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What You Need to Know Aboutthe Redesigned Form 990

Cordelia A. Glenn, Esq. AOPO 2008 January Directors' Workshop

Park City, Utah

January 10, 2008

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Overview

First complete overhaul in nearly 30 years Draft form and instructions released June 14, 2007

3-month comment period IRS incorporated many comments into final draft

Final form released December 19, 2007Final instructions anticipated spring 2008

First use: 2008 tax year (returns filed in 2009)For non-calendar year fiscal years: tax years

beginning in 2008

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Overview 3 guiding principles

Enhance TransparencyKey transparency tool relied on by IRSPresent “realistic picture” of organization

Promote ComplianceVehicle for IRS to efficiently “assess risk of noncompliance”

Minimize BurdenMaterial change only for organizations with complex

compensation arrangements, related entity structures, and “activities that raise compliance concerns”

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Overview Why start preparing now?

More like SEC disclosure document than tax return Reponses to certain questions could:

Trigger audit or enforcement action by IRSProvide people unfriendly to the organization with

ammunition for negative publicity; whistleblower awards provide financial incentive

By identifying and resolving potential problem areas in advance, your organization can:Mitigate risk of negative publicity or unwanted AG attentionTurn Form 990 into positive PR tool

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Overview Old Form

9-page core form 2 schedules, 36 possible attachments

New Form 11-page core form completed by all exempt orgs

Includes summary of key info on first page 16 schedules focusing on “areas of interest”

To be completed as needed (trigger questions)

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Core Form

Parts I & IISummary of key information & signature block

Part III Mission, program changes, and program service

accomplishments (narrative format) Part IV

37 trigger questions for schedules Part V

Questions flagging other potential compliance and filing obligations

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Core Form

Part VIGovernance, management, public disclosures

Part VII Compensation of officers, directors, key employees,

highest compensated employees, independent contactors

Part VIIIStatement of revenue

Part IXStatement of functional expenses

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Core Form

Part XBalance sheet

Part XI Financial statements and reporting

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Schedules to New Form 990

A: Public Charity Status & Public Support*

B: Contributors* C: Political Campaign and

Lobbying Activities* D: Supplemental Financial

Statements* E: Schools F: Activities Outside U.S. G: Fundraising & Gaming*

H: Hospitals I: Grants* J: Compensation Info* K: Tax-Exempt Bonds L: Transactions with

Interested Persons* M: Non-Cash Contributions* N: Liquidation, Dissolution O: Supplemental Info* R: Related Organizations*

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Mission and Achievements

Mission Statement (Core Parts I & III)First thing reviewers will see on summary pageProvides opportunity to “tell your story” and provide

context for all other info in form Changes in Activities (Core Part III)

Describe new activities, changes in activities Exempt Purpose Achievements (Core Part III)

Describe achievements for 3 largest programs by expenses

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Disqualified Persons

Many Questions (Core Part IV, IX, X & Schedule L)Excess benefit transactions (current and prior)Outstanding loans (to or from)Payment of compensation

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Disqualified Persons

Do you know who your disqualified persons are? Any person who was, at any time during a 5-year

look back period ending on the date of the transaction:In a position to exercise substantial influence

over the organization (e.g., D&O, senior managers, facts & circumstances)

Family members of such personsCompanies 35% controlled by foregoing

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Governance, Policies, Disclosures

Somewhat controversial Does IRS have authority? Could create de facto legal requirements and lead to

presumption of wrongdoing. IRS position:

“Independent governing body and well-defined governance and management policies and practices increase the likelihood that an organization is operating in compliance with federal law.”

Form educates organizations about best practices. Form provides opportunity to explain responses.

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Governance (Core Part VI.A)

Independent Directors (also in Core Part I) How many voting directors? How many independent? In draft instructions, “independent” means:

Not a compensated employeeDoes not receive compensation or other payments as an

independent contractorDoes not receive, directly or indirectly, material financial

benefits from the organizationNot a spouse, sibling, parent or child of foregoing

Definition may be revised in final instructions.

