the organization controls?
Governance, Management and Disclosure (Part VI) • Other Policies and Procedures Mentioned or Implied in New Form 990 – Is there an Audit Committee? – Policy Requiring Safeguarding Exempt Status with Respect to Transactions and Arrangements with Joint Ventures and Subsidiaries? – Accountable Plan for Reimbursement of Travel and Entertainment Expenses? – Gift Acceptance Policy? – Investment Policy?
Form 990: Part VII - Compensation • Requires disclosure of compensation and other financial arrangements with officers, directors, key employees and highly compensation employees and independent contractors • Definition of “Key Employee” –See John Graham’s Presentation
Form 990: Part VII - Compensation Disclosure includes: –Current officers, directors, trustees, and key employees – Top five highest paid employees with compensation greater than $100,000 – Former officers, key employees, or highest paid employees with compensation greater than $100,000 – Former directors or trustees who received compensation greater than $10,000
Form 990: Part VII - Compensation • Amounts to be reported are calendar year W-2/1099’s (Box 5 and 7 respectively) rather than fiscal year reporting (still used for Part IX Statement of Functional Expenses). • Include Reportable and “Other” Compensation from the organization and related organizations • Amounts from related organizations of $10K or less can be excluded • “Other Compensation” (column F) can be estimated and is defined as compensation not currently reportable including deferred compensation and certain nontaxable benefits including employer-provided health benefits, certain flex-spending programs, contributions to qualified and non-qualified retirement plans (see Core Form Instructions Part VII p.7 of 14)
Schedule J - Compensation Info • Must be completed for: – Any individual currently listed in Part VII and receiving compensation in excess of $150,000 in reportable compensation or $250,000 in total compensation from the reporting organization and any related organization – Former officer, key employee or highest compensated employee receiving compensation in excess of $100,000 – Former director or trustee receiving compensation in excess of $10,000 – Any person listed in Part VII who receives or accrues compensation from any unrelated organization for services rendered to the organization – Disclose total number of individuals and contractors listed receiving more than $100K
Compensation Example From Draft Instructions Reporting on Part VII & Schedule J Base compensation: $105K Employer contribution to retirement plan $ 5K Pre-tax employee contribution same plan $ 5K Non-taxable employer health plan contribution $ 4K Pre-tax employee contribution same plan $ 4K Non-taxable dependent care assistance $ 4K Non-taxable group life premium $ 500 Non-taxable qualified moving expense $ 8K Related organization base compensation $ 20K Related organization retirement funding $ 2K Related organization tuition Assistance $ 5K $162,500 Reportable is $145,000 * HCE Not Key Employee •Other items specific exclusions No need to report items as “Other Compensation” on Part VII column F If related organization base comp $30K, then reportable is $155K and now over Key Employee threshold and all non-taxable items must be included on both Part VI (F) and Schedule J (D)
Schedule J - Compensation Info (cont’d) • Additional disclosures (box check) required if compensation includes: – First-class/charter travel – Travel for companions – Tax indemnification/gross up payments – Discretionary spending accounts – Housing allowance/residence for personal use – Payments for business use of personal residence – Health/social club dues or initiation fees – Personal services (i.e. maid/chauffeur/chef)
Schedule J - Compensation Info (cont’d) • Requires indication of the process of setting compensation for CEO/Executive Director – Compensation committee – Independent compensation consultant – Comparison of Form 990 of other organizations – Written employment contract – Compensation survey or study – Approval by the Board of Directors or compensation committee
Schedule J - Compensation Info (cont’d) • The following disclosures are required: – Whether expenses reimbursed under a written policy following accountable plan rules – Whether the organization provided any severance payments, supplemental nonqualified deferred compensation or equity-based compensation arrangement – Whether any payments are contingent on net earnings – Whether the organization provides any non-fixed payments – Whether the organization made any payments subject to the initial contract exception
Other Schedules & Fun Facts • Core Form “Summary” (Part I) – To increase transparency new form includes a summary of key financial, compensation, governance and operational information – Instructions include a table that shows how to combine 2007 line items for comparison to 2008 required disclosure • Schedule A Public Charity Status & Public Support – More emphasis placed on meeting the support test – Now a five year summary of support (include the current year) on the same basis of accounting used in the overall form (don’t need to covert to cash-basis). No more “advanced ruling period”
Other Schedules & Fun Facts • Schedule C-Political Campaign & Lobbying Activity – Requires narrative of the organization’s direct and indirect political campaign activities – Requests information on excise taxes incurred and paid – Requests information regarding 527 exempt function activities (non-501(c)(3) organizations) – Lobbying activities required to be disclosed for electing and non-electing organizations (501(c)(3) organizations) – Disclosures on lobbying for organizations exempt under 501(c)(4), (5) and (6) –Requests information on name, address, aggregate contribution and type (cash, payroll or non-cash) – See ASAE Comment on duplicate reporting
Other Schedules & Fun Facts • Schedule D–Supplemental Financial Information – New section intended to capture support supplemental financial information formerly required in attachments to the form – Required to disclose text of FIN 48 (i.e., tax uncertainties) footnote in the audited financial statements “Verbatim” – Why is this important? *The IRS believes that too few organizations are filing Form 990-T and that half of those who do file report zero losses. * James Hasson, a partner with Sutherland Asbill & Brennan, discussed the numbers at the Georgetown University Law Center tax-exempt organizations conference and said the Service believes the low number of filers with losses suggests that organizations may be overly generous in accounting for expenses (ASAE Inroads May 1, 2008, Volume 23, Number 18)
Other Schedules & Fun Facts • Schedule O-Supplemental Information To Form 990 – Explanations and narratives for other schedules or other information to be conveyed. – Limited space for e-filed returns – The IRS does not want it used as “a garbage dump where they just put in everything…” *Ronald Schultz, Senior Technical Adviser to the Commissioner
Redesigned Form 990 - Wrap-up • Reporting burden will increase at least in year one for most organizations • Larger organizations, especially hospitals, colleges and universities and those with sophisticated compensation arrangements, foreign operations, related organizations and targeted activities (conservation easements, credit counseling, donor advised funds, etc.) will have an increased burden • Organizations may not currently have systems in place to gather the info needed and should start addressing this now • Organizations should consider adopting policies that allow them to answer questions favorably
Redesigned Form 990 - Wrap-up • Take a dry run and attempt to complete (at a minimum) the following schedules with your 2007 information – Governance (Part VI) – Compensation (Part VII) including Schedule J – Checklist of Required Schedules (Part IV) – Related Organizations (Schedule R if required) – Fund-raising Activities (Schedule G if required) • See New 990 Tax Assistance Letter (Excel) in LarsonAllen Form 990 Toolbox to guide preparation • Prepare and file your instruction comments by June 1st!
Resources • IRS website irs.gov/charities.com has excellent materials on the new form, supporting schedules and draft instructions including the rationale for each, comments received and the difference between drafts and final forms • www.larsonallen.com(Industries: Nonprofit/Government) • www.asaecenter.org