By now, you probably have seen lots of articles on the “new Form 990” – the IRS’s long-overdue re-design of the annual information reporting form filed by tax-exempt organizations. There are major changes and significant additions to the Form. This Alert is not meant to review them. Instead, we want to provide you with a reminder and a checklist of governance and policy issues to address before your organization’s tax filing year ends.
The first thing to establish is when your organization must file the new Form 990. For organizations that use the calendar year system, the new Form 990 must be used for the 2008 tax year (filed in 2009). Organizations that use the fiscal year system must begin filing the new Form 990 for fiscal years ending in 2009. If you are a small organization, the IRS is providing more time through a three-year phase-in and a permanent exemption for very small organizations, as follows.
Once you have determined when your organization must file the new Form 990 (or the 990-EZ or 990-N), we recommend you carefully review the new Form, particularly the sections regarding schedules required to be filed (Part IV), governance practices (Part VI) and compensation (Part VII) to determine whether any policy changes should be made, or new policies adopted. Among other things, those sections address relationships within the organization and policies and practices helpful to ensure good governance.
Specifically, Part IV includes questions regarding direct and indirect business relationships that current and former officers, directors and key employees have with the organization (other than as officers, directors and key employees), relationships of family members and relationships with other entities doing business with the organization. While Part IV does not specifically ask about written policies, the organization should carefully review all relevant relationships to determine if it desires to establish or modify any policies or practices addressing those relationships. Part VII (focused on compensation of key individuals) asks, among other questions, whether the organization has written expense reimbursement policies requiring substantiation of all expenses.
Part VI is focused on policies and practices related to “Governance, Management and Disclosure.” It requires that every organization provide information regarding its governance practices, including answers to the following key questions, among others:
- How many voting members are on the organization’s governing body (board of directors) and how many are “independent”?
- Are there any family or business relationships among officers, directors, trustees and key employees?
- Is the organization managed by anyone other than its directors, officers or key employees (e.g., by a management company)?
- Does the organization have members with the right to elect the board and approve the board’s decisions?
- Does the organization keep minutes of meetings and decisions of the board and committees with authority of the board?
- Are there chapters, branches or affiliates and, if so, written policies and procedures governing their activities?
- Is there a written conflict of interest policy, are disclosures made and how is the policy enforced?
- Is there a written whistleblower policy?
- Is there a written document retention policy?
- Did the process for compensation decisions include review and approval by independent persons, comparability data and contemporaneous substantiation of decisions?
- Are governing documents, conflict of interest policy and financial statements made available to the public and, if so, how?
- Was a copy of the Form 990 provided to the board prior to its filing and what, if any, process was used to review it?
While it is acceptable to answer “no” to questions posed in Part VI (because such governance, management and disclosure policies and procedures are not required under the Internal Revenue Code), the organization should consider the perception answering “no” may create. By asking these questions, the IRS believes it will encourage greater tax compliance through encouraging organizations to adopt various policies and procedures. So, answering “no” may raise suspicion, not only about the organization’s compliance with the terms of its tax exempt status, but also its adherence to practices associated with good corporate governance.
Since Form 990 information returns are accessible by the organization’s members, donors and the public, the organization may want to maximize the number of questions to which it can answer “yes.” To do that, it is necessary to take the time now to review the Form 990 and see how your organization would answer each question and describe its activities. If the organization wants to answer “yes,” and otherwise avoid creating a potentially negative and, perhaps, misleading perception about the organization’s governance practices, here is a checklist of policies and procedures to have in place before the end of the organization’s tax year:
- Conflict of interest policy and enforcement procedure
- Whistleblower protection policy
- Document retention and destruction policy
- Expense reimbursement and substantiation policy
- Compensation review process including review and approval by independent persons, comparability data and contemporaneous substantiation of decisions
- Policy on activities of chapters and affiliates
- Joint venture policy
- Process for board of directors to review the Form 990 before filing
Depending on your organization’s activities, not all of the above policies and processes may apply or be necessary. Organizations will benefit from working with their auditors, lawyers, officers and directors to do a “dry run” in preparation for next year’s filing. By identifying potential issues now, there is time to take thoughtful action, as necessary or appropriate, to minimize scrutiny and avoid leaving misimpressions with the IRS, members, donors or the public.