The redesigned form 990: advising nonprofit organizations.

EXECUTIVE SUMMARY

* CPAs helping nonprofit organizations file the new, redesigned IRS information Form 990 can provide valuable service in understanding the scope of its new schedules and other reporting requirements.

* The full form is required for tax year 2008 of organizations with gross receipts of $1 million or more and $2.5 million or more in assets. More organizations will be required to file it rather than the shorter EZ form, however, starting in 2009, when the threshold begins dropping in two stages to gross receipts of $200,000 or more and total assets of at least $500,000 in 2010.

* Although Form 990 is only two pages longer than before, it is accompanied by 16 schedules, many of them new and unprecedented in the level of detail in their inquiry.

* Many questions target so-called excess benefit transactions. Certain organization employees and officers are "listed persons" subject to reporting on compensation in many more of its possible forms than previously. The new form also requires organizations to report on how they determined reasonable compensation for their top management official.

* Organizations also are asked whether they have a written policy covering conflicts of interest, including how it is monitored and enforced.

**********

[ILLUSTRATION OMITTED]

Most nonprofit organizations are now reviewing their first redesigned IRS Form 990 and its many new information requirements designed to enhance transparency and accountability. CPAs with nonprofit clients now are seeing the pieces fit together with satisfaction or, if drawing together the information has been difficult, perhaps with some concern. Many small organizations may be in need of some quick pointers and suddenly need your help. The new form, unveiled in late 2007, must be used for tax years beginning in 2008 by nonprofit organizations required to file Form 990, Return of Organization Exempt From Income Tax.

WHO MUST FILE THE NEW FORM 990?

As previously was the case, the full form is required only of larger organizations, with an abbreviated form for smaller ones and an e-postcard for the smallest. The reporting thresholds have changed, however, and will continue changing this year and next. Whether an organization will be subject to the stringent reporting requirements of the Form 990 depends on its financial activity (see sidebar, "EZ--or Not?"). For tax year 2008, that benchmark for the full Form 990 is gross receipts of $1 million or more and total assets of $2.5 million. It declines this year and again in 2010, so more organizations will be required to file the full form. For the 2009 tax year, the filing threshold drops to gross receipts of $500,000 or more and total assets of $1.25 million or more. For the 2010 tax year, the filing threshold drops to gross receipts of $200,000 or more and total assets of $500,000 or more. Any organization that fails to file its required form--Form 990-N, Form 990-EZ, or Form 990--for three consecutive years will have its tax-exempt status terminated.

The core Form 990 is now 11 pages, only two more pages than before, but it also has 16 accompanying schedules, many of them new. Some of the core form's questions simply gather information to obtain a better understanding of the organization. However, other questions can trigger a punitive action by the IRS against either the organization or against the board members and management. Moreover, this additional information is also available to the public.

As formerly, organizations' forms 990 and 990-EZ are by law available for public inspection, including on the Internet at www.guidestar.org. In addition, Form 990-T for unrelated business income is now public record.

The new Form 990 has a number of questions designed to determine whether any activities have occurred that warrant revocation of the tax-exempt status or the imposition of sanctions on the nonprofit's board and management. These questions must be addressed by all nonprofits filing Form 990.

CLOSER SCRUTINY ON COMPENSATION

Many questions on the new Form 990 are designed to aid the Service's continuing scrutiny of overpayment of organization employees and officers and other so-called excess benefit transactions (see IRC [section] 4958, also "NPO Compensation in the Spotlight," JofA, Oct. 07, page 54). An "excess benefit transaction" is any transaction where a disqualified person (an "insider") receives a payment or a benefit that exceeds the amount or value he or she has given in exchange. Simply put, the insider has been overpaid.

