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The Big Dig: Digging Your Way Through The New Form 990

In June 2007, the IRS released a significantly revised Form 990, the reporting form that tax-exempt organizations are required to file each year. It held a ninety day “comment” period in which the public was invited to submit reactions and suggestions. The IRS received over 3000 pieces of written and electronic comments from organizations impacted by the Form and from those which rely upon and post 990 data such as*

This is the first major revision of the Form 990 since 1979, and it was prompted by increased demands for transparency and accountability in the nonprofit sector, a backlash from similar demands in the for profit world. The new Form will be required beginning with 2008 returns filed in 2009, and it will be phased in over a three-year period to give smaller non-profit organizations “transition relief.” Our schools, however should be prepared to file the new Form in the first year because the vast majority have gross receipts of $1.0million or greater and assets of $2.5million or higher.

Although the IRS did heed some important suggestions from non-profit sector representatives, the basic format of the draft presented last June did not change significantly. All preparers of the Form will be required to complete the first core eleven pages but the sixteen schedules which replace the current attachments will not apply to all filers.

I. Of Particular Interest to Independent Schools and Non-Profits

The initial draft had a summary section of financial ratios and percentages which many felt could be taken out of context and misinterpreted thus creating an inaccurate picture of the organization. The final version contains instead a snapshot of two years of basic financial information. Many were pleased to see the addition of a Schedule (the last one, “O”) which provides organizations with a place to add further explanations and other relevant financial information.

Trustees of independent schools and other nonprofits will be pleased to know that filing organizations will no longer be required to provide the private addresses of board members.

While your organization’s Business Managers will need obviously to become familiar with the new Form in great detail, board members, heads and non-profit CEO’s should be aware of those sections which address the accountability and transparency issues: “Governance, Management and Disclosure” and “Compensation of Officers, Directors, Trustees, Key Employees and Five Highest Compensated Employees”

A. Governance

This new section asks questions about “the organization’s board composition and independence, its governance and management structure and policies and whether (and if so how) it promotes transparency and accountability to its constituents or beneficiaries:

Littleford & Associates’ clients will be especially interested in these specific additional requests or information:

  1. There are questions relating to who elects directors; whether the board’s decisions are subject to approval by members or others; and the documentation of board action which this consultant presumably encompasses the documentation of executive compensation decisions.
  2. Does the organization have a written conflict of interest policy? If so, how is it implemented and how is compliance with the policy monitored?
  3. This consultant has recommended repeatedly that the Head (or CEO), the Board Chair and the Finance Chair see and be familiar with the content of School’s (or other non-profit’s) Form 990 before filing. The June Draft went so far as to include a question about whether the FULL Board had “reviewed” the Form 990 before it was filed with the IRS. As expected, many found the action that this query implied impractical and inappropriate and worried about the definition of “review”. The IRS responded by revising the question so that it now asks “whether the Form 990 is provided to the governing body before it is filed and directs all organizations to describe the process (if any) as to who is provided the form, when, and the level of review.” While this is more acceptable, it underscores the importance of at least the key trustees having a basic understanding of the document.
  4. Some non-profits have family and business relationships among officers, directors, trustees and key employees. The new Form defines “family and business relationships” and requires basic information about them.

B. Compensation

In reporting compensation on the Form 990, there is a continual effort to balance the need for greater transparency, objectivity and key information versus the burden of increased reporting (and expense) and the risk of complicating comparative analyses through excessive detail.

The chart on the new 990 relating to Officers, Directors, Trustees, Key Employees and Five Highest Compensated Employees contains several additional columns. Four relate to types of compensation: base, bonus or incentive, severance and other. Three ask for the dollar amounts of nonqualified deferred compensation, nontaxable benefits and nontaxable expense reimbursements. Two require “Yes/No” answers to supplemental non-qualified retirement plans and equity-based compensation.

There are two specific questions in this Section which are intended to target the abuse of fringe benefits. These ask whether the organization has “a written policy concerning payment or reimbursement of travel and entertainment expenses (incurred by officers)”, and whether the organization paid or reimbursed officers for “first-class travel, club dues or use of a personal residence.”

II. Summay

This brief article highlights only some core issues of interest to our readers on this important topic and hopefully underscores the need for heads, CEO’s and trustees to strive for a greater level of understanding and familiarity with the Form 990. Littleford & Associates advises its clients not to overreact to the new Form 990 but to focus on its intent and key Sections and to consult their independent auditors for further information.

*, “Unveiled:The IRS Introduces the Redesigned Form 990”, January 3, 2008.

John Littleford
Senior Partner