Six Things Every Board Member Should Know About the NEW 990

Just the thought of an IRS form can bring out the clouds on a sunny day. But now that this annually required nonprofit form is on the web for everyone to see (at GuideStar.org), it goes beyond compliance to being an important way to tell your organization's story.

Federal Form 990 from the Internal Revenue Service (IRS) is like a tax return for nonprofits, but since we are tax-exempt, it's called an "information return."

You may have heard by now that the IRS Form 990 has been substantially revised for the fiscal years beginning in 2008 and in the future. The issues disclosed on the form that especially interest the media, potential donors, and the general public still include executive compensation and overhead costs, but with this revised form, the IRS has entered the territory of "good governance" as well.

In fact, in a speech this week, IRS Commissioner Steve T. Miller said, "We have pushed to require [new] reporting on how organizations are managed. The crown jewel of this effort is the governance section of the revised Form 990, effective for [tax years beginning in] 2008." This broader IRS scrutiny means that board members and executives of community nonprofits should feel even more urgency to review and understand what's being submitted each year.

Here, very briefly, are six things that you should know about the revised nonprofit tax return. You can find all the details about these and other changes -- and download forms -- at www.irs.gov/charities.

1. Your organization's 990 is due 4 and one-half months after the close of your fiscal year: if your fiscal year ends June 30 your 990 is due on November 15; if your fiscal year ends December 31 it s due May 15, and so on. It is very common to obtain an extension of time to file by submitting Form 8868, so that you can use your final audit numbers in completing the Form 990. Our recommendation: the Board Chair should review and sign the 990, and copies should be given to each board member. P.S. The penalties are substantial so be sure either to get it in on time or to request an extension by the filing date.

2. It used to be that most small tax-exempt organizations -- those with annual gross receipts below $25,000 -- didn't have to file the 990 annually, but now every year they must file the new Form 990-N, "Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ." This "proof of life" form will allow for a much more accurate count of nonprofits and what we do.

3. Part III of the new 990 is an expanded Program Service Accomplishments section that requires you to describe your three largest programs, how much you spent on each of them in the prior year, and even whether you discontinued any core programs since your last filing. Our recommendation: don't just let your auditor or bookkeeper complete this section as a routine task. This is a key opportunity to tell the story of your organization's impact to the world: make full use of it.

4. A new section is Part VI of the revised form Governance, Management, and Disclosure that asks about the organization's board structure, policies, and practices. Examples: whether your organization has a conflict of interest policy, whether it posts its 990 on its website, and whether there was an annual compensation review for the executive director and other key employees that included a review by independent persons, the use of comparable salary data, other factors.

5. The expanded scrutiny of employee, director, and contractor compensation requires that full compensation be disclosed for all key employees and current board members. It also asks whether the organization paid a former board member or key employee more than $100,000 in the prior year. And, the organization must disclose its five highest paid employees and independent contractors making more than $100,000.

6. Part IX, the Statement of Functional Expenses, is still the place readers will find out how much of every dollar your organization spent last year on your non-program activities: fundraising and management. It is important not to overstate these overhead costs due to poor accounting allocation methods. We recommend: Board members should ensure that finance staff or contractors have appropriately classified both direct and shared costs across the core functions of the organization.

The IRS is allowing for a rolling adoption of the new form depending on current organizational revenue and asset size. Again, be sure to check the directions and download blank forms at www.irs.gov/charities.

See also: Is It Time to Get an Audit?

Jeanne Bell is CEO of CompassPoint Nonprofit Services and a nationally recognized researcher and writer on nonprofit finance, executive transition, and other issues.

Editor's note: Starting in January 2009 we'll be having a series on board policy documents with model templates including conflict of interest policy, bylaws, whistleblower policy, document retention policy, ethics policy, and more. Stay tuned to your Inbox!

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Comments

There is a typo in your section about when to file...it reads 4 1/2 months from the end of your fiscal year. It should read 5 1/2 months.

Actually 4 and a half months is right. It took me a long to understand this. If your fiscal year ends on December 31, then four a half months later is May 15. It FEELS as if May 15 is five and a half months later, but actually it's four and a half months later. Ultimately it's easier just to remember the date!

Wow. I have always thought that it would have been 5 1/2 as well. I guess because we're so accustomed to starting with "one" (January, not December)

From December 31 to January 31 = 1 month
From January 31 to February 31 = 1 month
From February 31 to March 31 = 1 month
From March 31 to April 31 = 1 month
From April 31 to May 15 = 1/2 month TOTAL = 4 1/2 MONTHS

"The IRS is allowing for a rolling adoption..." I was unable to find IRS guidance on anything related to "rolling adoption." Can you post a webpage citation? Thanks.

Sure . . . here is the link to the "rolling adoption" schedule:

http://www.irs.gov/charities/article/0,,id=184445,00.html

Great article, but I have a quibble with your statement that "since we are tax-exempt, it's called an 'information return.' " Rather, nonprofits "are mostly tax-exempt" since nonprofits are exempt from corporate income taxes on revenue RELATED to their exempt purposes, and on many state and local taxes. Nonprofits are not exempt from payroll taxes, and from unrelated business income tax. They may also participate in PILOT programs.

You make an excellent point---nonprofits may indeed be reporting unrelated business income, in which case it is more than informational.

I thought that in August the IRS revised the compensation limits upwards, so that now you need to disclose information for the five top employees and consultants making more than $150,000 per year, not $100,000. Can you clarify?

The 150,000 disclosure is for Key Employees. The top five making over 100,000 are still disclosed. Details of what a Key Employee is can be found in the 990 instructions' glossary (link opens a PDF) http://www.irs.gov/pub/irs-pdf/i990.pdf

Do all these changes apply to the 990 EZ as well as the 990?

