Filing organizations should evaluate the changes to Form 990 and determine the impact on their reporting requirements.
On February 12, 2010, the Internal Revenue Service (IRS) announced significant changes to the Form 990 for fiscal year 2009 (i.e., forms for fiscal years beginning on or after January 1, 2009, to be filed in 2010). The revised form affects program service accomplishment disclosures, provides a new checklist for determining when certain schedules must be completed, and clarifies governance and compensation disclosures. The significant changes to the form provide clarity on various reporting items as the exempt organization sector acclimates to the redesigned format. Filing organizations should evaluate the changes to Form 990 and determine the impact on their reporting requirements.
Statement of Program Service Accomplishments
Effective with 2009 Form 990, filing organizations must report significant changes in their program services during the year using Part III of Form 990. Historically, such information could be submitted to the IRS Exempt Organizations Determinations Office in the form of a letter.
On the updated governance portion of the Core Form, it is more apparent that questions under Section B (Policies) are not required under U.S. tax laws for tax exemption. The draft 2009 form reshuffles the governance questions, and shifts to Section B the questions on local chapters, branches and affiliates, and on providing a copy of this Form 990 to the organization’s governing body.
- Relationships Between Officers, Directors, Trustees and Key Employees – The IRS emphasizes that if two officers, directors, trustees or key employees (ODTKEs) of the filing organization each serve in one of those capacities for a different tax-exempt organization, their services for the otherwise unrelated organization is not a reportable business relationship for purposes of line 2.
- Significant Organizational Changes – A new “Tip” in the instructions to Line 4 explains that filing organizations must report significant organizational changes using the Form 990, Part VI and in Schedule O, rather than sending a letter to the IRS. This change is similar to that described above for program service accomplishments. EO Determinations will no longer issue letters confirming the tax-exempt status of organizations that report significant changes to their organizational documents. It will, however, issue letters confirming an organization’s name change.
- Board Review of Form 990 – The IRS expressly permits a “yes” answer to line 11 (was a copy of the 990 provided to all board members before the 990 was filed?) if the organization provides Form 990 by e-mail or makes it available by a password-protected website portal to all board members. The requirements to respond “yes” are: (a) it must be the entire Form 990 as filed with the IRS, (b) it must be sent to each voting member of the board, (c) the entire Form 990 must be viewable in the electronic form, and (d) the e-mail notice to board members must note that the Form 990 is available for review at the particular site.
- Compensation Review Process – For purposes of line 15 (indicating whether the organization reviewed and approved executive pay in a manner that satisfied the three-part rebuttable presumption of reasonableness process), the IRS has cleared up the confusion caused by the 2008 form’s reference to “independent” board members. The instructions now contain the same five-part definition of “disinterested” board members that is contained in the regulations explaining the rebuttable presumption process. It is now clearer that the IRS wants to know in line 15 whether the organization used the full rebuttable presumption process.
Compensation – Core Form and Schedule J
- Highest Compensated Employees – The instructions to Part VII, Section A now explain that an organization’s current five highest compensated employees must be persons other than its current ODTKEs.
- Officers – The instructions to Part VII, Section A clarify that an organization’s officers may, in some cases, include its board chair.
- Key Employees – The instructions to Part VII, Section A explain that a person must be reported as a key employee even if that person was a key employee for only a portion of the tax year. The filing organization must report the partial-year key employee’s entire compensation for the calendar year ending with or within the organization’s reporting period even though the individual may have served in a capacity other than key employee for part of the year.
- Foreign Persons – If an ODTKE or a highest compensated employee is a foreign person, the organization must report that person’s U.S. source income received during the calendar year ending with or within the organization’s reporting period. If the person received a Form 1042-S, the box 2 amounts should be reported in Part VII, Section A, column (D) or (E). If the foreign person was not required to receive a Form W-2, 1099 or 1042-S, then the organization will report the total value of the compensation paid in the form of cash or property during the calendar year ending with or within the organization’s tax year.
- Leased Employees and Compensation from Unrelated Organizations – Compensation paid to an employee leasing company should be reported in Section B of Part VII, which is used for reporting compensation to independent contractors. If the organization is leasing an individual from another organization (which is the true employer of the individual), the arrangement is treated the same as payments by the filing organization to a management company for compensation reporting purposes (this is still reportable as Form 990 compensation). Similarly, if an ODTKE or “highest five paid” employee is paid by an unrelated organization for services provided to the filing organization, his or her pay must also be reported as compensation, subject to an exception where the employer is a taxable organization and the individual is providing the services free of charge to the filing organization.
- Compensation from Related Organizations – The instructions explain that if an organization is related to the filing organization for any part of the filing period, then it is a related organization for the entire reporting period. Accordingly, the filing organization must report all compensation paid by that related organization during the calendar year to its listed persons, and not just compensation paid during the period when the two organizations were related.
- Compensation Table – The updated compensation disclosure table, which helps organizations determine where and how to report certain types of compensation, indicates that an employee’s deferrals to a Section 401(k) or Section 403(b) plan must be reported in Part VII, columns (D) and (E), and in Schedule J, column B(I), rather than Schedule J, column B(III).
- Initial Contract Exception – On Schedule J, if the organization indicates on line 8 that it used the “initial contract exception” under the intermediate sanctions rules, a new line then asks whether the organization also followed the rebuttable presumption of reasonableness process for the same compensation arrangement. The IRS does not clarify why the organization would be claiming the initial contract exception and the rebuttable presumption safe harbor at the same time.
Tax-exempt hospitals must, for the first time, fully complete Schedule H to Form 990 when filing their 2009 tax returns. The trigger question in Part IV of the Core Form explains that the full Schedule H is required. The schedule requests disclosure of each hospital’s community-building activities, bad-debt expenses, Medicare-shortfall and debt-collection practices, arrangements with management companies, participation in joint ventures, and level of charity care and other community benefits. In addition to these data, Schedule H also requests supplemental information in narrative form, including descriptions of how the hospital assesses the needs of its community, informs patients of their eligibility for charity care and uses community-building activities to promote the health of its service area. While many hospitals used last year’s filings as “practice” for Schedule H’s data portions, few prepared sample responses to its narrative portions.
Organizations must fully complete Schedule K to provide supplemental information on tax-exempt bonds, including disclosure of private business use. Again, the trigger question in Part IV of the Core Form explains that the full Schedule K is required.
The IRS has simplified the trigger questions for Schedule L, Part IV, which is used to disclose business transactions with interested persons. If the filing organization and an interested person participate in a reportable joint venture (in which each has a profits or capital interest exceeding 10 percent), the filing organization has to include in the disclosure the cumulative amount invested by the filing organization in the joint venture as of the end of the reporting year (even if nothing was invested during that year). A joint venture transaction is subject to reporting only if the organization has invested a total of $10,000 or more in the joint venture (in all years).