IRS Releases Draft of New Form 990
Not-For-Profit Advisor, 2007 Fall

On June 14, the IRS released a draft of a completely redesigned Form 990 — the most comprehensive revision in more than 25 years. The IRS currently anticipates having the new form in place for the 2008 filing year, for returns that are due in 2009. Comments on the draft form were requested by the IRS and were due by September 14. You can view the draft form and the comments that were submitted on the IRS website: www.irs.gov/charities.

According to the IRS, the redesign was performed to recognize the changes in the exempt organization sector over the past 25 years, by focusing on such issues as governance, executive compensation, related organizations, fundraising practices, and hospitals’ provision of community benefit. The form is also intended to increase transparency of exempt organizations’ operations, which has been a focus of discussions within the IRS as well as Congress.

The IRS and many practitioners had come to feel that the current Form 990 was cumbersome and illogical, as it had been pieced together over the years to request additional information required by various tax law changes and changing areas of IRS focus. While the current form includes nine core pages, two schedules, and numerous (up to 36) potential attachments, the new form contains ten core pages and 15 schedules that may be required based on the organization’s activities. With this redesign, the IRS has also attempted to eliminate paper attachments and provide room for all of the requested information directly on the forms and schedules. This should help organizations to move toward electronic filing of Form 990, which is now required for certain large exempt organizations and will likely be required for most, if not all, organizations at some point in the near future.

Some highlights of the contents of the new form include:

• The first page of the form provides summarized key information about the organization and its operations, including a summary of current year and prior year income and expenses, highest compensation paid, fundraising activities, and activities and accomplishments.

• While compensation data must still be provided for all current officers, directors, trustees, and key employees, the threshold for reporting compensation of other employees has been raised from $50,000 to $100,000. In addition, the data to be reported is to come from the Form W-2 or 1099 issued to the individual, which will provide much less subjectivity on what amounts to report on the 990.

• Additional information will be required for certain individuals, including those receiving more than $150,000 in W-2 compensation or more than $250,000 in total compensation and benefits as well as certain former officers/directors or individuals receiving compensation from other organizations. This information, on Schedule J of the new form, will include details of W-2 compensation amounts, deferred compensation plans, nontaxable benefits and expense reimbursements, and equity-based compensation.

• New Schedule L will provide detail on loans to and from insiders, which has been a recent area of focus by the IRS.

• New Schedule D provides areas to report detailed balance sheet information where required, rather than attaching paper schedules.

• New Schedule F requires more detailed information on foreign accounts and activities.

• Hospitals are significantly impacted by the addition of Schedule H, which requires reporting of community benefit activities. Numerous hospitals have provided comments indicating that the full value of benefits provided by hospitals should be included in this schedule, including Medicare underpayments and the cost of patient bad debt.

• New Schedule K will require organizations with more than $100,000 of outstanding tax-exempt bonds to report additional information, such as use of proceeds and compensation of third parties.

• More detailed information is required regarding related entities, including separate sections for disregarded entities, related tax-exempt organizations, and related taxable organizations.

• One section of the new form deals with numerous governance-related questions. Some practitioners have criticized this section because, although many of the practices addressed are not required by law but are merely recommended “best practices,” the form leaves readers with a negative impression if the organization does not follow the practices.

Individual opinions of the redesigned form will vary, but one thing is clear: the time and effort needed to prepare and gather the information for the Form 990 will increase significantly as a result of these changes. Even if, as the IRS suggests, many organizations file only three of the 15 possible schedules, each schedule will need to be reviewed for its applicability and more detailed information will need to be gathered. Organizations will need to review the new forms carefully and enhance their documentation procedures accordingly so that the information needed for the new form will be available.

Based on comments from nonprofit organizations, the IRS has announced that the proposed reporting of various percentages on the summary pages of the Form 990 will not appear in the final form. In the draft version, various percentages were required, including those on executive compensation, fundraising, gaming, and an expense to net assets percentage. The biggest reason for this change was that the IRS was persuaded that placing these percentages on the front page of the return created a perception by potential readers that these percentages were to be used as valuable metrics to determine an organization’s performance.

The IRS has also indicated that there will likely be some transitional relief for compliance for tax year 2008, particularly for Schedule H (hospitals), Schedule K (tax-exempt bonds), and Schedule F (foreign activity).