Several questions on the new Form 990 warrant careful consideration by the board and management, since they specifically ask about more forms of reportable compensation, and for more employees and officers, than on the old form. The first group of questions is designed to identify and consolidate all forms of employee and officer compensation by the organization and related organizations to certain "listed persons." Listed persons include all current officers who manage the daily operations of the organization and voting directors and trustees, even if they received no payment. In addition, the top 20 highest earning "key employees," those earning more than $150,000 of reportable compensation, must be listed. The old form required organizations to list only the five most highly paid officials who earn more than $50,000 annually.

Key employees are further defined as having responsibilities, powers or influence over the entire organization similar to those of officers, directors or trustees. They also must manage a discrete segment or activity of the organization that is at least 10% of the organization's entire activity, assets, income or expenses, or have or share authority to control or determine 10% or more of the organization's capital expenditures, operating budget or compensation for employees.

Besides these key employees, the organization must also disclose information about these persons:

* The five current highest-compensated employees earning more than $100,000 in reportable compensation who may meet some but not all of the tests for being a key employee.

* Former officers, key employees or highest-compensated employees who received more than $100,000.

* Former directors or trustees who received in that capacity more than $10,000 of reportable compensation.

For the above persons, information to be reported on new Schedule J, Part If, includes base compensation, bonus and incentive compensation, other compensation reported in box 5 of Form W-2 or box 7 of Form 1099-MISC, such as payments of amounts earned in a prior year, or severance payments, also deferred compensation and nontaxable benefits.

Another group required to be reported on Schedule J is any listed person who received compensation from an unrelated organization for services rendered to the filing organization. For the five current highest-compensated employees, those earning less than $150,000 are not required to be included in Schedule J.

Additional compensation amounts reported on Schedule J (questions 4 through 7, with the details reported in Part III) are payments for severance or change of control, a supplemental nonqualified retirement plan or equity-based compensation arrangement. Compensation contingent on revenues, compensation contingent on net earnings, and any other nonfixed payments must also be reported.

Other questions focus on whether all the fragments of compensation were properly included on the W-2 or 1099-MISC and whether there is an automatic excess benefit because of failure to properly report compensation.

FRINGE BENEFITS FRONT AND CENTER

Schedule J, question la, asks about specific expenses and fringe benefits provided to listed persons: first-class or charter travel, travel for companions, tax indemnification and gross-up payments, discretionary spending account, housing allowance or residence for personal use, payments for business use of personal residence, health or social club dues or initiation fees, and personal services. These must be identified regardless of whether they were reported as compensation on the W-2 or 1099-MISC. For each item, additional information must be provided as to the type of benefit, who received it, and whether the benefit was treated as taxable compensation.

Schedule J, question 1b, asks if there is a written policy for the payment or reimbursement of these expenses. If there is no written policy for payment or reimbursement of expenses, the organization must identify who determined that such benefits would be provided and the basis for that determination.

Schedule J, question 2, asks whether substantiation is required before reimbursing or paying the expenses. This can be used to determine whether there was an accountable plan and whether compensation was reported properly. Expenses that were not covered by an accountable plan should have been treated as compensation. However, if they were not, they become an automatic excess benefit.

SAFE HARBOR FOR COMPENSATION ARRANGEMENTS

Additional questions focus on whether the compensation arrangement can meet the three-prong safe harbor test to provide a defense for the organization against intermediate sanctions, which are the taxes imposed on the board and management for an excess benefit transaction. First, the compensation arrangement for the top management official must be approved by the board or compensation committee (Schedule J, question 3). Second, the organization must use a method to establish compensation of the CEO or executive director that compares it to other CEOs' pay. Schedule J, question 3, asks what comparability data was used: an independent compensation consultant, Form 990 of other organizations, written employment contract or a compensation survey or study. Third, the organization must contemporaneously document the meetings held or written actions undertaken during the year by the governing body and each committee with authority to act on its behalf (page 6 of the core form, question 8). Question 15 on page 6 of the core form directly asks if the organization can meet the safe harbor:

"Did the process for determining compensation of the following persons include a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision: (a) the organization's CEO, Executive Director or top management official; (b) other officers or key employees of the organization? Describe the process."

