what does your 990 say about you?

What Does Your 990 Say About You?

River Network’s

River Rally 2012

May 5, 2012, Portland, Oregon

Terry Miller

[email protected]

www.TerryMiller.biz

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Agenda Today Historical Perspective, 990 Basics & IRS Filings Basics

Main areas of interest to the public & stakeholders (funders) Program / Admin / Fundraising Compensation of Insiders, Staff Director, Senior “Financial official” Governance: Policies & Actual Procedures

• Lois Lerner 4/19/12 speech on governance & other matters• Governance check-sheet December 2009 (Lerner: results)

Income: Donated v. Earned Balance Sheet Strengths / Weaknesses Program Accomplishments: The Commensurate Test

(Time Available) What’s IRS told us so far? EO Workplans and evolving Instructions Questions for public response Summer 2011

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Historical Perspective: 2008 First Overhaul in 30 Years: Big Project

IRS released Draft 990 June 2007 received over 800 formal comments, made some changes, but dug in its heels on governance

Stated goals: 1. compliance,

2. transparency, and

3. no increase in burden• #3 was subject of public derision

WWID (What Would IRS Do?) Where there are not clear answers: default to “Big 3” above

• (HT: Jane Searing & Eve Borenstein)

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Comments Helped: Major changes from Draft to Final for 2008

IRS’ Steve Miller 10/22/07:

“…[from] the comments, we [made] some decisions: The so-called efficiency ratios will drop off the summary

page; We will move the program service explanations up to the

front; We will substantially re-format some of the more

burdensome schedules; And we are considering what targeted transition relief we

should provide.”

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Basics: 990, 990-EZ or 990-N?(What if none filed?)

Transition Rules on filing thresholds are now finished: 2010 was final stage. From now on: File Form 990, unless:

• Form 990-N: Gross receipts “ordinarily” <$50K• Form 990-EZ: Gross receipts “ordinarily” <$200K and Assets <$500K • !! certain exceptions when the full 990 is required

• (e.g. Donor Advised Fund sponsoring organizations)

Congress (Pension Protection Act “PPA” 2006) mandated: ‘three years if no 990, lose exemption must re-apply’ By May 17, 2010, >300,000 orgs due to be automatically revoked IRS would have faced many of them re-applying,

• typically tiny, messy D-I-Y filings, so • there was an extraordinary initial extension (not legislatively approved or

authorized) a/k/a “Filing Relief Program”• it worked! Only 257,000 actually revoked in early 2011, still daunting

380,000 revoked as of November 2011

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IRS and the Automatic Revocations “Select Check” list at IRS.gov/charities searchable variously,

combines with Pub 78 information

As of 10/1/2011, 5,000 organizations had “taken advantage” of small organizations relief [for IRS!] program

Reinstatement Process Special Relief Program – Notice 2011-43. Eligibility:

• no 990-series forms due prior to 2007, and• eligible for 990-N in 2007, 2008 and 2009, and• file new 1023 by 12/31/2012 with certain statement• BENEFITS: $100 filing fee, retroactive reinstatement

If not Eligible under 2011-43, see Notice 2011-44• no reduced fee, • no retroactive reinstatement, but • guidance on how to claim reasonable cause for delinquent filings• 4/2012: IRS announced it is “surprised” at number of claims of reasonable cause

(Lerner speech)

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Basics: Parts of the Core Form (2011)

I & II Summary & Signature Block

III Stmt of Program Service Accomplishments

IV Checklist of Required Schedules (much improved)

V Stmts Re: IRS Filings & Tax Compliance (evolving)

VI Governance, Management & Disclosure (improved)

VII Compensation of Ofcrs, Dirs, Ttees, Key Ees, Highest Comped Ees, and Indep Contractors

VIII Statement of Revenue

IX Statement of Functional Expenses

X Balance Sheet

XI Reconciliation of Net Assets (helpful)

XII Financial Statements & Reporting

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Basics: 16 Schedules [& how to remember]

(based on “trigger questions” – various thresholds)

(Not all schedules relevant for 990-EZ filers;

none are relevant for 990-N filers)

A Public Charity Status & Support [509(a) status] (990 & EZ)

B [Big] Contributors (no change; 990 & EZ)

C Political Campaign & Lobbying Activity (990 & EZ)

D Supplemental Financial Statement Detail (990 only)

E Schools [Education] (990 & EZ)

F Foreign Activities & Grants (990 only)

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Basics: 16 Schedules [& how to remember]

G Fundraising Events & Gaming (990 & EZ)

H Hospitals (990 only)

I Grants In the U.S. (990 only)

J [Justify?] Compensation (990 only)

K Bonds [“k” is lawyer abbrev for contract] (990 only)

L Loans and Insider Transactions (990 & EZ)

M Non-Cash Contributions (990 only)

