By Anthony G. Sandonato, CPA, Esq.
In February of this year, the IRS released the final version of a redesigned Form 990 that will be used for the 2008 returns that are filed in 2009. The initial draft was released in the summer of 2007 and was the subject of extensive public comment. The final Form 990 replaces the old Form 990 that has not been overhauled in many years. As a result of these changes to the Form 990, organizations must plan and take action to get ready for the 2008 filing.
The new Form 990 is very comprehensive and now more logical in order. The form will provide the IRS and the public with a complete view of the organization's financial, governance, and tax positions. The goals of the IRS in redesigning the form were to promote transparency, improve tax compliance and ease the reporting burden of organizations. The new Form 990 consists of an 11-page core form and 16 possible schedules. While it is not possible to review all the changes in one article, the following discussion highlights some of the major new provisions.
Form 990, Part III - Statement of Program Service Accomplishments: This part is similar to the old Part III, but adds specific questions regarding reporting of changes in activities during the year. While the new form reduces the reporting of the major program service accomplishments to the top three, it now requires an organization to list the related program revenue in addition to the total expenses and grants for each program. As a result, an organization should consider the need to modify the organization's existing accounting system to classify revenue by program to match against the program service expenses. A new requirement to use identifying codes for each activity has been deferred for a year until the IRS determines the best series of codes needed for the IRS and other users.
Form 990, Part IV - Governance, Management and Disclosure: The IRS has taken the position that a well-governed organization is more likely to be in compliance with the tax laws than one that is not. Although is was questioned whether the IRS had the statutory authority to ask the governance questions, it was ultimately decided that this was an appropriate use of its powers. The questions cover the composition of the governing body and management and their independence, conflict of interest policies, policies for setting compensation, whistleblower policies, document retention policies, how the board of directors reviews joint ventures between the organization and outside entities, disclosure policies, and how the board reviews the Form 990 before it is filed.
This new series of questions will require an organization to review the items and consider if it should make any changes or additions to existing policies that would allow them to answer in a manner that reflects well on the organization. It is important to note that not all good governance policies are statutorily required, but ultimate compliance would be prudent. The questions regarding family and business relationships require an organization to make a good faith effort to obtain this information on an annual basis.
Form 990, Part VII - Compensation: One of the most contentious additions to the redesigned form was the compensation section of the core form. Although the information requested, for the most part, was already required to be reported by 501(c)(3) organizations, other organizations were not required to report the five current highest compensated employees and vendors (more than $100,000 now, previously more than $50,000). The new form extends more comprehensive compensation reporting requirements to all 501(c) organizations that use the form. The new form also requires the data to be summarized from the Form W-2 and 1099 on a calendar year basis. A fiscal organization cannot show compensation here on the fiscal year basis, which may result in some unusual differences in compensation reported under Functional Expenses on Part IX and here.
Form 990, Schedule D, Supplemental Financial Statements: This schedule puts the balance sheet details in one place instead of requiring various attachments and is the new location for the reconciliation of revenue and expenses from the financial statements to the Form 990. Schedule D also requires that any FIN 48 footnotes to the financial statements be disclosed on this schedule. FIN 48 is an accounting pronouncement that requires financial statement recognition of material uncertain tax positions. Tax exemption, by itself, is a tax position and, if in issue, will almost always be material, especially if there is a large amount of investment income. Other significant income tax positions for exempt organizations include whether a stream of income is unrelated business income. An organization should review the new structured statement formats to ensure appropriate information is available from the accounting system.
Conclusion: The above discussion highlights some of the significant changes to the new Form 990. The important point to remember is the fact that now is the time for tax exempt organizations to implement the necessary changes to their internal procedures and accounting records so that a year from now they can complete the Form 990 in a way that reflects positively on the organization, both in the eyes of the IRS and the public.
Anthony G. Sandonato, CPA, Esq, is a Senior Tax Manager with Mengel, Metzger, Barr & Co. LLP. He can be reached at 585-423-1860 or by e-mail at asandonato@mmb-co.com.
