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The New IRS Form 990:What Does It Mean

For Your Organization?

George E. ConstantineThora A. JohnsonSerena G. Simons

Jeffrey S. Tenenbaum

September 22, 2008

Association of Corporate Counsel

www.acc.com

Overview• Introduction to the new Form 990, Jeffrey S. Tenenbaum

• The core Form 990, Thora A. Johnson

• Compensation reporting, Serena G. Simons

• Schedule highlights, George E. Constantine

• Next steps – Jeffrey S. Tenenbaum

Introduction to Redesigned Form 990 Jeffrey S. TenenbaumVenable [email protected]

The New IRS Form 990:What Does It Mean For Your Organization?September 22, 2008

Background on Form 990 RedesignReasons for redesign

first redesign since 1979more up-to-date reporting

Purpose of Form 990primary tax compliance tool for tax-exempt organizationsIRS and State tax enforcementsource of information for the public, media, researchers, and policymakers about the tax-exempt sector generally and individual organizations specifically

IRS “guiding principles"Enhance transparency to provide the IRS and the public with a realistic picture of the organization, along with the basis for comparison to other organizationsPromote compliance by accurately reflecting the organization’s operations so the IRS may efficiently assess the risk of noncomplianceMinimize the burden on filing organizations

Final form issued December 20, 2007Draft instructions and glossary issued April 7, 2008, with comment period until June 1Final instructions released on August 19Implementation for 2008 requiredPhased-in Schedules H (Hospital) and K (Bonds)

Timing of Redesigned Form

Format of Redesigned FormCore form, including summary page16 schedules with applicability based on organization’s specific indicatorsFor complete set of Form 990 and final instructions, go to www.irs.gov/charities/article/0,,id=185561,00.html

The Core Form 990

Thora A. JohnsonVenable [email protected]

The New IRS Form 990:What Does it Mean for Your Organization?September 22, 2008

Overview of the Core FormSummary page with signature block

Statement of program servicesChecklist of required schedulesChecklist of other IRS filings and tax complianceGovernance, management, and disclosure questionsCompensation reportingFinancial reporting – revenue, expenses, balance sheet, and financial statements

The SummaryNew to the Form 990A snapshot of the organizationHighlights

most significant activitieskey financial, compensation, governance, and operational information

Signature block

Statement of Program ServicesMission, program services, programmatic

changes, and accomplishments in narrative format

reformattedupfront so that organization can “tell story” early

Must describe three largest programsif a Section 501(c)(3), must include:

amount of grants to otherstotal expensesrevenue

Checklist of Required Schedules J. Compensation Detail

K. BondsL. Transactions with

Interested PersonsM. Non-Cash ContributionsN. Terminations and Major

DispositionsO. Supplemental InformationR. Related Organizations

and Certain Joint Ventures

A. Public Charity StatusB. Schedule of ContributorsC. Political and LobbyingD. Supplemental Financial E. Private SchoolF. Foreign ActivityG. Professional Fundraising and

GamingH. HospitalsI. Grants

Other IRS Filings and Tax Compliance

Alerts both filer and IRS to other potential federal tax compliance and filing obligationsFor example,

UBIT and Form 990-Tsubstantiation and disclosure requirementsapplicable to charitable contributions

Governance, Management, and Disclosure

Rationale: independent boards and well-defined governance and management policies increase likelihood of tax compliance, safeguarding of charitable assets, and serving of charitable interests Self-regulation and internal controlsTransparency and accountability

Questions Regarding Board and Management

Independence of board memberstotal number of voting board membersnumber of voting board members that are independentrelationships between officers, directors, and key employees

More Questions Regarding Board and Management

Any delegation to a management companyAny material diversion of assetsMinutes taken at board and board committee meetings

and More Questions Regarding Board and Management Board receives a copy of Form

990 before filedWhat process to review Form 990

Questions Regarding PoliciesA written conflict of interest policy

officers, directors, and key employees required to disclose each year interests that could give rise to conflictsmonitor and enforce its conflict of interest policy

More Questions Regarding PoliciesMaintain a written whistleblower

policyMaintain a written document retention and destruction policy

Note – broader than SOX requirement

More Questions Regarding Policies Follow the procedures for the

rebuttable presumptionInvest in a joint venture with taxable entity

Questions About DisclosureMake its Form 1023 availableMake its governing documents, policies, and financials available

Legally Required?Not all policies legally requiredThis point clarified on Form 990 itselfPresumption of wrongdoing, however, if not in place?

Remaining Sections of Core FormCompensation

Revenue, expenses, and balance sheetFinancial statement and reporting

audits?audit committee?