N Termination / Disposition of Assets (990 & EZ)

O Open-Narratives (required/optional) (990 only)

R Related Organizations (990 only)

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IRS Basics: How many determinations?(~65,000 in FY10, 44% got questions)(this graphic from FY11 workplan; Lerner speech: about 60,000 per year)

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IRS Basics: EO Division of TE/GE(exams staff is on the rise)

Rulings & Agreements Exams

Education & Outreach

Director's Office Total

2008 364 449 12 12 837

2009 366 525 8 11 910

2010 337 538 13 12 900

2011 332 531 12 14 889

Director: David Fish

Nan Downing

Melanie Partner

Lois Lerner

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IRS Basics: How many exams? (11,699 exams, 3,194 compliance checks;

% exams rising)

5,800

1,475

7,580

6,322

7,861

7,466

10,187

6,773

11,449

3,893

11,699

3,194

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

FY04 (Baseline)

FY07 FY08 FY09 FY10 FY11

Total number of returns reviewed(aggregated from EO Workplans FY11 & FY12)

Traditional Exam Compliance Check

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IRS strongly prefers e-filed returns

Easier to manage, profile, and fewer errors; 27% of 2008 990s and 14% of 990EZs were e-filed Paper filed 990s had errors 28% of the time, and 990EZs 29% of

the time, just on initial review, while e-Filed 990s had errors just 2% of the time, and 990EZs just 1% of

the time

What errors? Mismatched Name/EIN Missing Schedules (especially Schedule O) “Inconsistencies in reporting of revenues, expenses and assets”

…. expect to see mandatory e-filing for more filers

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IRS: What schedules are actually filed?

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So What Does it Say About us?

Program / Admin / Fundraising Definitions / Source Authority Public Perception

Compensation of Insiders, Staff Director, Senior “Financial official” Not likely an issue for this group (unless too little!)

Governance: Policies & Actual Procedures Trickier than it might seem

Income: Donated v. Earned Support v. Revenue

Balance Sheet Strengths / Weaknesses Program Accomplishments: The Commensurate Test

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Program / Admin / Fundraising

a/k/a “Functional Accounting”

GAAP: Key Distinction: Program v. Supporting Program Functions

• often sub-programs for restriction / donor intent reasons, or • to communicate the range of work to the public & stakeholders

[common] Supporting Functions• Management & General

[often a/k/a “Admin” or “G&A”]• Fundraising• Membership Development

[more on this in a bit]

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GAAP Definition: Mgt & Generala/k/a “Admin”

Management & General

(FASB ASC 958-720-45-7)a. “Oversightb. Business managementc. General recordkeepingd. Budgetinge. Financing …f. Soliciting [income other than gifts grants & contributions] …g. Disseminating [info to public on stewardship of contributed funds]h. Announcements concerning appointmentsi. The Annual Reportj. Related administrative activitiesk. All mgt & admin except for direct conduct of program or fundraising

activities.”

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GAAP Definition: Fundraising& Membership Development

Fundraising (FASB ASC 958-720-45-9)

a. “Publicizing and conducting fundraising campaignsb. Maintaining donor mailing listsc. Conducting special fundraising eventsd. Preparing & distributing fundraising manuals, instructions & other

materialse. Conducting other activities involved with soliciting contributions

from individuals, foundations, government agencies, and others.”

Membership Development Activities(FASB ASC 958-720-45-11)

a. “Soliciting for prospective members and membership duesb. Membership relationsc. Similar activities.”

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Shorthand

Program - everything that is not Mgt&Gen or Fundraising• a note on “everything that is not XYZ”

Mgt & Gen All financial management All costs of the board, meetings, D&O insurance Possibly office of CEO in big organizations Corporate legal, general management, general financing P.R. for the overall organization (not public education) Chasing & managing earned Income

Fundraising Chasing donations (of Money AND Time)

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Difficult Issues Joint Activities / Joint Costs

Guidance difficult due to abusive practices SOP 98-2 / FASB ASC 958-720-28 to -55 “Accounting for Costs that

Include Fundraising” and in 958-720-55-1 to -167

“Outreach” about both the organization and river / watershed issues Is that mere public relations?

Recruiting new members first a membership is substantially a donation so more like fundraising

than management & general second, what about “building the base” or increasing public

awareness?

Recruiting volunteers volunteer for the organization narrowly? or to benefit the public?

mobilization?

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Public / IRS Expectations Program = Good, Supporting = Bad

Charity Navigator / Wise Giving Alliance / etc etc United Ways historically behind this Like choosing an airline for low maintenance expenditures!

