Form 990 Update

Governance Issues Related to the Form 990

May 12, 2011Douglas Boedeker, CPA, [email protected]

Course Outline

Form 990 Backgroundg

Overall Good Governance Themes

Compensation Policies – Schedule J

Form 990, Part VI – The Governance Centerpiece

Consideration of the other schedules

Checklist of Required Schedules

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Background on the Federal Form 990

Publicly available document, easily accessed via www.guidestar.org

Significant redesign issued in 2008.

The 990 now consists of a 12 page “core form” supplemented by various supporting schedules.

Major focal points for the redesigned form are transparency regarding governance and compensation.

The IRS believes that a well-governed organization is more likely to be a compliant organization.


Overall Themes of Good Governance per the 990

The Organization’s best interest is always top priority.

Have an engaged, independent Board.

Understand the regulations regarding tax-exempt organizations.

Have written policies and procedures in place whenever possible.p p p p

Transparency fosters compliance.


Compensation – Schedule J


Compensation – Schedule J

Part I of Schedule J performs two functions:

- Increases Transparency of Executive Perks

- Helps the IRS Look for Likely Candidates for Intermediate Sanctions


Schedule J – Let’s Talk Intermediate Sanctions

If an “Excess Benefit Transaction” takes place…..

I. Initial 25% excise tax is imposed on the disqualified person receiving the benefit. (Tax is levied on the amount of the excess benefit.)

II. A 200% excise tax is then imposed on the disqualified person if the excess benefit is not corrected on a timely basis.

III. Organization managers who knowingly participate in the excess benefit transaction are subject to a 10% excise tax.


Things to watch on Schedule J, Part I

Line 1a: Be sure the organization can support why these benefits are “reasonable”. Follow written policies regarding payment of these perks!

Line 2: Be sure to have a policy in place so that you can check “Yes” to this box.

Line 3: The more boxes you check in this section, the better.

Lines 5 & 6: These are potential traps – especially Line 6.

Line 7: It is easier for the IRS to attack “non-fixed” payments

Lines 8 & 9: If you can check these “Yes”, that’s a bonus!


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Schedule J – Governance Considerations

Understand your organization’s compensation practices.

The creation of a board-level Compensation Committee can help inject independence into the process.

Written compensation policies and procedures can save a lot of potential angst.

Remind folks that the potential excise taxes are levied on them!


Form 990, Part VI – The Governance Centerpiece


Form 990, Part VI - Most Talked About Policies

Section B, Line 12a, b, & c: Conflict of Interest- Is annual disclosure required?- Does the entity monitor and enforce compliance?

Section B, Line 13: Whistleblower Policy

Section B, Line 14: Document Retention and Destruction Policy

Section B, Line 10b: Do you have written policies governing the conduct of your chapters?

Section A, Line 8a & b: Do you keep meeting minutes?


Form 990, Part VI – The Annoying Questions

Section A, Line 2: Family & Business relationships with Board members and key employees

- You only need to ask them, you can’t force them to respond!- Don’t forget the “in the ordinary course of business” exception.

C id i ti ti i i t l fli t f i t t li- Consider incorporating questionnaire into annual conflict of interest policy certification.

Section B, Line 11a & b: Have all members of the governing body received a copy of the Form before it was filed? And, how does the organization review the 990?


Form 990, Part VI – The Trap Questions

Section A, Line 1b: The number of “independent” voting Board members

Section B, Line 15a & b: Was compensation for CEO and other key employees set by independent persons?

- Really more of a trap for the CEO’s compensation, many organizations answer “No” to Line 15b.

S ti B Li 16 & b D ti i t i j i t t ith t bl Section B, Line 16a & b: Do you participate in joint ventures with taxable entities? If so, do you have written policies to evaluate the allowability of such an endeavor?

Section A, Line 5: Was there a “significant diversion” of assets?

Part C Line 18: Be sure to check at least one of the boxes!


Part C, Line 18: Be sure to check at least one of the boxes!

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Schedule L – Transactions with Interested Persons


Schedule L – Things to Consider

Another “intermediate sanctions” trap!

Disclosure is the key thing, not everything reported here is necessarily “bad”.- An inadvertent omission can make something look much worse.

Documentation and monitoring of these items is key.

Involve the Board whenever possible.


Grants and Assistance

Schedule F – Outside USA Schedule I – Inside USASchedule F – Outside USA Schedule I – Inside USA


Grants & Assistance

Key concept is whether the entity maintains records to document:1. The amount of the grants and assistance2. The grantee’s eligibility for the grant or assistance3. The selection criteria used to award the grants or assistance

In addition, how does the organization monitor the use of grant or assistance funds?

W itt d t ti i l b t- Written documentation is always best.

Schedule F is subject to particular scrutiny.

Concerns are private inurement, tax compliance, and illegal acts.


Schedule M – Noncash Contributions


Schedule M – A few things to consider

Line 30 is designed to help detect valuation errors on the part of donors.- Be wary of entering into any such arrangement.

Line 31, Gift Acceptance Policy, is a good idea. If you don’t have a written gift t li id i l tiacceptance policy, consider implementing one.

Line 32a is designed to reveal improper fundraising arrangements. If you say t thi ti lik l h ld b filli t S h d l G S l t lyes to this question, you likely should be filling out Schedule G, Supplemental

Information Regarding Fundraising or Gaming Activities.


Schedule C – Political Campaign and Lobbying Activities


Schedule C – Political Campaign and Lobbying Activities

Remember, for 501(c)(3)’s, POLITICAL activity is prohibited.

Lobbying for a 501(c)(3) organization is permitted, but it cannot be a significant component of the entity’s activities.

Schedule C gives you ample space to admit your sins!

It’s a great idea to have documented policies regarding what governmental affairs activity is permissible.


Form 990, Two other points to watch

Part IV, Line 36: For 501(c)(3) organizations, “Did the organization make any transfers to an exempt non-charitable related organization?”

- Be careful about the flow of funds between related entities. Make sure payments from a (c)(3) to a non-charity are for services rendered or cost reimbursements.

Part XII, Line 2c: “Does the organization have a committee that assumes responsibility for oversight of the audit, review, or compilation of its financial statements and selection of an independent accountant?”s a e e s a d se ec o o a depe de accou a

- Not a mandatory thing for IRS purposes, but often a great governance tool.


Form 990 – Checklist of Required Schedules

Read this on the very first day of Read this on the very first day of each quarter.

This can be an excellent tool toThis can be an excellent tool to provide a heads-up if new governance issues have arisen.

Plus, it can make your 990 prep easier if you know what information you need to gather!


Good Luck!
