1. Your Board and the New 990 July 31, 2009
Janice A. Ratica, Tax Senior Manager
Cherry, Bekaert & Holland, L.L.P.
1111 Metropolitan Avenue - Suite 1000
Charlotte, NC

2. Learning Objectives
Summarize current tax environment for nonprofit organizations
Identify key changes in the information required for the new Form 990
Discuss the impact that these changes will have on you and your organization’s board members
Provide suggestions to organizations for preparing for the additional disclosures required

3. Current Tax Environment

4. Era of Heightened Scrutiny -- Scandals
Corporate and Accounting Scandals
Tyco
Enron
Highly Publicized Nonprofit Scandals
Excess compensation
Misuse of funds

5. Growth in Nonprofit Sector
Growth in Number of Tax-Exempt Organizations
1.9 million tax-exempt organizations, not including churches
Approximately 66,000 exempt organizations created each year
180 organizations created each day
Growth in Power and Size:
$2.2 trillion in assets
$1.6 trillion in revenue for public charities
Continued growth as baby boomers retire and increase contributions

6. Areas of Concern
Blurring line between taxable and tax-exempt organizations
Charities established to benefit donors
Unrelated business income
Unrelated activities not being reporting and taxed
Allocation of expenses generally leads to losses
Excessive compensation and benefits
Governance

7. Congressional Leaders Pushing for Reform
Senator Grassley, Nov. 2007: “My goals are to ensure that nonprofits are protected from money-making opportunists; that donors feel confident that their money is well spent; and that taxpayers are assured that the billions of tax dollars foregone by the government also is money well spent.”
Compliance checks for various industries:
Health care
Colleges and universities
Televangelists

8. Concern Leads to 990 Attention
The 990 is an informational return to assure that exempt organizations are in compliance.
Moreover, Form 990 is a public document used by:
State regulators (attorneys general)
Granting organizations and donors
Watchdog and charity rating organizations
The media (especially useful for digging dirt!)
Anyone who wants to look at it!
Available on the internet at Guidestar.org

9. IRS Recourse for Abusive Situations -- Intermediate Sanctions
Individuals can be subject to personal liability!
Section 4958 of Internal Revenue Code – enacted in 1996
Prior to that time, the Service’s only remedy for abusive situations was revocation of exempt status.
IRS came up with penalties (“intermediate sanctions”) that actually punished the wrongdoers rather than the organization.

10. Intermediate Sanctions – Types of Organizations
Limited to 501(c)(3) and 501(c)(4) organizations
However, 501(c)(6) organizations should be familiar with the rules. Why?
A 501(c)(6) organization may have a related 501(c)(3) educational or charitable foundation
501(c)(6) organizations are still subject to the same prohibition on private inurement
It is possible that IRS may extend applicability

11. Intermediate Sanctions – Disqualified Person
Two key terms involved with intermediate sanctions: “disqualified person” and “excess benefit transaction”
Penalty excise taxes imposed on a “disqualified person” who participates in an “excess benefit transaction”
A disqualified person is a person in a position to exercise substantial influence over the organization’s affairs
Generally, officers, directors and key employees

12. Intermediate Sanctions – Excess Benefit Transactions
An excess benefit transaction is a transaction in which the organization receives less value than it gives up (i.e., non- FMV transaction)
Unreasonable compensation paid to officers, directors, or key employees
Payment of personal expenses and benefits
Excess of FMV paid for an asset acquisition
Provision of below-market services, rents, etc.

13. Intermediate Sanctions – Excise Taxes
25% of excess benefit imposed on the disqualified person, plus repayment requirement
200% of excess benefit if transaction not timely corrected
BOARD MEMBERS BEWARE: 10% (capped at $10,000 per transaction) of excess benefit imposed on any organization manager (i.e., officer or director) who knowingly approves the transaction

14. How can IRS improve compliance?
THE NEW 990!

15. Why Redo The 990? First redesign in over 30 years!
Congress and IRS have significant concerns about nonprofits due to abusive situations
New form addresses their concerns about governance (board responsibility) and compensation
Ad hoc revisions over the years led to incomplete and inaccurate responses
However, real reason could be to make it easier for the IRS to identify noncompliance and target organizations for audit!