Thanks for your question. According to the IRS summary called, "What's New: Redesigned Form 990 and Instructions for 2008 Tax Year," which is downloadable at http://www.irs.gov/charities/article/0,,id=181089,00.html, the Form 990 E-Z was not substantially redesigned for 2008, but nonrpofits filing the E-Z will in some cases need to use the redesigned Schedules A, B, C, E, G, L and N to report infromation that used to be collected right on the E-Z.

Equally important is a policy and process for how your non profit board members review the 990 before submission. Yes, policy and process.
Same goes for compensation.
It seems that the Section"o" in the 990 form will be a term essay paper on each nonprofit governance structure.

Question ... can authority for reviewing the 990 be delegated to a committee ? I'm not sure that it is practical to have a full Board (some of whom have limited financial knowledge) review the return.

As I read the instructions and the form it asks if the Board has approved it, meaning that in the minutes it must be shown that the board has approved it. I'm not sure this is something that can be delegated to a committee, or that it should be.

There is no legal requirement for the full board to review the 990 before it is submitted. Usually a committee reviews it prior to submission, and as a matter of accountability, every one on the board is given a copy. As a board member myself, I appreciate seeing what we're saying to the world, and sometimes it gives me questions to take up.

Very good report.
However, there are a large number of Small Nonprofits who will have difficulty completing the Revised 990 Forms without the assistance of an Auditor. Many of these Small NP's have not been able to afford the expense of an Auditor in the past. They will need help from their Board Members to find a qualified person who can assist them on a probono basis..
Also, it is important that the Executive Director keep the Board Members informed of these changes and presents the completed report at least for the Board's review prior to its filing.
Larry Klinger

I am interested in what the 990 says about disclosures/ reporting for affiliated companies. Can you describe affiliation under the new 990?
B

Very good article thank you...

I am interested in your thoughts about whether a tribal organization that is already federally tax-exempt under Section 7871 should also file for a 501c3 designation? Please give your rationale for yes, no, maybe. thanks, s jamison

I am interested in whether you or readers can recommend good sources for model policies such as a conflict of interest policy that would be helpful to non-profit staff that need to draft such policies in order to be in compliance with the new regulations?

The IRS has a sample policy in their Form 1023 on pages 25-26: http://www.irs.gov/pub/irs-pdf/f1023.pdf and some general narrative here: http://www.irs.gov/charities/article/0,,id=139515,00.html. Good luck with that.

here is the link http://www.irs.gov/charities/article/0,,id=184445,00.html
an interesting article keep it up

I am a frequent visitor of your blog and usually do not leave comments.
Just wanted to let you know that I very much enjoy reading your blog.
Keep it up.
Thanks :)

I am a board director of a nonprofit. I don't receive compensation from it. Recently, the nonprofit wants me to provide it my tax returns.
Is this right?

Right or not, any organization that wants MY tax returns is going to see my backside receding as fast as I can run. If I were not retired, that would include any employer I might have. There is no reason I can think of why anything not directly pertaining to that organization should be any of their business.
We once insisted our daughter turn down a MERIT-BASED scholarship she didn't even apply for because the school insisted WE had to file tax returns for the previous THREE YEARS. After we refused, they admitted it was just a formality to satisfy the computer, and found a way around the problem.

This broader IRS scrutiny means that board members and executives of community nonprofits should feel even more urgency to review and understand what's being submitted each year.

Mike, thanks for this comment, and to go just one step further: embezzlement can hurt not only the organization, but its cause, and the whole nonprofit sector.

In addition to these changes, which I am in full support of, it would have been beneficial for the IRS to modify the rules of filing so that religious charities would be held to the same filing standards. Many non profit organizations hide (intentionally or not) under a religious affiliation. This is unfair to thier donors who are truly not getting the best picture about where thier money is going. For schools or other groups to be loosely affiliated with a church should not qualify as exemption from filing.

Question:
I'm seeing more and more local non-profits who are using the 501(c)(3) status of an "umbrella organization" that provides administrative services, bookkeeping, etc. The "umbrella" files a 990, but the information about "member" organizations is confined to one line each about their revenues. Nothing about executive compensation, where the money raised goes, where it came from, etc.
The umbrella is supposed to be temporary while the organization gets its own 990, but some of these orgs have been "umbrellaed" for years now.
The policy doesn't look like it complies with the intent of the law, which is to provide accountability and let the public know where their charity dollars are going.
Will the new 990 requirements apply to the sub-organizations I'm talking about, or will it just be the "umbrella" report as usual?
--Richard (textfile {at} mac.com)

DJean
Delaware
We pay an Auditor, as deemed by the State for yearly funds requests. Perplexed as to why anyone would do their own 990.
Not happy about paying $5000 per year for this process(depleats serious monies from budget), but have never been told otherwise.
Is it really worth it to do your own?

If your organization brings in less that $25K, you fill in Form 990-N; if between $25K and $100K, you can use Form 990 EZ; and if more than $100K, you have to use Form 990. My understanding is that 990-N and 990-EZ are much less stringent (for example, only 10 questions on 990-EZ). However, this is something I’d check with an accountant.

I loved the editorial. It is very interesting. Thank you for the information. Non-profits, charities, and other tax-exempt organizations are generally required to file Form 990 or Form 990-EZ along with Schedule A with the Internal Revenue Service each year to maintain their tax-exempt status.

Equally important is a policy and process for how your non profit board members review the 990 before submission. Agreed that, policy and process.
Thanks, Alan

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