• (H/T Bob Ottenhoff of Guidestar.org) Good news: watchdogs moving away from over-reliance on functional

percentages (happy to email a press release) Read: “Nonprofit Starvation Cycle” (easy to find on Web)

Program 75-80% of Expenses is a good Target• Core Form Part IX, Line 26 Col(b) / Line 26 Col(a) >= 75%

IRS has been known to expect to see Fundraising Expenses of at least 5% of Donated Income

• Core Form Part IX, Line 26 Col(d) / Part VIII, Line 1 >= 5%

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Form 990

Core Form, Pg 9

Part VIII

Statement

of

[Support &]

Revenue

Donated

Earned

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Form 990

Core Form, Pg 10Part IX

StatementofFunctionalExpenses

a/k/a Program / Admin /Fundraising

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Governance Tax Code doesn’t mention, so why do they care? Risk Assessment

Lois Lerner, addressing state Attorneys General:“Some folks would argue that we have gone beyond where we

should be going” with such questions, Lois G. Lerner, director of the Exempt Organizations Division of the IRS…

“We disagree; we think that governance is a very big part of accountability,” said Ms. Lerner. “There is some argument that this is only the purview of the states. The IRS believes it is your purview but it is also of interest to us.”…

“Ms. Lerner said governance policies are one factor that figure into “risk models” that the IRS uses to help decide “which organizations we should use our scarce resources on ”when selecting charities for review.”

-- From “Governance Is Key Issue in Regulating Charities, IRS Official Tells State Leaders,” Chronicle of Philanthropy, 10/16/07

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Governance

Counterpoint: Bruce Hopkins“…organization was denied…tax-exempt status, in part

because…it did not adopt a conflict-of-interest policy and it lacks an independent board.

“…This attempt to invoke the private benefit doctrine is ludicrous. That doctrine is to be applied when there is actual private benefit. It is not to be invoked on the basis of wild speculation, such as the possibility that the organization’s assets “could” be used to benefit one or more board members.

“… It is imperative that this matter be advanced to the courts, where this arbitrary and capricious policy can be stopped.”

-- Bruce Hopkins, in Nonprofit Counsel, October 2008 (Wiley Periodicals), commenting on PLR 200830028

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IRS: Lois Lerner speech 4/19/12

1 Worth a close read; on www.irs.gov/charities and in supplemental materials

Speech to the Georgetown tax conference Topics Covered in Lerner’s Speech

1. SSNs reported on 990s in erroro WARNING: NEVER required on 990; Chronicle of

Philanthropy found 20% had at least one; concern over identity theft

2. Governance and results from the Dec 09 “check sheet”

3. Diversions of Assets

4. Unexpected “things organizations have been doing with” Form 990-N

5. Determinations Process [and delays]

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2 Governance and results from Check Sheet referred to 990 Part VI as the “Crown Jewel” of IRS efforts to

use governance practices as a risk assessment tool for non-compliance

ACT, others, cautioned and/or pushed back on IR• Lerner asserts they have done lots of training and understand one

size does not fit all• Lerner acknowledges did not have actual data to back up assertion

that poor governance = high risk non-compliance, so: Governance Check Sheet released December 2009

• Lerner says it “mimics” 990 Part VI [if only!]• Check Sheet worth an immediate read• 1300 have now been collected in the course of public charity

audits; regression analysis has been performed where there was sufficient data• Lerner acknowledged that the population selected for exam is not

statistically representative [but clearly goes on to infer substantive conclusions!]

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3 Governance and results from Check Sheet (cont) Statistically significant correlation between these governance

practices and good tax compliance• Has written mission statement

• Always uses comparability data when making compensation decisions

• Has procedures in place for the proper use of charitable assets

• 990 reviewed by the entire board of directors• She double-emphasized this last one• Fully in keeping with year-by-year tweaking of the question and the

instructions

Inverse: Stat Sig Correlation between control concentrated in one or few individuals and bad tax compliance

SAFE ASSUMPTION IMHO: These governance questions now become the main audit flag issues on Part VI

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4 Governance and results from Check Sheet (cont) NOT Statistically significant correlation between these

governance practices and good or bad tax compliance• Conflict of interest policies

• I wondered about “adopt, file and forget”

• Organizations that never or only occasionally use comparability data to set compensation

• Voting board members having outside family & business relationships• I wish they’d just stop talking about “non-voting” Board members• Example of being ahead of their skis – similar to re-defining “officer”

when it’s an important legal term

Another safe assumption IMHO that these questions will be lower risk

Lerner quite pleased that results supported her assumption of correlation, and is assigning TE/GE to figure out how to gather a statistically representative sample – best guess FY13 EO work plan Questionnaires or Compliance Checks, random

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Governance Policies Board-adopted Mission Statement Contemporaneous minutes (of Board & Committees of the Board)

less is more on formal minutes Conflict of Interest Policy, with at least Annual Declarations

IRS view: money; other issues worth considering Procedure for monitoring & dealing with conflict

• disclosure & recusal Whistleblower Policy Document Retention & Destruction Policy (and practice!) Compensation: Procedure over Policy

