Presented by Kevin T. McGrath, CPA

1. Presented byKevin T. McGrath, CPA

2. Acknowledgement We would like to acknowledge Eve Borenstein of Borenstein & McVeigh Law Office, LLC, Minneapolis, MN, for her contribution to this presentation.

4. Focus of Presentation Overall Form (Core and Schedules) Background: "What, Why, When" -- Explanation from IRS Radical Redesign of 2008 Form 990: Core Form Preparing for Core Form's Operational Impact

5. 2008 Form 990: an IRS Perspective What IRS did Released the form Dec. 2007, no instructions Effective for 2008 tax years (2009 filings) One year relief for hospitals and bonds Why IRS did it Current form is out of date and inadequate to serve transparency and tax compliance needs Does not portray what organization does

6. Philosophy of 2008 Form 990 Compliance, transparency, accountability Focus on areas with substantial compliance interests and trends; build the form to design compliance projects Build the form to appropriately take advantage of its public nature and accountability aspects Structure: core form for all, complete schedules depending upon activities Provide opportunities to explain and supplement their responses, tell their story

7. Key Aspects of the Redesign Increased focus on activities, not just numbers Summary page - snapshot Checklist of schedules - burden, snapshot Governance section - board, policies, disclosure Compensation and insider transactions Foreign activities Related organizations, joint ventures, UBI Non-cash contributions and fundraising Targeted information: hospitals, bonds other tax filings, endowments, major transactions, FIN 48

8. 2008 Form 990 Instructions (Pending) Will be separate 990 instructions for the core and for each schedule, and for the 990-EZ Still building the glossary and appendices Expect to have special instructions regarding disregarded entities, group returns, JVs Still developing PSAs by sub-sectors Goal #1: help organization answer the Q's Template for schedules - purpose of form, who must file, accounting method, period covered, penalties, public disclosure, special instructions Release draft, comment period, finalize summer 2008

9. Radical Redesign of Form 990Background - Practitioner Perspective IRS released in June a draft of “redesigned” Form 990 for 90-day comment period New 990 to be in use beginning in FY 2008 (returns filed in 2009 for FYs beginning in 2008) For calendar year organizations, new form is operational now! Structure of the Form 11-page core form 16 separate schedules

10. Radical Redesign of Form 990Background - Practitioner Perspective Existing Form of 9 pages PLUS Schedule A (501(c)(3)’s only) Schedule B In Redesign (for filing on years begun in 2008), becomes Form of 11 pages (“Core Form”) PLUS 16 Schedules

11. Collateral Matters Redesigned 990 to be phased in over three years for “smaller” entities, who may use Form 990-EZ IF 2008 Form (years begun in 2008): Gross receipts less than $1.0m and total assets less than $2.5m 2009 Form (years begun in 2009): Gross receipts less than $500K and total assets less than $1.25m 2010 Form (years begun in 2010) ... and beyond: Gross receipts less than $200K and total assets less than $500K

12. Radical Redesign of Form 990Background - Practitioner Perspective IRS’s Stated Goals: Enhance transparency and provide realistic picture to the IRS and public Accurately reflect operations so as to facilitate IRS assessment of non-compliance Minimize the burden on filing organizations

13. Radical Redesign of Form 990Core Form Walk Through .. . Program Service Accomplishments (p. 2) Dashboard/Snapshot (p. 1) - includes Key Metrics Total employees, but not compensation data Total Unrelated Business Taxable Income Key financial data for prior year and current year (contributions, program service revenue, investment income, fundraising expenses, total compensation, and benefits expense) Entity-specific approach, rather than System/ Consolidated approach

14. Radical Redesign of Form 990Core Form Walk Through .. . New Part requires comprehensive disclosures of governance policies and practices New Part operates as “Checklist” of when triggers hit for attaching specific Schedules: Have there been loans or other transactions with insiders? Are there “related organizations?” Hospitals have required schedule for detailed disclosure of charity care and community benefit Exceeding certain thresholds of pay provided to current and former officers, board members, and key employees 

15. Radical Redesign of Form 990Core Form Walk Through .. . Compensation Part (alters present form greatly) This Part is dropped back to page seven Discloses W-2/1099 pay and "other compensation" from this and related organizations for Officers, directors, trustees, and key employees; Five highest paid employees over $100,000; Former officers, key employees, and high fives, over $100,000, and Former directors or trustees over $10,000.

