1 Form 990 Fallout: Lessons Learned February 26, 2010 Grace Lee, Esq., Presenter

2 © 2010 Venable LLP Overview of redesigned form Recap of 2008 Who must file in 2009 Lessons Learned and Changes for 2009 –Release of information related to trustees receiving financial aid –Creation of policies –Disclosure of compensation for highly compensated –Private business use of bond proceeds overview

3 © 2010 Venable LLP IRS “guiding principles“ –Enhance transparency to provide the IRS and the public with a realistic picture of the organization, along with the basis for comparison to other organizations –Promote compliance by accurately reflecting the organization’s operations so the IRS may efficiently assess the risk of noncompliance –Minimize the burden on filing organizations overview of redesigned form 990

4 © 2010 Venable LLP Core Form –Summary page with signature block –Statement of program services –Checklist of required schedules –Checklist of other IRS filings and tax compliance –Governance, management, and disclosure questions –Compensation reporting –Financial reporting – revenue, expenses, balance sheet, and financial statements overview of the redesigned form 990

5 © 2010 Venable LLP Intended to provide the IRS with an overview of a school’s activities Answers to the questions trigger when a school must complete a schedule New question 12A in Form 990 for 2009 asks whether school was included in consolidated independent audited financial statements prepared in accordance with generally accepted accounting principles New Form 990 has 16 schedules checklist of required schedules

6 © 2010 Venable LLP J. Compensation Detail K. Bonds L. Transactions with Interested Persons M. Non-Cash Contributions N. Terminations and Major Dispositions O. Supplemental Information R. Related Organizations and Certain Joint Ventures A. Public Charity Status B. Schedule of Contributors C. Political and Lobbying D. Supplemental Financial E. Private School F. Foreign Activity G. Professional Fundraising and Gaming H. Hospitals I. Grants checklist of required schedules

7 © 2010 Venable LLP New Form 990 as source of information for the public, media, researchers, and policymakers about the tax-exempt sector generally and individual schools More emphasis and questions about governance, management, and disclosure More questions about Board and Management More questions about Policies More specifics required about compensation overview of the redesigned form 990

8 © 2010 Venable LLP recap of 2008 IRS will view 2008 filing year as first run on substantially new form and less likely to pursue enforcement of issues related to manner in which form was filed Many schools updated or created new policies to be able to answer “yes” to questions Schools forced to take a closer look at compensation, method of determining compensation, independence of board, and governance issues Beginning 2009 filing year, IRS will be less forgiving Beginning in 2010, schools that have not filed Form 1099 for three consecutive years will automatically lose tax-exempt status

9 © 2010 Venable LLP Core form must be completed by all filers –Except, Form 990-EZ can be filed by schools with gross receipts of less than $500,000 in revenue and total assets of less than $1.25 million. Lower threshold than 2008 (1 million in revenue and total assets less than $2.5 million for 2008) More schools must file the From 990 Only non “church” schools complete –Church schools must obtain approval letter from IRS 16 schedules filled out based on a school’s specific indicators who must file form 990 in 2009

10 Hot Issues and Lessons Learned

11 © 2010 Venable LLP New Form 990 as source of information for the public Schools can expect more public scrutiny under redesigned form (parents, prospective families, media) Summary section asks for: –most significant activities –key financial, compensation, governance, and operational information –revenue and expense information from current and prior year Summary section allows reader to spot changes and trends and draw conclusions on the overall health of the school Schools should take the opportunity to market itself to donors, media, and others who may search for public information about the school summary section

12 © 2010 Venable LLP Mission, program services, programmatic changes, and accomplishments in narrative format –reformatted –upfront so that organization can “tell story” early –another marketing opportunity for schools Must describe three largest programs measured by expenses –if a Section 501(c)(3), must include: amount of grants to others total expenses Revenue statement of program services