Compensation Reporting on the Form 990

Serena G. SimonsVenable [email protected]

The New IRS Form 990:What Does It Mean for Your Organization?September 22, 2008

Who gets how much, and who decides?Compensation information

core form, Part VIISchedule J

Process of setting compensationgovernance and policiescore form, Part VI, Section B, item 15

Form 990 focus

Setting CompensationGeneral requirements

knowledge in compensation mattersno financial interest

IRS safe harbor processindependent bodycomparability datadocumentation of decision

General Structure For Compensation Reporting

Basic reporting on core form with more detail on Schedule JNew thresholds for reporting on key employees, highest paid non-key employees, and formers and for more detailed reportingSame structure for all organizations

Core Form Reporting - WhoCurrent officers, directors, trustees, and

key employeesCurrent 5 highest paid non-key employees – reportable compensation over $100,000 Former officers, key employees – reportable compensation over $100,000Former 5 highest paid (different test) Former directors or trustees – reportable compensation over $10,000

Core Form Reporting – Who“Key employee” definition$150,000 test

Employee had reportable compensation of more than $150,000

Responsibility testEmployee had or shared organization-wide control or influence similar to an officer, director, or trustee

orEmployee managed or had authority or control over at least 10% of the organization’s activities

Top 20 testEmployee one of “top 20” highest paid

Core Form Reporting - WhoFormer status applies only to

individuals reported as current on any Form 990 from five previous yearsAlso

5 highest paid independent contractors - over $100,000 of reportable compensationIncludes organizations as well as individuals

Core Form Reporting - WhatReportable compensation from

organizationReportable compensation from related organizationsOther compensation from organization and related organizations

Core Form Reporting – Reportable Compensation DefinitionFor employee, compensation reported on Form

W-2, Box 5, i.e., Medicare wages (includes vested nonqualified deferred compensation and 401(k) and 403(b) deferrals)For non-employee, compensation reported on Form 1099-MISCOther taxable compensationFor calendar year ending with or within organization’s fiscal year

Core Form Reporting – “other” Compensation

Includes nontaxable deferred compensation (qualified and nonqualified, vested and nonvested) and most nontaxable benefitsReporting exclusion for items under $10,000, but with various exceptionsIRS requested comments on whether nonvested, nonqualified deferred compensation should be excepted

Schedule J – Compensation Questions

Fringe benefits (expanded from discussion draft)first-class or charter travel, companion travel, tax indemnifications and gross-ups, discretionary accounts, housing, payments for business use of personal residence, club dues, personal services

Severance or change in control paymentsSupplemental nonqualified deferred compensationEquity-based compensation

Schedule J – Compensation Questions for Charities

Compensation based on revenues or net earningsOther non-fixed paymentsPayments under the initial contract exception

Schedule J – Thresholds for “Chart” Reporting

All “Current’s” listed in Form 990, Part VII, Section A – “total” compensation over $150,000 (reportable + other)All “Former’s” listed in Form 990, Part VII, Section AAny person listed in Form 990, Part VII, Section A (line 5) who receives compensation from “unrelated” organization for services to filing organization

Schedule J – Chart Compensation Breakout

Base compensationBonus and incentive compensationOther reportable (W-2/1099) compensationDeferred compensationNontaxable benefitsPreviously reported deferred compensation (intended to address double-reporting issue)

Schedule HighlightsGeorge E. Constantine Venable [email protected]


Overview of The Schedules16 separate schedules

Reflects IRS approach of segmenting out unique types of entities and issues (e.g., hospitals, fundraising, bonds)Checklist of required schedules (Part IV of core form)

Checklist of Required Schedules J. Compensation Detail

K. BondsL. Transactions with

Interested PersonsM. Non-Cash ContributionsN. Terminations and Major

DispositionsO. Supplemental InformationR. Related Organizations and

Certain Joint Ventures

A. Public Charity StatusB. Schedule of ContributorsC. Political and LobbyingD. Supplemental Financial E. Private SchoolF. Foreign ActivityG. Professional Fundraising and

GamingH. HospitalsI. Grants

Schedule ARemoves questions unrelated to public charity status — no more questions about school non-discrimination policies, lobbying activities, compensation of employees and contractors, related party and other “red flag” transactionsMoves public support testing period from four to five years (including the current tax year) IRS doing away with advance rulings process

Schedule A (cont’d)Change now allows accrual accounting organizations to use accrual method for calculating public support test (used to required use of cash method for Schedule A)Supporting organization questions included

Schedule AOther changes:

Form 990-EZ filers will be required to complete this Schedule ASpace added to make the case under the 10% “facts and circumstances” testMembership dues section included in support schedulesSeparates 509(a)(1) and 509(a)(2) support tests

Schedule BNo changes – requires listing of all contributors who gave $5,000 or more for the yearNote that new Schedule M captures information on non-cash contributionsGenerally not required to be disclosed publicly (except 990-PF and 527s that file Form 990 or 990EZ)

Schedule CSpecific form for disclosing lobbying and political activitiesSome new disclosure requirements compared to what used to be collected on the Form 990 and Schedule A

description of direct and indirect political campaign activitiesestimate of volunteer hours spent on political activities