16. Radical Redesign of Form 990 Augmenting Core Form's disclosures are much more detailed compensation and benefits reporting (via Schedule J) for all “formers” and for any person with total pay over $150,000 who is reported on the Core Form, as well as for anyone paid by an unrelated organization for services they provide to the filing entity Core Form uses a table for reporting five highest paid independent contractors receiving more than $100,000 from the filer (no longer two lists of independent contractors) Note the continuing need for consistent definitions of “officer” and “key employee” for this purpose

17. Radical Redesign of Form 990Core Form Walk Through .. . Part VI Governance, Management, and Disclosures (Sections A, B, and C information about policies not recorded by the Internal Revenue Code) Section A. Governing Body and Management For each “Yes” response to Lines 2-7 below, and for a “No” response to lines 8 or 9b below, describe the circumstance, process, or changes in Schedule O. See instructions. 1a Enter the number of voting members of the governing body . . . . . . 1a b Enter the number of voting members that are independent . . . . . . 1b NOTE: answers here (1a and 1b) are also prominently inputted upon the Dashboard/Summary Page

18. Radical Redesign of Form 990Core Form Walk Through .. . Governance Part (new) Number of voting and independent directors Any family or business relationship among officers, directors, trustees, and key employees Delegation of management control to a management company or other person Any significant change to governing documents Any “material diversion” of entity's assets Contemporaneous documentation of all board and committee meetings

19. Radical Redesign of Form 990Core Form Walk Through .. . Governance (continued) Written conflict of interest policy with annual interest disclosure by officers, directors, trustees, and key employees? Explain in Schedule O regular monitoring and enforcement of compliance with policy. Written whistleblower policy? Written document retention, destruction policy? Policies governing consistency of affiliate activities? Was 990 provided to board before it was filed? Explain in Schedule O the process used to review 990. Explain in Schedule O how governing documents, conflicts policy, 990/990-T, and financial statements made available to public.

20. Radical Redesign of Form 990Core Form Walk Through .. . Governance Did compensation process for CEO include review and approval by independent persons, comparability data, and substantiation? Use Schedule O to describe compensation review and approval process for other officers and key employees. Written policies regarding participation in joint ventures, including safeguards for exempt status. Note number of narrative explanations - does ability to explain make it less likely that these policies will become de facto legal standards?

21. Radical Redesign of Form 990Core Form Walk Through .. . Conflicts/Self-Dealing Trigger questions require reporting on Schedule L to disclose details involving current and former officers, directors, trustees, and key employees and, as applicable, disclose: Name of interested person Relationship between interested person and the entity Description of disclosable transaction Whether transaction involves sharing or the entity’s revenues “Amount of the transaction”

22. Radical Redesign of Form 990Core Form Walk Through .. . Conflicts/Self-Dealing Simplified compared to June 2007 draft Will there be a five-year or other look-back period for determining “former” for this purpose? Will there be a $5,000 or other materiality threshold for “business relationship?” Will entity be required only to make a reasonable effort to obtain the information - e.g., a completed and signed questionnaire (as is now the case with 75c)?

23. Radical Redesign of Form 990Core Form Walk Through .. . Other Noteworthy Changes Income side of Income and Expense statement: Dues now reported as Program Service Revenue No “exclusion codes” for lack of UBIT-application Gaming and fundraising in-flow scheduling pushed to Schedule G

24. Radical Redesign of Form 990Core Form Walk Through .. . Other Noteworthy Changes Expense side of Income and Expense statement: Expense statement retains present form's separate listing of compensation to “disqualified persons” other than current officers, directors, and key employees

25. Radical Redesign of Form 990Core Form Observations .. . Primacy of Program Service Accomplishments Enunciation Moves up to page two of core form Now includes separate description of “significant changes” and of most important accomplishment for the year Electronic filers will have little room to “tell their story,” because new Schedule O has two-electronic-page limit per item

26. Radical Redesign of Form 990Core Form Observations .. . • Description of a discovered excess benefit transaction (old 89b) now flows over to Schedule L, where one reports name of disqualified person, description of transaction, whether corrected, and 4958 excise tax paid

27. Radical Redesign of Form 990Core Form Observations .. . Reportable (a/k/a Taxable) Compensation tracks to clear measures: Officers and other employees --- amounts reported in Box 5 of Form W-2 Directors and individual trustees --- amounts reported in Box 7 of Form 1099-MISC. Institutional trustees --- fees for services paid pursuant to a contractual agreement or statutory entitlement: note also that amounts paid to institutional trustees are reported on the Core Form but >$150,000 threshold trigger to Schedule J does not apply

28. Radical Redesign of Form 990Core Form Observations/Preparing for Operational Impact Reportable compensation is picked up in Part VII’s Columns D and E, picking up amounts from filer and related organizations, respectively:

29. Radical Redesign of Form 990Core Form Observations/Preparing for Operational Impact Non-reportable renumerative benefits (again, from BOTH filter and related organizations, if any) are reported in Column F. Here ONLY an estimate is required.