13 © 2010 Venable LLP Schedule O Any additional information about the school’s mission and programs can be reported on a new Schedule O Asks whether organization makes its governing documents, conflict of interest policy, and financial statements, available to the public –Schools should make sure such documents are updated, sends a consistent message about mission and philosophy, and accurate Schedule O is required in 2009

14 © 2010 Venable LLP New section of Form 990 Rationale: independent boards and well-defined governance and management policies increase likelihood of tax compliance, safeguarding of charitable assets, and serving of charitable interests IRS encourages higher level of self-regulation and internal controls Transparency and accountability Influenced by the Sarbanes Oxley Act governance, management, and disclosure

15 © 2010 Venable LLP Importance of an organization maintaining an independent board highlighted in the new Form 990 Core Form asks about: –total number of voting board members –number of voting board members that are independent –relationships between officers, directors, and key employees –relationship with school questions regarding board and management

16 © 2010 Venable LLP Any delegation of control to a management company –IRS signaling the importance of having an engaged Board manage the school, and not ceding control to an outside company Any material diversion of the school’s assets –Diversion is “material” if it exceeds the lesser of $250,000 or 5% of the school’s gross receipts for its tax year or total assets as of years end Minutes taken at board and board committee meetings –IRS stressing the importance of maintaining Boards and Committees that do not operate in secrecy, and help foster transparency and accountability more questions regarding board and management

17 © 2010 Venable LLP Board receives a copy of Form 990 before filed –Reviewed at board meeting –Provided a copy –Core form but not schedules Process to review Form 990 –IRS signaling the need for trustees (or at least board committee or top management officials) to play an active role in the Form 990 preparation and more questions regarding board and management

18 © 2010 Venable LLP Questions regarding policies are a new addition to the Form 990 –Answers are yes/no Questions indicate the importance of self- regulation and transparency Policies not legally required Schools must have policies and procedures in place by the end of the 2009 tax year to answer in the affirmative NOTE: In 2009 Form 990 schools should report major changes in policies in Part VI rather than in a letter to EO Determinations questions regarding policies

19 © 2010 Venable LLP Form asks whether the school has a written conflict of interest policy –officers, directors, and key employees required to disclose annually interests that could give rise to conflicts “Key employee” definition (must meet all three tests) –$150,000 test Employee had reportable compensation of more than $150,000 –Responsibility test Employee had or shared organization-wide control or influence similar to an officer, director, or trustee or Employee managed or had authority or control over at least 10% of the organization’s activities –Top 20 test Employee one of “top 20” highest paid conflict of interest policy

20 © 2010 Venable LLP Key employees –Head of school, business manager, division head Describe regular and consistent monitoring and enforcement Process –create process for investigating conflict –review disclosures of potential conflicts when reviewing agenda items –affirm no conflicts of interest exists and/or that rebuttable presumption process was followed, in minutes and/or board resolution conflict of interest policy

21 © 2010 Venable LLP Recommended format –General conflict policy signed by officers, directors, and key employees –Disclosure statement –Investigation/due diligence process including Identification of conflicts rebuttable presumption and intermediate sanctions process Reporting to board and documentation of monitoring and enforcement conflict of interest policy

22 © 2010 Venable LLP conflict of interest policy Policy should be approved by the Board Conflict of Interest process/procedures are just as important as the policy statement Many schools rushed to establish new policies and should now ensure enforcement and ongoing compliance –Annual disclosure statements –Staff or board member should review disclosure statements for potential issues before each board meeting

23 © 2010 Venable LLP Maintain a written whistleblower policy –Applies to employees and VOLUNTEERS –Schools must enforce policy and train supervisors and volunteer coordinators on receiving complaints –More expansive than Sarbanes Oxley Act: SOX imposes criminal penalties for retaliating against those who report a suspected federal offense to a law enforcement agency IRS encourages organizations to have a policy for handling employee complaints and protect employees who report any suspected financial impropriety or misuse of assets whistleblower policy

24 © 2010 Venable LLP More expansive than Sarbanes Oxley Act: –SOX makes it a crime to destroy documents to prevent their use in an official proceeding –IRS encourages organizations to have a policy for document integrity, retention, and destruction. document retention and destruction policy

