Federal filings: IRS changes the Form 990 once again.

The Internal Revenue Service (IRS) is continuing to evolve Form 990. While it is generally intended to provide information to the IRS about whether your organization is complying with the tax law, it also serves as a public information document and a report to various state agencies.

As a result, the IRS has made numerous changes to the Form 990 in recent years to make it a more useful reporting tool. The 2006 version continues this process. There are a number of areas that will require you to do more work to obtain all of the required information.

This article will discuss the expanded electronic filing requirements, some new paper return filing requirements, identification of disqualified persons and changes to the rules for reporting compensation. Next month, new requirements for supporting organizations, sponsors of donor advised funds, payments among controlled organizations and other changes will be covered in this column.

EXPANDED ELECTRONIC FILING

While we have known about this change for a year, mandatory electronic filing will apply to many more organizations for 2006. You will have to file your Form 990 electronically if your organization had assets of $10 million or more at the end of your fiscal year, and you filed more than 250 returns with the IRS. For this purpose, "returns" include Forms W-2, 1099, 1098 and quarterly and annual payroll tax filings.

For 2005, the asset requirement was $100 million. If you are required to file electronically, you will have to use the appropriate software and comply with all of the requirements that are built into the system.

The IRS believes that electronic filing improves compliance. You can't skip lines or fail to attach required schedules, or the system will reject the return. Also, you will have to make sure the return reflects the identical name and address that the IRS has for your organization in its master file. If you are not sure, you can contact the IRS at [phone] to confirm what their file shows. The only documents you can attach using PDF files are conformed changes to your organizing documents. You must create any other schedules in the system.

CHANGED FILING REQUIREMENTS

In general, if your gross receipts are less than $25,000, you do not have to file Form 990. If your gross receipts are less than $100,000 and your total assets are less than $250,000, you can file Form 990-EZ rather than the complete Form 990.

However, for 2006, you might have to file Form 990 even though you meet these requirements. If you are a supporting organization under Internal Revenue Code (IRC) Section 509(a)(3), you have to file a return (either a 990 or a 990-EZ) even if your gross receipts are under $25,000. If your organization is a sponsor of donor advised funds, you have to file Form 990 and cannot file Form 990-EZ. Finally, if your organization controls another taxable or exempt organization you have to file Form 990.

IDENTIFYING DISQUALIFIED PERSONS

Congress passed IRC Section 4958 in 1996, and the IRS finalized the regulations under that section in 2002. Section 4958 imposes excise taxes on disqualified persons and organization managers if the organization engages in an excess benefit transaction with a disqualified person (DP). Despite the existence of this section for almost 10 years, this year for the first time the IRS will require you to identify all of your organization's DPs.

Line 25c in Part II asks you for the total compensation paid to DPs (as defined in IRC Section 4958(c)(3)(B)) other than officers, directors, trustees and key employees, and requires you to attach a schedule to support the entry. Line 50b asks for the total and a schedule of loans you have made to DPs.

To complete this line, you will have to know the identity of these people. Section P of the instructions provides a four-page explanation of the excess benefit rules, including the definition of a DP. A small organization might not have any DPs other than its officers, etc., but a larger organization is likely to have a number of them. Making the determination may require a detailed analysis of each employee's role in your organization, and can be quite complex.

REPORTING RELATIONSHIPS AND COMPENSATION

The 2005 Form 990 introduced new questions 75b and 75c that required you to disclose any relationships among your officers, directors, trustees and key employees and your top five highly compensated employees and contractors listed on Schedule A of Form 990. You had to disclose both family relationships and business relationships. The requirement continues for 2006, with a definition of the relationships in the instructions for Line 51.

Family relationships include an individual's spouse, ancestors, children, grandchildren, great grandchildren, siblings, and spouses of the last four categories. Business relationships include employment and contractual relationships, and common ownership of a business where any of the included people individually or together possess more than a 35 percent ownership interest.

Question 75c asks if any of the persons listed in Parts V-A (current officers, etc.) or Parts I (top five compensated employees), II-A (top five compensated professionals) or II-B (top five compensated other independent contractors) received aggregate compensation of $50,000 or more from your organization and all "related organizations." This question caused a lot of difficulty due to vagueness of the instructions for 2005, and the IRS has attempted to clarify it for 2006.

The new definition of "related organization" includes eight categories of relationships. They are:

* One organization owns or controls the other organization;

* The same person(s) own or control both organizations;

* The organizations have a relationship as supporting and supported organizations under IRC [section] 509(a)(3);

* The organizations use a common pay master to handle their payrolls;

* The other organization pays part of the compensation that the filing organization would otherwise have to pay;

* The organizations are partners in a partnership or members of an LLC or other joint venture;

* The organizations conduct joint programs or share facilities or employees; and,

* One or more persons exercise substantial influence over both organizations, as defined in the regulations under IRC Section 4958.

The level of information you must disclose depends on the category of each relationship. Categories 1 through 6 require you to disclose the person and entities involved, the name and employer identification number or each related organization, the relationship between the entities, and the compensation and benefits paid to the person in question.

If the relationship comes within categories 7 or 8, you will not have to report the compensation paid by the related organization. There is also an exception to category 2 that allows you to avoid reporting compensation paid by the related organization if the person involved received no compensation from your organization. Compensation most likely includes expense reimbursements as well as actual salary and benefits.

The instructions contain six examples to illustrate the rules. However, there are many situations that will require reporting of information that you may not have accessible to you. You will have to solicit your key employees and contractors to determine if they receive compensation from any other organization (taxable or exempt) that falls within any of the eight categories. You will then have to obtain the appropriate information, which individuals might not want to disclose. The few exceptions may help in some of the more extreme situations, but there will be many cases in which your organization works with other organizations in ways that fall within one of the categories. Therefore, there may be some awkward situations that you will have to deal with. In any case, you need to file a complete and accurate return in order to avoid significant penalties imposed by the IRS.

Form 990 is a critical part of our tax system, as it provides information to the IRS and the public about your organization. Many donors and funders use the 990 as their primary source of information about your organization. Many sophisticated people will look at your return and may make decisions based on it. You therefore have to make sure you prepare the return as accurately as possible to avoid misunderstandings.

Harvey Berger is a retired tax partner with Grant Thornton and currently serves as a consultant on nonprofit tax issues. His email is [e-mail]. Peggy Bradshaw is a tax senior manager in the Washington, D.C. Not-for-Profit practice. Her email is [e-mail]. D. Greg Goller is Grant Thornton's National Partner-in-Charge of Not-for-Profit Tax Services and is based in the Washington, D.C. area office. His email is [e-mail]