After nearly thirty years of no changes, the IRS has revamped Form 990, the annual return that charities and other tax-exempt organizations are required to file.  In an effort to gain greater transparency, the form now requires more detailed reporting from filers.  On the one hand, the extra information sought allows the charities to explain their activities more fully to the IRS (and to the donor pool, as the form is made publically available), but it also gives the IRS more indicators in determining whether each charity deserves to retain its tax exempt status.

As the IRS sorts through the stack of over a million 990’s and divides them into two piles, every charity wants to be placed in the bigger of the two – the pile containing no red flags.   The other stack consists of those forms that raise concerns which may result in an audit, or could ultimately result in the loss of the precious tax-exempt status.

The new 990 which is effective for the 2008 tax year,  takes the shape of an eleven-page “core form” which includes a summary, along with sixteen (previously only two) schedules to be completed where applicable.  Beyond simple reorganization, more impactful changes in the new form include 1) graduated transition for smaller organizations whereby they are permitted to file the 990-EZ rather than the full 990, 2) substantial revisions to the reporting of the organization’s compensation of officers, directors, trustees, key employees, and highest compensated employees, 3) new disclosures regarding donor advised funds and other similar funds or accounts, museums and other organizations maintaining collections, conservation organizations,  trust and escrow arrangements, endowment funds, and other investments, 4) new reporting requirements for joint ventures less than 50% owned by the organization to be reported, 5) new information required regarding arrangements with professional fundraisers, special events, and gaming activities, 6) entirely new schedules for reporting on foreign activities, hospitals, tax-exempt bonds, transactions with interested persons, and non-cash contributions,  and finally 7) a revised Instructions section with a glossary containing new definitions.

Section VI on Core Form 990

An aspect of the new form that charities may mistakenly consider to be insignificant is Section VI which asks about the organization’s governance, management, and disclosure policies.  The reason this may be overlooked is because the form itself specifies that the policies addressed in the “yes/no” questions of that section are not legally required to be in place.  The questions pertain to such things as the independence of board members, what process is used to review Form 990 and whether the organization lets its board see it before it is filed, whether it has a conflict of interest policy in place, a whistle blower policy, a document retention and destruction policy, whether it takes minutes during meetings, delegates anything to a management company, and whether it makes its Form 1023 and governing documents publically available for inspection.

But it is clear that the IRS considered these policies more than “suggestions” by this official statement: “Even though governance, management, and disclosure policies and procedures generally are not required under the Internal Revenue Code, the IRS considers such policies and procedures to generally improve tax compliance.”  The takeaway message from this statement should be clear.  Although it is not required by law for a tax-exempt organization to have certain policies in place, an organization places itself at much greater risk of suspicion if it does not.   Without proper accountability policies in place, the IRS is less confident that the organization is not engaging in nonexempt activity or private inurement.

For a Christian organization, many of the IRS-suggested policies are required anyway if it wants to become a certified member of the reputable group ECFA (Evangelical Council for Financial Accountability).  The ECFA certification indicates to donors that the charity complies with ECFA criteria in the following seven areas: 1) Doctrinal Statement, 2) Board of Directors and Financial Oversight, 3) Financial Statements, 4) Use of Resources, 5) Financial Disclosure, 6) Conflicts of Interest, and 7) Fund-Raising.

More than before, it is becoming important to shape organizational policies around the Form 990.  It would be useful to perform a “practice run” with the Form 990 earlier in the year before it is time to file.  The board would be able to see in black and white what the public (much less the IRS) would see and how the organization’s practices and policies might affect its reputation, which is invaluable to an organization dependent on donors.  A practice run allows the organization to focus on topics spotlighted on the form while there is still time to make changes.  (Only changes made during the tax year are reflected on the 990, even if made before filing the following year.)

The donors want to know precautionary policies are in place, and the IRS certainly does as well.  It is always desirable to be in the IRS’s bigger stack.

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