30. Radical Redesign of Form 990Core Form Observations/Preparing for Operational Impact for FORMERs, this Part applies thresholds based upon columns’ D+E amounts: for O/KEs, list if >$100k for T/Ds paid IN THAT CAPACITY, list of >10k

31. Radical Redesign of Form 990Core Form Observations/Preparing for Operational Impact Part VII Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors

32. Preparing for Operational Impact Review governance policies and procedures Assure “yes” to policies on conflicts of interest, whistleblower, document retention/destruction, consistency of affiliate activities, and safeguarding exempt status while participating in joint ventures Apply new independence standard in assessing number of independent directors Contemporaneous minutes for all committee meetings Determine any failure to monitor and enforce compliance with conflicts policy

33. Preparing for Operational Impact Review governance policies and procedures (cont’d) Is compensation review and approval process structured to qualify for rebuttable presumption - for all officers and key employees? Plan to provide 990 to Board before filing date; consider 990 review process and how it will be explained Consider what information is made public and be ready to explain

34. Preparing for Operational Impact Continue to collect data on business and family relationships among current officers, directors, trustees, and key employees (current 75b) Expand collection of data on business relationships between entity and current/former officers, directors, trustees, and key employees Relationships only as they existed at any time during year for which 990 is filed? How far back on formers? Any de minimis amounts, such as $5,000?

35. Preparing for Operational Impact Need to prepare now for new Form 990 Coordinate with other reporting obligations and best practices Note that 990 applies operationally on first day of fiscal year beginning in 2008 - for calendar year filers, current operations will be disclosed on new 990 How will entity describe its program service accomplishments in space provided? Schedule O’s “best foot forward?” When will we know of any space limitations for electronic filers?

38. Focus of Presentation Reprise Background: “What, Why, When” --Explanation from IRS 2008 Form 990: NEW Schedules (other than Hospitals) Schedule H (Hospitals) Preparing for Schedules’ Operational Impact

39. Radical Redesign of Form 990Schedule Observations: Practitioners Perspective Schedule A: So-called “Public Support Tests” Each test (170(b)(1)(A)(vi) and 509(a)(2)) now inputted on separate pages (separate grids, each specific to regulations) Cash basis NOT mandated Calculated results compared (with prior year’s result) to thresholds Two years’ sequential flunk noted as disqualifying allows movement fluidly between tests without permission (check the box serves)

40. Radical Redesign of Form 990Schedule Observations: Practitioners Perspective Schedule A: 509(a)(3) Supplement Does organization have a written determination from IRS as to Type I, II, or III supporting status? Since 8/17/06, has organization accepted gifts from a person who controls board of supported organization, from a family member of such a person, or from a 35%-controlled entity of such a person? Detailed information on organizations supported by this organization

41. Radical Redesign of Form 990Schedule Observations: Practitioners Perspective Schedule H: Hospitals Definitions of hospital and facility Entity v. group v. hospital as the reporting unit Cost of charity care and community benefit What counts, how do you count it Treatment of joint venture activities Bad debt Medicare shortfalls Costs funded by others - e.g., restricted grants, transfers within an affiliated group

42. Radical Redesign of Form 990Schedule Observations: Practitioners Perspective Schedule H: Hospitals Most of form delayed one year; reporting on facilities required for 2008 Hospital defined by state licensure/certification for now - all reporting on entity-by-entity basis More detailed questions on and data acquired about charity care and community benefit - charity care policy, eligibility criteria, annual report

43. Radical Redesign of Form 990Schedule Observations Schedule H: Hospitals Provide detailed figures on specified categories of community benefit For each, report number of programs, persons served, total expense, offsetting revenue, and percentage of net expense to total expense Separate section on community building activities (same financial data as per charity care and community benefit)

44. Radical Redesign of Form 990Schedule Observations Schedule H: Hospitals New section for disclosing bad debt, Medicare shortfall, and collection practices - note narrative explanations required Draft table on billing data by patient category eliminated Describe management companies and joint ventures owned jointly with officers, directors, trustees, key employees, and physicians, and disclose ownership percentages - aggregate ownership threshold of 10% (raised from 5% in draft) New section requiring details about “charity care” policies, procedures, etc.

