For the first time in more than 25 years, the IRS has issued a redesigned Form 990, Return of Organization Exempt from Income Tax, that must be completed for the 2008 tax year (returns filed in 2009). This annual information return must be filed by most organizations exempt from federal income tax under section 501(a) of the Internal Revenue Code, including section 501(c)(3), (c)(4), and (c)(6) organizations. Private foundations, however, are required to file Form 990-PF, Return of Private Foundation, which the IRS has not yet revised or redesigned. Form 990 now consists of an 11-page “core form” and 16 related schedules, and has numerous new questions that must be answered by tax-exempt organizations. On August 19, 2008, the IRS released final instructions to accompany the Form and schedules.
Special transitional rules for small and mid-size organizations permit such organizations, subject to certain gross receipts and asset thresholds, to file the short-form Form 990-EZ for the 2008 and 2009 tax years. In general, the Form 990-EZ does not require the reporting of governance and management practices required in the Form 990. Beginning in 2010, however, organizations with gross receipts of $200,000 or more and assets of $500,000 or more must file the Form 990. The following discussion summarizes some of the new reporting requirements in the updated Form 990 and various policies and procedures that your organization should have in place by the end of the year. We can assist you in developing policies and procedures which address important issues raised by the new reporting requirements.
- Board Independence and Conflict of Interest Policy. The new Form 990 requires disclosure of the number of voting members on an organization’s Board and the number of those members who are considered “independent.” In general, Boards should consist of members who can exercise independent judgment so that objective decisions are based solely on the best interests of the organization and not the financial interests of a Board member. A Board member is considered independent when the following circumstances are satisfied: (1) the member was not compensated as an officer or other employee of the organization or related organization; (2) the member did not receive total compensation or other payments exceeding $10,000 for the year from the organization or from related organizations as an independent contractor, other than reimbursement of expenses or reasonable compensation for services provided in the capacity as a member of the governing body; and (3) neither the member, nor any family member of the member, was involved in certain reportable financial transactions and arrangements with the organization (whether directly or indirectly through affiliation with another organization) or with a related organization (generally those financial transactions and arrangements that must be reported on Schedule L). Organizations must also disclose and explain any family or business relationships among Board members, officers and key employees. Additionally, the new Form 990 asks whether Board members, officers, and key employees are required to disclose annually interests that could give rise to possible conflicts. The filing organization is also required to report whether and how it regularly and consistently monitors and enforces compliance with its conflict of interest policy.
- Board or Management Review of the Form 990. The new Form 990 asks whether the Board was provided the Form 990 before it was filed, and directs organizations to describe the process, if any, as to who is provided the form, when it is provided, and the level of review that is undertaken. Organizations should review existing policies or otherwise adopt policies that address the distribution and review of the Form 990 so as to ensure that each Board member is provided a copy, or access to a copy, and at least a designated committee of Board members undertakes a review of the Form 990 before it is filed.
- Whistleblower Policy. The new Form 990 asks whether an organization has a written whistleblower policy. The policy should address procedures for receiving, investigating, and taking appropriate action regarding fraud and non-compliance with the law or the organization’s policies and also provide protection to whistleblowers against retaliation.
- Document Retention and Destruction Policy. The new Form 990 asks whether an organization has a written document retention and destruction policy. Such a policy should identify the record retention responsibilities of staff, volunteers, board members, and outsiders for maintaining and documenting the storage and destruction of the organization’s documents and records. The policy should also address document preservation responsibilities in investigations and litigation situations.
- Policy Regarding Participation in Joint Ventures or Similar Arrangements. The new Form 990 asks whether an organization invested in, contributed assets to, or participated in a joint venture or similar arrangement with a taxable entity during the year. If so, the new Form asks whether the organization has a written policy or procedure requiring the organization to evaluate its participation is such an arrangement under Federal tax law and whether the organization has taken steps to safeguard its exempt status with respect to such arrangements.
- Policy Regarding Public Disclosure of Documents. In addition to an organization’s tax-exempt application and Forms 990, which are required to be made available for public inspection, now an organization must respond whether and how it makes its governing documents, conflict of interest policy and financial statements available to the public.
- Compensation Practices for Top Management, Officers, and Key Employees. The new Form 990 asks whether an organization’s process for determining the compensation of top management officials, officers, and key employees includes: (1) a review and approval by independent persons; (2) compensation comparability data; and (3) written records of the deliberation and decision of compensation decisions. Whether or not such items are part of the compensation process, an organization is required to describe its compensation process and report the procedures used to establish the compensation of the CEO.
- Compensation of Key Employees. In addition to compensation reporting for Board members, officers, and the five highest compensated employees, the new Form 990 requires the reporting of information on up to 20 “key employees.” A “key employee” is an employee of the organization, other than an officer, director, or trustee, who: (1) receives reportable compensation from the organization and all related organizations exceeding $150,000 for the year (the “$150,000 Test”); (2) (a) has responsibilities, powers or influence over the organization as a whole that is similar to those of officers, directors, or trustees; (b) manages a discrete segment or activity of the organization that represents 10% or more of the activities, assets, income, or expenses of the organization, as compared to the organization as whole; or (c) has or shares authority to control or determine 10% of more of the organization’s capital expenditures, operating budget, or compensation for employees (collectively, the “Responsibility Test”); and (3) is one of the 20 employees (that satisfies the $150,000 Test and the Responsibility Test) with the highest reportable compensation from the organization and related organizations for the calendar year ending with or within the organization’s tax year. The Form also requires reporting of compensation for former officers, key employees, and trustees whose compensation meets certain thresholds.
- Reportable Compensation. The new Form 990 requires the reporting of compensation from the organization and also from related organizations, and compensation from any unrelated entity if it provided services to the reporting organization.
- Reporting Certain Fringe Benefits or Perks. Schedule J requires an organization to report (and describe) whether it provided any of the following with respect to certain persons: first-class or charter travel; travel for companions; housing allowance or residence for personal use; payments for business use of personal residence; tax indemnification and gross-up payments; health or social club dues or initiation fees; discretionary spending accounts; the provision of personal services (e.g., maid, chauffeur, chef); severance or change in control payments; payments (or participation in) supplemental nonqualified retirement plans and equity-based compensation arrangements; and compensation contingent on revenues, net earnings, or other nonfixed payments of the organization or any related organization.
If you have not yet addressed these issues by undertaking a review of current policies and procedures or drafting new policies and procedures, we would be happy to assist your organization in doing so.
To view the new Form 990 and instructions, including those sections dealing with the governance and compensation reporting requirements outlined above, please refer to the IRS website at the following link: www.irs.gov