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Governance Aspects of the Redesigned Form 990 and What are Best Practices? presented by Howard Donkin, CPA April 27, 2009 A sustaining resource to the not-for-profit community Pacific NW Assoc of Independent Schools (PNAIS) Business Officers Conference

Biographical Information Partner, Jacobson Jarvis CPA’s BA – Accounting - U of W, Seattle WSCPA - NFP Committee AICPA EO Tax Resource Panel AICPA 990 Redesign Task Force Executive Alliance Public Policy Group EO Tax Review – Advisory Board

Recent Articles “IRS Asks Governance Questions on the New Form 990, JJCo Communiqué. “IRS releases revised Instructions for Redesigned Form 990”, JJCo Communiqué

2006 Predictions 90% chance your 990 will ask you to gather new information. 75% chance you will adopt a conflict of interest policy. 35% chance you will file electronically. #9

Today’s Topics What are the Governance Aspects in the Redesigned Form 990? How will they impact your school? What are Best Practices? What can you do to prepare? Your questions?

Optional Topics (if time allows) Property tax exemption update UPMIFA comes to Washington FAS Proposed legislation in Olympia

How did we get here? 2004 Grassley white paper and hearings 2005 Independent Sector panel on accountability 2007 Independent Sector report “Principles for Good Governance and Ethical Practice: Guide for Charities” 2008 ACT Report “IRS Role in Good Governance Issues”

Recent Quotes from IRS Officials A well-governed charity is more likely to obey the tax laws, safeguard charitable assets, and serve charitable interests than one with poor or lax governance. The IRS has no interest in telling charities how to run their organizations. The question is no longer whether the IRS has a role to play in this area, but rather, what the role will be. Timeline

Another Recent Quote “If a governing board tolerates a climate of secrecy or neglect, we are concerned that charitable assets are more likely to be diverted to benefit the private interests of insiders at the expense of public and charitable interests.” IRS 2/4/08

Another Recent Quote “While the tax law generally does not mandate particular management structures, operational policies, or administrative practices, it is important that each charity be thoughtful about the governance practices …..As a measure of our interest in this area, we ask about an organization’s governance.” IRS 2/4/08

Another Recent Quote “Because there is no precedential federal tax law guidance that prescribes the appropriate standards for nonprofit governance, a number of my clients have raised questions about how to comply with the new IRS initiatives.” Mark Owens, a DC lawyer specializing in nonprofit issues. 1/14/09

How do we comply? That’s why you are here !

3 things you need to know: What are the Governance Requirements? What are Best Practices? How do you prepare?

What “New” Form 990 ? ?

Redesigned Form Page “Core” Form 16 Schedules (A-R) (Old Sch. A = New Sch. E)

Redesigned Form 990 Some are not new, just same questions in different places, like…… (Old Sch. A = New Sch. E)

Where are the Governance Questions? ? Handouts

990 Part IV (Core, page 3&4) Checklist of Required Schedules Q27 – Grants or assistance to directors? Q28 – Business relationships? If yes, complete Schedule L, “Transactions with Interested Parties”. 1,2,3

990 Part VI (Core, page 6) Governance Questions Section A: Governing Body & Management Section B: Policies Section C: Disclosure 4

990 Part VI (Core, page 6) Governance Question #1 What is the number of voting & “independent” board members? Section A 4

990 Part VI (Core,page 6) Governance Question #1 How do you determine Independence? Section A

IRS Says…. IRS: The organization must make a “reasonable effort” to obtain the necessary information to determine the independence… For instance, the organization may rely on information it obtains in response to a “questionnaire” sent annually to each member, containing instructions and definitions. See sample questionnaire

Questionnaire Purpose: To make a “reasonable effort” to gather information needed to answer questions about conflicts of interest and independence. Is your board independent?

What is “IRS” Independence? 1.Not a School employee or of a related organization. 2.Didn’t get over $10,000 of pay or other payments, and 3.Wasn’t involved in a transaction reportable on Schedule L (Interested Party)

Independence Case study: You are a voting member of the board and a partner (more than 5%) in a law firm that charged $120,000 for legal services in a court case? What if you were not a partner? Answer: Schedule L instructions say greater than 5% ownership and $10,

990 Part VI (Core,page 6) Governance Question #2 Did any officer, director, trustee or key employee have a family or business relationship? How do you determine this? Section A 7

Governance What is an officer, director, trustee or key employee? Handout defines TDOKE ’s 8-9

Family or Business Relationship What is a “family” relationship? What is a “business” relationship? See Questionnaire for definitions. 7

Horizontal Relationship Case Study: Bob & Steve are board members of the school. Bob owns a car dealership and sells Steve a $45,000 car. Did they have a business relationship? Answer: It is not a reportable relationship because it was in the ordinary course of business at same terms as public. 10, 11

990 Part VI (Core,page 6) Governance Question #10 Question 10 – Describe the process used to review the Form 990 before it was filed? Schedule O. Section A 4

Washington State Law (has a similar requirement) Washington State Charitable Solicitations Act (RCW 19.09) Currently in rulemaking (effective 2010). Issue – Tier 2 independent reviewer must be a person familiar with reviewing 990’s but can’t be a board member.

990 Part VI (Core,page 6) Policy Question #12 Do you have a Written Conflict Policy? Do you ask directors each year? Do you monitor and enforce compliance? (Describe on Sch. O ) Section B 4

What’s in a Conflict Policy? Define conflicts, Identify who is covered, Facilitate disclosure, and Specify procedures for managing a conflict. IRS model in the instructions for the Form 1023 application. See Handout. 12

990 Part VI (Core,page 6) Policy Question #13 Do you have a written Whistleblower Policy ? Was the policy in place as of the last day of your tax year? See IRS instructions page Section B 13

990 Part VI (Core,page 6) Policy Question #14 Do you have a written Document retention and destruction Policy ? See instructions page Section B 14

990 Part VI (Core,page 6) Policy Question #15 Do Compensation Decisions include three things? -Advance approval (independent) -Comparable data -Written decision Describe Process on Schedule “O”. Section B

Rebuttable Presumption Of Reasonableness 1.Compensation is presumed reasonable by the IRS if you follow the three rules listed above. 2.Use a Checklist 3.Think about a Compensation Committee Section B 15

990 Part VI (Core,page 6) Policy Question #16(b) Do you have (need) Joint Venture Policy? Only if you answer yes to 16(a). If yes, is it written? See IRS instructions page 19 Section B 16

Conclusions A series of events have come together and changed our world. More changes are ahead Here are my predictions for you in 2010 #9

2010 Predictions 90% chance the IRS 990 instructions will be revised. 95% chance your Endowment footnote will be longer. 99% chance some of these Best Practices will not be appropriate for your school. #9

What can you do to prepare? Find resources & stay informed Evaluate “Best Practices” Make a cost-benefit analysis of Best Practices Make Policies that fit your needs Keep your board informed #9

Thanks! Questions? or call (206)

Links to Reading “Principles for Good Governance – A Guide for Charities” “Advisory Committee on Tax – Report on IRS Good Governance Issues” June 11, “IRS Form 990 Instructions” “IRS Asks Governance Questions” Sample policies at Board Source”