25 © 2010 Venable LLP Federal and STATE compliance –Especially for student records All school documents including admissions, development, financial aid Policy should include: –Period of time to retain documents (including electronic documents) –Destruction timeline –Prohibition on destroying documents when an investigation is pending Now that policy is in place, schools must ENFORCE them in order for them to be effective –Designate and train employees in charge of ongoing compliance document retention and destruction policy

26 © 2010 Venable LLP Form 990 asks whether the organization followed the procedures for the rebuttable presumption in setting compensation (for the Head of School and other officers or key employees of the school) Form 990 asks schools to describe the process Rebuttable presumption process should include: –Independent body Approval of transaction by independent board, or committee thereof –Comparability data Reviewing comparable data –Documentation of decision Documentation of process and decision in minutes or other records Schools must actually FOLLOW the process in their policy more questions regarding policies

27 © 2010 Venable LLP Schedule K Supplemental information on tax-exempt bonds Significant new information being requested – IRS “is aware of significant non-compliance with recordkeeping and record retention requirements” for tax-exempt bonds %of private business use of bond proceeds on a year to year basis –Put into place procedures to create a data log –Very complicated regulations; have someone work with you to create the tracking process In 2009, if school had tax exempt bond issue with an outstanding principal amount of more than $100,000 as of the last day of the year that was issued after December 31, 2002, must complete entire Schedule K, not just Part I, with even more specific questions.

28 Compensation Reporting on the Form 990

29 © 2010 Venable LLP Who gets how much, and who decides? Compensation information –core form, Part VII –Schedule J Process of setting compensation –governance and policies Form 990 Focus

30 © 2010 Venable LLP Setting Compensation General requirements –knowledge in compensation matters –no financial interest IRS safe harbor process –independent body –comparability data –documentation of decision Schools should follow own policies

31 © 2010 Venable LLP Core Form Reporting – Reportable Compensation Definition For employee, compensation reported on Form W-2, Box 5, i.e., Medicare wages (includes vested nonqualified deferred compensation and 401(k) and 403(b) deferrals) For non-employee, compensation reported on Form 1099-MISC Other taxable compensation For calendar year ending with or within organization’s fiscal year

32 © 2010 Venable LLP Core Form Reporting – “Other” Compensation Includes nontaxable deferred compensation (qualified and nonqualified, vested and nonvested) and most nontaxable benefits Reporting exclusion for items under $10,000, but with various exceptions IRS requested comments on whether non vested, nonqualified deferred compensation should be excepted

33 © 2010 Venable LLP Schedule J – Compensation Questions Fringe benefits (expanded from discussion draft) –first-class or charter travel, companion travel, tax indemnifications and gross-ups, discretionary accounts, housing, payments for business use of personal residence, club dues, personal services Severance or change in control payments Supplemental nonqualified deferred compensation

34 © 2010 Venable LLP General Structure for Compensation Reporting Basic reporting on core form with more detail on Schedule J New thresholds for reporting on key employees, highest paid non-key employees, and formers and for more detailed reporting Same structure for all organizations

35 © 2010 Venable LLP Schedule J – Compensation Questions for 501(c)(3) Organizations Compensation based on revenues or net earnings Other non-fixed payments Payments under the initial contract exception –2009 Schedule J asks if rebuttable presumption process was used for initial contract

36 © 2010 Venable LLP Schedule J – Chart Compensation Breakout Base compensation Bonus and incentive compensation Other reportable (W-2/1099) compensation Deferred compensation Nontaxable benefits Previously reported deferred compensation (intended to address double-reporting issue)

37 © 2010 Venable LLP Questions?

38 © 2010 Venable LLP contact information YOUR VENABLE INDEPENDENT SCHOOLTEAM Caryn G. Pass, partner t f Heather J. Broadwater, associate t f Grace H. Lee, associate t f