These answers are extremely important, as they will force the organization to admit whether it has a defense against an intermediate sanction, perhaps before it is even aware that it has provided a sanctionable excess benefit.

Other activities of an organization that can give rise to an excess benefit transaction are reported on new Schedule L:

* Any excise taxes for excess benefit

transactions reimbursed by the organization.

* Loans to and/or from interested per sons.

* Grants or assistance benefiting interested persons.

* Business transactions involving interested persons.

An interested person is every "listed person" from Part VII of the core form. It also includes any "disqualified person," which is anyone who is in a position to exercise substantial influence on the organization, such as the board members or upper management, their family members, and businesses or entities in which they own or control more than a 35% interest. For a section 509(a)(3) supporting organization, an interested person includes a substantial contributor, his or her family members and a business or entity in which he or she owns more than a 35% interest.

CONFLICT-OF-INTEREST POLICY

Part VI of the core form, Governance, Management, and Disclosure, question 12, asks if there is a written conflict-of-interest policy that requires annual disclosure of conflicts. It also asks for a description of how this policy is monitored and enforced. A written conflict-of-interest policy that is monitored and enforced is considered essential to good governance and high ethical standards.

GREATER TRANSPARENCY

As you can see, the new Form 990 makes filing organizations much more transparent in their finances, especially their compensation practices. This, of course, may add burdens of recordkeeping and reporting. The intent of the IP, S is to give the public the necessary tools to determine if their contributions are being used wisely. In this way the IRS will facilitate the market forces to bring change to the nonprofit sector. The hope is to weed out organizations that manage their assets poorly and siphon away funding from other organizations, with the result of greater accountability and service to communities by organizations that will have a better opportunity to get the funding that they deserve.

Educational Resources

As the IRS enforces better compliance with the tax laws, it has a new strategy designed to educate the nonprofit sector. The IRS Web site www.stayexempt. org provides training for nonprofits, as well as links from the Service's home page, www.irs.gov. At the latter, see a sample conflict-of-interest policy in Appendix A to the instructions to Form 1023, Application for Recognition of Exemption (www.irs.gov/pub/irs-pdf/i1023.pdf). IRS publications specifically designed to help nonprofits are:

* Publication 557, Tax-Exempt Status for Your Organization

* Publication 561, Determining the Value of Donated Property

* Publication 598, Tax on Unrelated Business Income of Exempt Organizations

* Publication 1771, Charitable Contributions--Substantiation and Disclosure Requirements

* Publication 3079, Gaming Publication for Tax-Exempt Organizations, and Notice 1335, Gaming Activities, and Notice 1340, Tax-Exempt Organizations and Raffle Prizes--Reporting Requirements and Federal Income Tax Withholding

* Publication 4221-PC, Compliance Guide for 501 (c)(3) Public Charities

* Publication 4302, A Charity's Guide to Vehicle Donations

* Publication 4630, The Exempt Organizations Products & Services Navigator

Comments on Selected Parts of the New Form 990 and Schedules

(Download the form and related schedules from the IRS Web site, www.irs.gov/formspubs/index.html.)

* Part I provides a snapshot of the entire organization because it summarizes the income statement and balance sheet on the first page. It also asks for a description of the organization's mission. Since this is the first thing that a donor will see, it provides a great opportunity to make the case why this organization deserves to be funded. The organization's development staff could be very helpful in drafting this mission statement.

* In Part III, Statement of Program Service Accomplishments, the organization is asked to describe its exempt purpose achievements for the three most expensive services. This gives the organization another opportunity to tell its donors what a great job it is doing and how it is affecting the community.

* In Part IV, Checklist of Required Schedules, the answers to this checklist help determine which of the 16 schedules need to be completed.