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Governance (Core Part VI.A)

Review of Form 990Provided to governing body before filing?

Note: Draft asked whether the board reviewed the Form 990 prior to filing.

Describe review process.To whom is the form provided?When it is provided?What is the level of review?

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Policies (Core Part VI.B)

Conflict of Interest Policy In writing? Annual disclosure of interests? Describe how you monitor and enforce policy.

IRS wants to know how an organization actually implements its conflicts policy (i.e., that the policy isn’t just collecting dust).

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Policies (Core Part VI.B)

Whistleblower Policy Does the organization have a written policy?

SOX makes it illegal to punish whistleblowers who risk their jobs by reporting suspected illegal activities.

Policy not legal requirement but “communicates strong culture of legal compliance and ethical integrity”

Policy should provide procedures for employees to report in confidence suspected financial impropriety or misuse of resources.

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Policies (Core Part VI.B)

Document Retention & Destruction Policy Does the organization have written policy?

SOX makes it illegal to destroy documents in anticipation of a federal investigation.

Policy not legal requirement, but auditors often recommend it.

Policy should set schedule for maintenance/ destruction of documents by type and prohibit destruction of records (including e-mail and other electronic records) relating to potential litigation.

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Policies (Core Part VI.B)

Compensation Must describe process for determining compensation

of CEO/Executive Director and other key employees. Does process include:

Review and approval by independent personsComparability dataContemporaneous substantiation of deliberation

and decision

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Disclosure (Core Part VI.C)

Form 1023, Form 990, Form 990-TAvailable in own website, another’s website, and/or

upon request?Note: Disclosure required by law.

Governing Documents, Conflict of Interest Policy, Financial StatementsDescribe how made available to the public.Note: Disclosure not required by law, but promotes

transparency & inspires greater confidence in the organization.

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Compensation (Core Part VII, Schedule J)

Big changes in reporting of compensation of directors, officers, key employees, highest compensated employees & independent contractorsUse of Form W-2 and Form 1099 data to reduce

subjectivityMore details required for compensation paid to:

Former D&O, key employees, and HCEsCurrent D&O, key employees, and HCEs receiving

more than $150,000 in total compensationPersons receiving compensation from an unrelated org

for services provided to the reporting org

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Audit & Audit Committee (Core Part XI)

Independent AccountantCompilation, review, or audit of financial statements

performed by independent accountant?Definition of “independent accountant” to be clarified

in final instructions.

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Audit & Audit Committee (Core Part XI)

Audit CommitteeDoes the organization have a committee responsible

for oversight of audit, review, or compilation of financial statements and selection of independent accountant?

Required by some states under certain circumstances (e.g., CA).

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Fundraising (Schedules G, M)

Criticism that fundraising is misreportedLack of transparency on use of funds raisedConcern about overvalued non-cash contributions

Additional information required for use of professional fundraisers, special events, and gaming ($15,000 threshold)Note re: reporting of gaming activities: Schedule asks

whether organization is licensed by the applicable state(s) to operate gaming activities.

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Fundraising (Schedules G, M)

Non-cash contributions ($25,000 threshold)Does the organization have a gift acceptance policy

requiring review of non-standard contributions?New reporting requirements may result in new

recordkeeping practices and additional burden.

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Recommendations

Educate board and management Consider trial run to identify & correct potential

problem areas, develop explanationsWill expose areas needing additional recordkeepingConsider involving legal counsel

Work on mission statement, program descriptionsWill set the stage for all info in Form 990

Identify disqualified persons & update list annually Examine board independence

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Recommendations (cont.)

Examine and formalize Form 990 review process Prepare and present policies to Board for approval

Conflict of InterestWhistleblowerDocument retention and destructionCompensation reviewGift acceptance

Consider public disclosure practices

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Recommendations (cont.)

Consider formation of Audit Committee & examine relationship with auditor

Review financial arrangements with disqualified and interested personsRestructure problematic arrangements if possible

For organizations conducting solicitations and gaming in connection with fundraising ensure appropriate state licensure

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Recommendations (cont.)

OVERALL GOAL:

Present as good a public profile as possible.