16. IRS Rollout of New 990 Work in progress! Released December 19, 2007
Instructions released August 19, 2008.
New form utilized for 2008 tax year

17. Guiding Principle: An IRS Perspective
Enhancing transparency both for IRS and the public – present “realistic” picture of the organization
Promoting compliance by accurately reflecting organization’s operations and use of assets – key vehicle for IRS to assess risk of noncompliance
Minimizing burden on filing organizations (You be the judge!)

18. Overview of the New 990
New 11-page core form to be completed by all exempt organizations
16 separate schedules
Only complete schedules that relate to particular activities
Most nonprofits will complete a few schedules, according to the IRS. (However, large organizations will likely complete many schedules.)

19. Form 990: First Page Summary – Snapshot
Summarizes organizational information on one-page
Description of organization’s mission
Board size, number of employees and volunteers
Unrelated Business Income Amounts
Financial information:
Revenue/Expenses – current and prior year
Total assets, liabilities and net assets
Part II: Signature Block – previously on last page

20. Part VI Governance and Management, Policies and Disclosure
Overall—a check up on best practices
Use this section to be proactive in implementing the appropriate policies and procedures.
IRS may be overstepping its limits, but strive for as many
answers as possible.
“yes”

21. Governance – Governing Body
Question 10: Raising the most interest
Was a copy of the 990 provided to the governing body prior to filing?
Instructions indicate that providing the final 990 to each board member via before the form was filed is sufficient
However, description of process that organization uses to review 990 is still required

22. Governance – Governing Body
Question 2: Family and Business Relationships
Did the organization make a “reasonable effort” to determine if family and business relationships exist?
Questionnaire
Can be part of Conflicts Policy

23. Policy Questions
Compensation policy – Rebuttable Presumption of Reasonableness (Question 15):
Does process for determining comp for Executive Director include:
review and approval by independent persons
comparability data
and contemporaneous substantiation?
Description of process required

24. Part VII: Compensation Directors and Officers
Officers and Directors – regardless of amount
Instructions provide that the following individuals are treated as “officers” regardless of their titles:
Top management official
Top financial official – person who has ultimate responsibility for managing the organization’s finances

25. Part VII: Compensation Key Employees
Definition of “key employee” has changed
An individual is a “Key Employee” only if all 3 tests are satisfied:
Reportable compensation (Form W-2, Box 5) > $150,000 ($150,000 Test);
Same responsibility as officer/director OR manages at least 10% of organization’s activities (Responsibility Test); and
Within group of top highest paid employees who satisfy the above two tests (Top 20 Test)

26. Part VII: Compensation Highest Paid Employees and Contractors
Calendar-year reporting – Forms W-2 and 1099
Reporting of five highest-paid employees and independent contractors
More than $100,000
Applies to all organizations – big change for 501(c)(6)/ 501(c)(7)
Former board members with >$10K in compensation
Additional disclosures on Schedule J

27. Schedule J: Supplemental Compensation Information
Triggered by questions 3-5 in Part VII of core 990
Schedule J required if:
Anyone listed on Part VII received $150,000 or more in total compensation
Any former officers, directors, key employees or highest compensated employees are listed on Part VII
Anyone was listed on Part VII because they were compensated by an unrelated organization for services rendered to the reporting organization

28. Schedule J: Questions
Additional disclosure of certain expenses – Question 1
1st class or charter travel
Spousal travel
Housing allowances, etc.
If these benefits are typically provided, a written policy for reimbursement is suggested.

29. Schedule J: Questions (continued)
Question about various items used to establish CEO compensation: committee, consultant, contract, etc.
Questions on severance payments, supplemental nonqualified plans, compensation contingent upon revenues
Compensation contingent on revenues?

30. Schedule J: Compensation Listing
For individuals identified in Part VII, questions 3-5 only
Breakout of base comp, bonus/incentive, other compensation, deferred comp, non-taxable benefits
Deferred comp must be reported each year whether or not vested or funded
Prior year amounts previously reported on prior 990 also required

31. Schedule L: Transactions with Interested Persons
“Interested persons” include officers, directors, key employees, substantial contributors and related persons
Reporting of transactions include:
Reporting of excess benefits – 501(c)(3) and 501(c)(4)
Loans to and from “interested persons”
Grants/assistance to “interested persons”
Business transactions involving “interested persons”
Compensation

32. In Conclusion….
Anticipate more time to gather information and prepare return
Plan now on how information will be captured and presented
Board/audit committee should know about changes so they are not completely surprised
OVERALL OBJECTIVE: Present as good a public profile as possible.