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Changes to Form 990 Affect Compensation Reporting Beyond Top Executives
The IRS has recently released the new 2005 Federal Form 990, which includes dramatic changes designed to elicit more information on compensation and related-party transactions.
In addition to the reporting of compensation paid to officers, directors, trustees, and key employees (employees with powers or responsibilities similar to an officer), the new form also requests similar information on compensation and benefits paid and loans to former officers, directors, trustees, and key employees. Also, the Schedule A, which is required for Sec. 501(c)(3) organizations, now requires disclosure of the top five independent contractors that are paid more than $50,000. This is in addition to the current requirement to disclose the top five professional service providers paid more than $50,000.
Furthermore, the new form asks about family and business relationships among officers, directors, trustees, key employees, highest compensated employees (top five employees receiving more than $50,000), professional service providers, and independent contractors. For example, if your organization uses a professional fundraiser, the IRS wants to know if the company is related to any of your board members or their families. In a related vein, the new form also includes a question on whether the organization has a written conflict-of-interest policy.While a conflictof- interest policy is not legally required for exempt status, it is recommended. Lack of such a policy may raise a red flag with the IRS.
Compensation to be reported on the 990 includes salary and fringe benefits, including taxable and nontaxable benefits. In the case of deferred compensation benefits, the amount deferred on the executive’s behalf is reportable at the time the organization pays or becomes obligated to pay, as well as at the time when the executive receives a disbursement. Compensation paid through third-party management companies or professional employer organizations must also be disclosed.
One of the most significant changes relates to the reporting of compensation paid by related organizations. In the past, organizations were required to report compensation paid by related organizations to officers, directors, trustees, or key employees that received total compensation of more than $100,000 from the organization and all related organizations if the related organization paid more than $10,000. For the 2005 filing, the requirement has been significantly expanded. Total compensation paid by a related organization must be disclosed for officers, directors, trustees, key employees, highest-paid employees, professional service providers, and independent contractors of an organization who receive more than $50,000 of compensation. Furthermore, the definition of a related organization has also been expanded from “owned or controlled” to include organizations with a “close connection,” whether the related organization is taxable or tax-exempt.
A close connection can be defined as:
- Common control of one or more of the organizations
- Direct or indirect control of one organization by another through common governance
- Direct or indirect ownership of one organization by another
- Control of one organization by another through authority to approve budgets or expenditures
- Coordination of operations as to facilities, programs, employees, or other activities
- Common persons exercising substantial influence over all of the organizations The IRS has recently released the new 2005 Federal Form 990, which includes dramatic changes designed to elicit more information on compensation and related-party transactions.
Supporting organizations are by default considered related to the supported organization for purposes of this requirement, regardless of whether the supported organization owns or controls the supporting organization. For example, volunteer board members of a hospital auxiliary that also receive compensation from the hospital would be required to disclose that compensation on the auxiliary’s tax return if the compensation exceeded $50,000.
The instructions to the 990 are explicit that failure to fully complete this portion of the return may subject both the organization and the individuals responsible to penalties for failure to file a complete return. The instructions also say that noting "information available upon request" is not acceptable. The penalties for filing an incomplete return are $20 per day, not to exceed the smaller of $10,000 or 5 percent of gross receipts for the year, for organizations with revenue of $1 million or less. For larger organizations, the penalty is $100 per day, with a maximum penalty of $50,000. Penalties may also be imposed on the individuals responsible for the filing of an incomplete return at $10 per day up to $5,000 total.
With the increased government and public scrutiny of nonprofit organizations, particularly in the area of executive compensation, it is prudent to make every effort to comply with these disclosure requirements.
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