* Part V, Statements Regarding Other IRS Filings and Tax Compliance, provides a checklist for the nonprofits to report their tax filing practices. Information provided in the attached schedules will allow the IRS to double-check this section to determine that the filings and tax compliance are in fact correct. An organization that is not meeting its tax compliance requirements is probably not being managed very well.

* Part VI, Governance, Management, and Disclosure, is a dramatic addition to the Form 990 because it focuses on the board: whether it is independent and information about how it provides oversight. Part VI asks for specific information such as whether the board reviews the Form 990 before it is filed. It also asks if there is a written conflict-of-interest policy that requires annual disclosure of conflicts. It asks for a description of how this policy is monitored and enforced. It also asks if the organization has a written whistleblower policy and a written document retention and destruction policy.

If an organization does not have these policies, there is a sample conflict-of-interest policy in the instructions to Form 1023 posted at www.irs.gov. Samples of the conflict-of-interest, whistleblower and document retention and destruction policies can be found in The Nonprofit Policy Sampler, by Barbara Lawrence and Outi Flynn, which is published by BoardSource (2006). Another helpful resource is the book Managing Conflicts of Interest-A Primer for Nonprofit Boards, 2nd edition, by Daniel L. Kurtz and Sarah E. Paul, which is also published by BoardSource (2006).

Another resource designed to help organizations understand what is expected of them in terms of their ethical conduct, accountability and transparency is the Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations, by the Panel on the Nonprofit Sector, which was convened by the Independent Sector. It can be found at www.nonprofitpanel.org.

* Part IX, Statement of Functional Expenses, while not new, provides a more detailed breakdown of how money is spent. Anyone with a calculator can determine what percentages of revenue are actually paid for program services as opposed to management and fundraising expenses.

Comments About the Schedules

* Schedule A, formerly Organizations Exempt Under Section 501 (c) (3)--Supplementary Information, has been renamed and much of its contents moved elsewhere. It is now tided Public Charity Status and Public Support and has been revised to focus on how affected organizations meet their public support test. An organization must report as a private foundation if it does not meet the 33 1/3% test or the 10% facts-and-circumstances test described in Treas. Reg. [section] 1.170A-9(f)(3). Moreover, it reflects changes in the support schedule to include the current tax year plus four previous years, rather than just the previous four years, and requires accrual accounting, rather than cash accounting as it formerly did.

* Schedule C, Political Campaign and Lobbying Activities, needs to be carefully and accurately prepared. Certain organizations can have their tax-exempt status revoked or sanctions imposed for these activities.

* Schedule F, Statement of Activities Outside the United States, is designed to obtain specific information about an organization's foreign activities. It requires reporting for geographic regions of the organization's activities, its grants to foreign organizations or entities, and its grants or assistance to foreign individuals.

* Schedule G, Supplemental Information Regarding Fundraising or Gaming Activities, asks for information regarding an organization's fundraising activities, events and gaming. It also asks for information to determine if the organization has properly registered for charitable solicitation. (If an organization needs information regarding registration for charitable solicitation, it can be found at www. multistatefiling.org.) It asks for the identification and payment arrangements for professional solicitors.

* Schedule H, Hospitals, will dramatically affect tax-exempt hospitals. For a hospital to maintain its tax-exempt status, it must demonstrate that it operates for a charitable purpose. The intent of Schedule H is to make tax-exempt hospitals report uniformly and to measure their charitable purpose. In 2009 hospitals will be required to calculate their charity care, community benefits and community building activities. For 2008 they will only be required to list the locations of their facilities.

* Schedule I, Grants and Other Assistance to Organizations, Governments, and Individuals in the U.S., asks about an organization's records to substantiate its grants, the grantee's eligibility, its selection criteria and its methods for monitoring the use of the grant funds. For grants to organizations, it asks for information about the organization, including its IRC section. This will provide an in-depth look at the organization's grants administration program and how it dispenses money

* Schedule M, Non-Cash Contributions, has a detailed list of various types of property that an organization could receive as contributions. It also asks for the amount of revenue that resulted from each type of contribution and the method used for determining revenue.