45. Radical Redesign of Form 990Schedule Observations Part VII 1a Complete this table for all persons required to be listed. Section A

46. Radical Redesign of Form 990Schedule Observations Schedule J: Compensation Report detailed compensation data for subset of core form “section A” persons: Base compensation on W-2/1099 Bonus and incentive compensation on W-2/1099 Other pay on W-2/1099 Nontaxable benefits (no longer including de minimis fringe benefits and nontaxable expense reimbursements) Deferred compensation, including earnings on prior amounts and/or increases in actuarial value Total, including nontaxable benefits (including working condition and other nontaxable fringe benefits) Amounts also reported on prior 990

47. Radical Redesign of Form 990Schedule Observations Schedule J: Compensation Expanded check-box reporting - any instance of: First-class or charter travel Travel for companions Tax indemnification and gross-up payments Discretionary spending accounts -- Housing allowance or personal residence Payment for business use of personal residence, health or social club dues, or initiation fees Personal services (e.g., chef, chauffeur, and/or maid) Observations regarding expanded check-box reporting

48. Radical Redesign of Form 990Schedule Observations Schedule J: Compensation Other questions leading to narrative explanations: Failure to follow reimbursement policies Providing severance pay, change in control payments, SERP, or equity-based arrangement Compensation contingent on revenues (physician pay?) Compensation contingent on net earnings (circuit-breakers?) Any other non-fixed payments? Any amounts reported on core form paid or accrued under a contract subject to “initial contract exception” under intermediate sanctions rules?

49. Radical Redesign of Form 990Schedule Observations Schedule K: Tax-Exempt Bonds Most of form delayed one year Detailed questions on bond proceeds Series of questions on potential private use - management contracts, research agreements, and safe harbors Third-party compensation table eliminated New table on arbitrage reporting and compliance concerns

50. Radical Redesign of Form 990Schedule Observations Schedule L: Transactions with Interested Persons Describe “details” of each loan (outstanding at year end) to or from current/former officer, director, trustee, key employee, “high 5” employee, or other disqualified person Describe excess benefit transactions – name of DQP involved, transaction, and whether corrected Describe grants or assistance benefiting interested persons Describe business transactions with interested persons - triggered by response to core form line 28

51. Radical Redesign of Form 990Schedule Observations Schedule O: Supplemental Information Use O to comply with narrative requirements where directed Use O to provide other general explanations Note space limitations for electronic filers - two pages per required attachment, and two pages for anything else

52. Radical Redesign of Form 990Schedule Observations Schedule R: Related Organizations Identify each disregarded entity Identify each related exempt entity Identify (and provide EIN) each related entity taxed as a partnership or as a corporation Describe “details” of each transaction with a related entity (next slide)

53. Radical Redesign of Form 990Schedule Observations Receipt of interest, annuities, royalties, or rent Gift, grant, or capital contribution Loan or loan guarantee Sale, purchase, or exchange of assets Lease of facility, equipment, or other assets Performance of services Sharing facilities, equipment, mailing lists, other assets, or paid employees Reimbursement paid for expenses Other transfer of cash or property

54. Radical Redesign of Form 990Schedule Observations Other Schedules B: Contributors C: Political and Lobbying Activities D: Supplemental Financial Statements E: Schools F: Foreign Activity G: Fundraising or Gaming Activities I: Grants and Other Assistance M: Non-cash Contributions N: Liquidation, Termination, Dissolution or Significant Disposition of Assets

55. Collateral Matters Instructions (Drafts due out 8/15/08) Transitional Relief -- Schedule H: Hospitals One-year delay for all but facilities disclosure Transitional Relief -- Schedule K Tax-Exempt Bonds One-year delay for all but description of outstanding bonds

56. Preparing for Operational Impact Need to prepare now for new Form 990 Coordinate with other reporting obligations and best practices Note that 990 applies operationally on first day of fiscal year beginning in 2008 - for calendar year filers, current operations will be disclosed on new 990 How will entity plan for Schedule H? Schedule O?

57. Preparing for Operational Impact Preparing for Schedule H: Start mock-up now of Schedule H narratives to determine where additional adjustments to practices and procedures may be needed Make sure charity care, community benefit, bad debt, Medicare shortfall, and other data are captured on entity-by-entity basis Determine now which activities will be included in community-benefit and community-building, and begin capturing data

58. Preparing for Operational Impact Preparing for Schedules J: (Compensation) and L: (Transactions with Interested Persons): Track value of nonqualified benefits for individuals with compensation over $150K and all “formers” included on core form Determine amount of nonqualified deferred compensation reported on prior 990s Determine which Schedule J boxes will be checked, and get ready to explain - which practices should end now? Compile and be ready to explain all pay arrangements involving revenues or net earnings, or that are equity-based Determine all amounts paid accrued under contract subject to initial contract exception

59. Preparing for Operational Impact Preparing for Schedules J (Compensation) and L Transactions with Interested Persons): (cont’d Determine status of each loan between entity and any interested person - in default? Approved by board or committee? In written agreement? Consider clearing out all current loans and prohibiting further loans Determine all related entities, and all transactions with them - track data in the form needed for Schedule R Determine how Schedule O will be needed, and whether space will permit all that entity wishes to explain