Comparison with written comparables Gift Acceptance Policy – why, when? (990 Sched M if over $25K) Chapters/Affiliates charitable / mission compliance Conservation Easements monitoring (if any) Reimbursements: Accountable Plan (more about procedure)

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Form 990

Core Form, Pg 6

Part VI

Governance,

Management,

and

Disclosure

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Others Income: Donated v. Earned

Earlier Slide #22Support v. Revenue• Support / Donations / Gifts / Contributions / Grants• Revenue / Earned / Fees / Exchange Transactions

“Reciprocal” Benefit vs. Public / Charitable

Balance Sheet Strengths / Weaknesses

Program Accomplishments: The Commensurate TestThis section of the 990 is often ill-attendedPrimary chance to tell your storyGets reworked and sold by Guidestar et al to funders

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Summary: What to Look For? Think like a reporter; don’t worry about IRS: Does it tell your story right? Make Page 1 headline look good – Mission or highlight Be sure you have a Board-adopted Mission on Page 2 Does the total spent make sense for the accomplishments listed? Put some “oomph” in your program accomplishments Check to see if Program >= 75% of Total Expenses Check to see if Fundraising >= 5% of Donated Income Review list of Officers, Directors/Trustees, make sure that

“Senior management official”“Senior financial official” …are properly reported

Look at your Balance Sheet like a skeptic: will you survive? Review Part VI Governance Questions – fix any “wrong” answers Step back 15 paces and think: Do you say “no lobbying” yet have it all

over your website? Are you related to any organizations with board overlap? Better to learn the rules than stick head in sand !

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Form 990 & Schedules: Broad Changes since 2008

also

Questions IRS posed for Public CommentSummer 2011

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Broad Changes

1 2009: clarifies ALL 990 filers owe Schedule O

2009: clarifies that: organizational termination, new programs, and changes to governing documents, must all be reported on 990, not by letter to IRS (IRS continues to mention this in speeches about 2010) (Parts I, III, VI)

2010: changes Schedule O to only for Core Form narrative responses & explanations (for accessibility)

1. Core Form headers have checkboxes required if Schedule O has information (Parts III,V,VI,VII,XI,XII and IX in 2011)

2. Continuation forms are eliminated; duplicate main pages if needed (Schedules F-1,I-1,J-1,J-2,N-1,R-1)

3. New narrative sections so that O will be just for Core Form on (Schedules E,G,K,L,R)

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Broad Changes

2 RE-emphasized in 2010 Instructions that Governance Policy

Questions Yes/No are only Yes if the Board adopted the policy before the end of the tax year TIP: be sure to be familiar with the two-page December 2010 IRS

Governance “Check Sheet” for its auditors to use; it goes beyond 990 questions in some respects (!)

Transition provisions on Schedules H (Hospitals) and K (Bonds) are over (2009); full Schedules now due BUT, due to Affordable Care Act (healthcare reform), 2010 Calendar

990’s with Schedule H were automatically extended 90 days and could not be filed prior to July 1 (ACA: facility-by-facility vs. EIN-by-EIN exemption), also audited financials are now required to be attached to 990 (2010); UPDATE: one part of Schedule H still optional

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Comments Requested Summer 2011

1 Part VII Compensation:

Should various compensation thresholds be increased, decreased or left as-is? (Part VII instructions / definitions)

Should O & DTs paid via Management Companies be better disclosed than present instructions to use Section B? (Part VII instructions)

Part VIII Income: Should government awards reported as revenue on Line 2

require more disclosure, or should all government awards be reported on 1e? (request for comment did not address impact on Schedule A public support) (Part VIII instructions / definitions)

Part XII Financial Reporting Should Question 2d be changed from asking whether reviewed

or audited statements were “issued” on a separate basis to “audited” on a separate basis?

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2 Schedule D Part XI (Net Asset adjustments)

Should this be dropped now that it is redundant with Core Form Part XI?

Schedule F Foreign Activities Should Name & EIN of foreign grantees on Part II be required (un-

shade Cols 1a/b), or should Columns 1a/b be removed? Should Schedule F require indirect foreign expenses? (F.I.3.)

Schedule L Transactions with Interested Persons Want comments on pros & cons of excluding bank deposits (e.g. when

banker is on organization’s Board) from definition of reportable transactions

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3 Schedule R Related Organizations

Whether overly burdensome in certain situations; cites:• associations of churches, • hospital systems, • chapters of national organizations, and • certain foreign affiliates, CRTs & VEBAs regarding privacy

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Questions?

(full-size copy of these slides and other materials are online at www.TerryMiller.biz/RALLY )

Terry Miller

[email protected] or [email protected]

FYI: to submit comments (I believe at any time) on Form 990:Stephen Clarke, [email protected], 202-283-9474,

or [email protected]

what does your 990 say about you?

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