* Schedule N, Liquidation, Termination, Dissolution or Significant Disposition of Assets, asks to whom the organization distributed its assets, whether it went through the appropriate procedure with the IRS, and whether it filed with the appropriate state official.

* Schedule R, Related Organizations and Unrelated Partnerships, asks for information regarding transactions and significant activities with related organizations. The intent is to put together all the fragments of the organizational structure and look at it in its entirety. This sum may provide a very different picture than each part separately.

EZ--or Not?

For tax year 2008, the Form 990-EZ can be used if an organization has gross receipts greater than $25,000 but less than $1 million, and total assets less than $2.5 million. For tax year 2009, it can be used if the organization has gross receipts greater than $25,000 and less than $500,000, and total assets less than $1.25 million. For tax year 2010, it can be used if the organization has gross receipts greater than $50,000 and less than $200,000, and total assets less than $500,000.

The 2008 Form 990-EZ core form has four pages. In addition, depending on the organization's activities, it may need to complete additional schedules from the Form 990:

* Schedule A, Public Charity Status and Public Support (to be completed by section 501(c) (3) organizations)

* Schedule B, Schedule of Contributors

* Schedule C, Political Campaign and Lobbying Activities

* Schedule E, Schools

* Schedule G, Supplemental Information Regarding Fundraising or Gaming Activities

* Schedule L, Transactions With Interested Persons

* Schedule N, Liquidation, Termination, Dissolution or Significant Disposition of Assets

Postcards for the Smallest

Prior to the tax year 2007 nonprofit organizations with gross receipts of $25,000 or less were not required to file anything. However, for tax years beginning in 2007 most nonprofit organizations with gross receipts of $25,000 or less were required to file Form 990-N, which is an electronic form that can be accessed and prepared through www.irs.gov.

The Form 990-N requires reporting the employer identification number, the tax year, the legal name and mailing address, the name and address of a principal officer, Web site address if the organization has one, and a confirmation that the organization's gross receipts are $25,000 or less.

Organizations that are exempt from even this filing requirement are ones that are part of a group return, also churches, their integrated auxiliaries and conventions or associations of churches.

Form 990-N cannot be used by private foundations, section 509(a)(3) supporting organizations, or section 527 political organizations.

For tax years beginning in 2010, the Form 990-N filing will be extended to organizations with gross receipts of $50,000 or less.

AICPA RESOURCES

CPE 

* Form 990: AICPA's Answer to Unlocking the Tax Complexities, a CPE self-study course (DVD/manual, #181454; additional manual for DVD, #351454; text, #731140)

* Nonprofit Organizations: Guide to Advanced Tax Planning, a CPE self-study course (#?36790)

For more information or to place an order, go to www.cpa2biz.com or call the Institute at 888-777-7077.

On-Site Training

Form 990: Moving Beyond the Basics (Acronym #AF990)

To access on-site training courses, go to www.aicpalearning.org, click "On-Site Training" and search by "Acronym Index." If you need assistance, please contact a training representative at 800-634-6780 (option 1).

Tax Section

The Tax Section provides tools, technologies and peer interaction to CPAs with tax practices. The Section keeps members up to date on tax legislative and regulatory developments. Visit the Tax Center at www.aicpa.org/TAX.

OTHER RESOURCES

Books

* The Nonprofit Policy Sampler, by Barbara Lawrence and Outi Flynn, BoardSource, 2006

* Managing Conflicts of Interest: A Primer for Nonprofit Boards, 2nd edition, by Daniel L Kurtz and Sarah E. Paul, BoardSource, 2006.

Statement of Principles

Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations, Panel on the Nonprofit Sector, www.nonprofitpanel.org

Bonnie M. Wyllie, Esq., LL.M., is vice president of tax consulting services at New Orleans-based LaPorte Sehrt Romig Hand CPAs. Her e-mail address is bwyllie@ laporte.com.