Schedule DSupplemental financial statementsDisclosures regarding donor advised funds, conservation easements, art collections, other investments, trust and escrow arrangements, endowment fundsFIN 48 disclosure – uncertain tax positions under SFAS 109

Schedule EOnly to be completed by schoolsSame information as had been collected under Schedule A, Part V

Schedule FActivities outside the U.S.Recent increased scrutiny on foreign activitiesNot limited to 501(c)(3)

Schedule F (cont’d)Significant new disclosures required for entities engaging in non-U.S. activities:

for aggregate revenue or expenses that exceed $10,000disclosure of region, offices, employees, activities, expenditures

Schedule F (cont’d)Requires grantmakers to describe procedures for monitoring use of grant funds

name of recipient organizationEIN, IRS code sectionregionpurpose of grantamount of grant, manner of disbursementamount, description of non-cash assistancemethod of valuation

Schedule GFundraising or gaming activitiesSignificant new disclosures required, particularly for fundraising activitiesService reports “continuing noncompliance” in these areasFundraising questions – designed to facilitate “quick look” reviews by state attorneys general, charity officials

Schedule G (cont’d)Describe relationships with fundraisersList states in which the organization is registered to solicitList fundraising eventsList gaming activities

Schedule HHospitals – controversial new schedule“Hospital” – defined by state licensureFor 2008, only Part V (Facility Information) requiredFor 2009, entire schedule must be completed

Schedule H (cont’d)Significant inquiry regarding charity care and community benefitCharity care policy? If yes, in writing?

not bad debt expensesnot the difference between cost of care provided under Medicaid/Medicare and revenue derived therefromworksheets provide the methodology for calculatingcost reporting

Annual written report on charity care? If yes, available to public?

Schedule H (cont’d)Description of community building activities and how these activities provide community benefit and promote healthHow much bad debt, if any, is attributable to persons who qualify for financial assistance under charity care policy? Disclosure of management companies and joint ventures

Schedule IGrants and other assistance to organizations, governments, and individuals in the U.S.Very similar questions regarding grant recipients as asked in Schedule F$5,000 threshold

Schedule JCompensation Information (covered already)

Schedule KSupplemental information on tax-exempt bondsSignificant new information being requested – IRS “is aware of significant non-compliance with recordkeeping and record retention requirements” for tax-exempt bondsOnly Part I required for 2008; Parts II-IV required for 2009Davis Sherman will discuss in next session

Schedule LTransactions with interested personsOne-pager

listing of excess benefit transactions (c)(3) and (c)(4);loans to and from interested persons;grants or assistance benefitting interested persons;business transactions involving interested persons.

“Reasonable efforts” provisions in instructions

Schedule MNon-cash contributionsIRS reports “significant tax compliance problems exist” with non-cash contributionsDonations of art, books, clothing, cars, boats, intellectual property, securities, qualified conservation easements, real estate, collectibles, food inventory, drugs and medical supplies, taxidermy, historical artifacts, scientific specimens, archeological artifacts

Schedule M (cont’d)$25,000 thresholdQuestion regarding “gift acceptance policy”Question regarding use of third parties to solicit, etc.

Schedule NLiquidation, termination, dissolution or significant disposition of assets

focus on significant transactions – liquidation, termination, dissolution, sale, exchange, disposition or other transfer of more than 25 percentnot just (c)(3)sseeking information that might suggest private inurement

Schedule OSupplemental information to Form 990Additional space for filers to submit narrative responsesDesigned to assist with simplifying the e-filing process

Schedule RRelated organizations and unrelated partnershipsExpanded questions regarding the identification of:

disregarded entitiesrelated tax-exempt organizationsrelated organizations taxable as a partnershiprelated organizations taxable as a corporation or trust

Schedule R (cont’d)Questions regarding transactions with related organizationsSignificant information regarding transactions that are often commonplace among related entitiesPart V, Line 2 limited to entities that would be described in 512(b)(13)

next stepsJeffrey S. TenenbaumVenable [email protected]


Next StepsDry run of new Form 990Perform gap analysis regarding policiesEstablish compensation approval proceduresDetermine if new bookkeeping requiredSelect Form 990 team

QuestionsGeorge E. Constantine575 7th Street NWWashington, DC 20004(202) 344-4790geconstantine@venable.

com

Thora A. Johnson750 E. Pratt StreetSuite 900Baltimore, MD 21202(410) [email protected]

Serena G. Simons575 7th Street NWWashington, DC 20004(202) [email protected]

Jeffrey S. Tenenbaum575 7th Street NWWashington, DC 20004(202) [email protected]

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Documents

new form

new irs form

tenenbaumthe core form

irs filings

core formsummary page

individual organizations

tax compliancegovernance

organizations operations