New IRS form presents challenges for nonprofits and lawyers

Long Island Business News, Oct 10, 2008 by Dan Heilman

Though it's not always easy to believe, changes in tax laws are generally made to help taxpayers. The Internal Revenue Service's new Form 990 might be an example of medicine that's ultimately helpful, even though it might not taste very good going down.

A recent amendment to Form 990, an important tax form for tax- exempt, nonprofit organizations, might have its intended effect of yielding more detailed returns, but attorneys who work with nonprofits warn it could also mean a lot more compliance and reporting work.

IRS Form 990 is submitted to the Internal Revenue Service by tax- exempt and nonprofit organizations. Its intent is to provide both the IRS and the public with annual financial information about a given organization. The form is important because it's often the only public source of such information, and it's used by government agencies to prevent organizations from abusing their tax-exempt status.

The IRS recently posted revised instructions on its Web site after about a year of public input on the form's content. It revised the form, it said, to enhance nonprofits' financial transparency, promote tax compliance and minimize the burden on filing organizations.

"They definitely didn't accomplish that last goal," said Steven D. Anseth, nonprofit director and audit manager for Francis & Associates in Minnetonka, Minn., and co-host of a recent seminar on the newly reconfigured form. Who said the IRS doesn't have a sense of humor?

Attorneys who work with nonprofits agree the new form will mean more work for their clients.

"The new 990 reporting will be a significant increase in work and information preparation for large, institutional-type exempt organizations," said St. Cloud, Minn. attorney Tom Mathews. He said for qualified nonprofits, the abbreviated 990-EZ form might be a more efficient option.

"I believe that for the small exempt entities, the abbreviated report will reduce some work," he said.

Explaining the details

Some of the most significant changes to Form 990 include:

l new methods for reporting financial information l schedules that include informationmany nonprofits currently prepare separately and attach to the Form 990 l new methods for reporting compensation of staff and board members.

The new Form 990 is the culmination of a period in which the IRS and Congress have pushed for increased transparency and reporting, according to Mathews.

"That reporting requires accuracy which, in turn, requires the organization to carefully examine its agreements, relationships, governance structure, payments and compensation," he said.

The form requires disclosure of organizational practices that aren't necessarily legally required. For example, nonprofits now need to disclose such things as whether they have an audit committee, whether they keep contemporaneous records of board and committee meetings, and whether they make available to the public audit reports, financial statements and conflict-of-interest policies.

Sarah M. Reisdorf, a member of Minneapolis-based Fredrikson & Byron's tax planning and business organization group, said at the seminar, "They're asking for more information than they did in the previous 990. You're going to have to explain and provide backup for a lot of the information you submit."

While the changed form lets nonprofits combine officers, directors and key employees in a single list, and raises the threshold for reporting the compensation of the five highest- salaried employees from $50,000 to $100,000, it also requires more scrupulous documentation in other areas. For instance, independent voting members of the organization's governing body must meet a fresh set of requirements to be designated as such, in order to avoid conflicts of interest within the organization.

The new form says the organization has only to make a "reasonable effort" to establish independent voting members, but Reisdorf advised against relaxing documentation in the hopes the IRS might find what you submit to be "reasonable."

"From a legal perspective, document what your reasonable effort was," she said. "You don't want the IRS to say you didn't try hard enough."

Benefit to donors

While decreasing some paperwork by consolidating schedules and forms that previously had to be filled out separately, the new Form 990 also calls for more exact documentation of such things as volunteer hours spent on political campaign activities, fundraising activities outside the United States and even more precise and timely meeting minutes.

Reisdorf said another new wrinkle requires not only the use of a conflict-of-interest policy, but also a detailed reporting of it.

"In the past you were just asked if you have a conflict-of- interest policy," she said. "Now you have to explain how you're using that policy."

One stipulation of the new form would prohibit expenses identified as "miscellaneous" from exceeding 5 percent of total expenses. That's just one example of how the form will call on organizations to give more precise financial information. St. Paul, Minn. attorney Rod Mason said one of the objectives of the new 990 is to require express accounting for excess benefit transactions - those in which the charity provides an economic benefit to someone that exceeds the value of the consideration given.