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The Revised Form 990: A How-to Guide for Your Organization

Note: The following discussion is provided for informational purposes and is not intended to serve as legal or tax advice. For specific information about completing IRS Form 990, consult your legal or tax advisor.

On December 20, 2007, the Internal Revenue Service introduced the revised 2008 Form 990, Return of Organization Exempt from Income Tax. This was the first redesign of the Form 990 in over 30 years, having no previous significant revisions since 1979. Although the new Form 990 still requires financial information as it did in the past, there are expanded reporting requirements, including information related to governance, oversight, and additional disclosures.

The revised Form 990 will require expanded recordkeeping and disclosure of information regarding the organization's governance and administrative policies. The IRS's intent is to improve the governance behaviors of organizations. With the current state of the economy in the forefront of all donors' minds, the Form 990 is an important tool that donors can use to compare organizations. With donors' ability to compare "apples to apples," nonprofits will not want to have missed out on contributions simply because their response to questions regarding governance, oversight, and accountability were less favorable than those of other organizations competing for the same funds.

Board Independence

In previous tax years, an organization needed only to disclose the total number of voting members of its governing body. Starting in 2008, nonprofits will need to disclose the number of voting members of its governing body that are "independent." Each board will need to examine, on an annual basis, whether its voting members meet the definition of "independent" as defined by the IRS.

There are four circumstances that must be in effect for the entire reporting period for a board member to be considered independent. For a board to monitor each of these items for all board members throughout the year could be time-consuming. We suggest that your staff administer the following checklist at the end of each reporting period with the following questions. If any of the questions are answered "yes," the independence of that board member is considered to be impaired, and that member should be left out of the final "independent board member" count.

Once this information has been received and the final count compiled, your staff will then be able to certify to your committee responsible for overseeing, completion, and acceptance of the Form 990 that the independence has been reviewed and updated according to IRS regulations.

  1. Were you compensated as an officer or other employee from this or a related organization?

  2. Did you receive total compensation or other payments exceeding $10,000 for the year from this or a related organization as an independent contractor? (This figure does not include reimbursement of expenses or reasonable compensation for services provided in the capacity as a member of the governing body.)

  3. Did you receive, directly or indirectly, material financial benefits from this or a related organization, including:

    1. Loans between you and the organization of greater than $50,000?
    2. Loans under $50,000 on arm's length or more favorable terms?
    3. A transaction in which an economic benefit is provided to you, directly or indirectly, and the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit?
    4. Loans, salary advances, and other advances and receivables? (This does not include advances under an accountable plan, pledges receivable that would qualify as a charitable contribution when paid, accrued but unpaid compensation, or receivables outstanding that were created in the ordinary course of the organization's business on the same terms as offered to the general public.)
    5. A grant, scholarship, fellowship, internship, prize, award, or other assistance (including provisions of goods, services, or use of facilities) to you or one of your relatives? (Do not include business transactions for full and fair consideration engaged in to serve the direct and immediate needs of the organization, such as payment of compensation to an employee or consultant in exchange for services of comparable value.)
    6. A direct business relationship with the organization (other than as an officer, director, trustee, or key employee)?
    7. An indirect business relationship through ownership of more than 35 percent in another entity?
    8. A family member who has a direct or indirect business relationship with your organization?
    9. Serve as an officer, director, trustee, key employee, partner, or member of another entity doing business with your organization?

  4. Did you have a family member that received compensation or other material financial benefits from this or a related organization?

Family and Business Relationships

The new Form 990 now requires disclosure of family and business relationships between any officer, director, trustee, or key employee. These types of relationships can be quite fluid and change from year to year, so updating this information annually will be a necessity.

To solve this problem, we suggest a second checklist be administered by your staff. The checklist should include the following:

  1. All family relationships with another officer, director, trustee, or key employee who is one of the following: a spouse, ancestor, brother or sister (whether whole or half blood), child (whether natural or adopted), grandchild, and spouse of brothers, sisters, children, and grandchildren. He or she will be required to identify the name of the person but is not required to identify the specific type of family relationship.

  2. All business relationships with the following:

    1. one person is employed by the other in a sole proprietorship, or, employed by an organization with which the other is associated as a trustee, director, officer, key employee, or greater than 35 percent owner;
    2. one person is transacting business with the other in one or more contracts of sale, lease, license, loan, performance of services, or other transaction involving transfers of cash or property valued in excess of $5,000 in total for the year, or, with an organization with which the other person is associated as a trustee, director, officer, key employee, or greater than 35 percent owner;
    3. the two persons are each a director, trustee, officer, or greater than 10 percent owner in the same business or investment entity.

Other Board Actions

There are several other questions on the revised Form 990 regarding the board's implementation of certain policies and procedures related to governance and oversight. Keep in mind, if you choose not to implement any of these policies, you will need to be prepared to explain "why not." Each policy is listed below for your organization's consideration, discussion, and implementation.

  1. If you have not already adopted a mission statement, compose and adopt one immediately.

  2. If your organization doesn't contemporaneously document the meetings held or written actions undertaken during the year by the governing body and each committee with authority to act on behalf of the governing body, adopt a policy to do so.

  3. If your organization has local chapters, branches, or affiliates, adopt written policies and procedures governing the activities of such chapters, affiliates, and branches to ensure that their operations are consistent with those of your organization.

  4. Was a copy of the Form 990, including required schedules, as ultimately filed with the IRS, provided to each voting member of your governing body before it was filed? If not, put policies in place to do so.

  5. If you do not have a written conflict of interest policy, have your governing body adopt one. The regular and consistent monitoring, compliance, and enforcement of such a policy would be easy to do if you have already taken the steps each year to document all family and business relationships.

  6. Adopt a written whistleblower policy to establish procedures for treatment of employees' complaints regarding suspected financial impropriety or misuse of the organization's resources.

  7. Adopt a written document retention and destruction policy outlining backup procedures, archival, storage, maintenance, and destruction of electronic and hard-copy files.

  8. Form a compensation committee and ensure that the process for determining compensation of the organization's CEO, executive director, or top management official, other officers, and key employees includes a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision.

  9. Adopt a written policy regarding payment, reimbursement, and required substantiation for the following: any form of travel above standard fare for members and companions, retirement plans, discretionary spending accounts, allowances for housing, personal and business use of residences, dues and fees to social or health clubs, personal services such as a private chef or chauffeur.

  10. Adopt policy and procedures to provide donors and the public with information about fundraising costs and practices.

  11. Adopt a policy for periodic review with your staff and board members on the rules constraining lobbying and political activities.

  12. Adopt a written policy or procedure that requires you to evaluate your participation in joint venture arrangements to ensure that your exempt status is protected and take steps to safeguard your exempt status with respect to such arrangements.

  13. Adopt a gift acceptance policy to provide for substantiation of gifts of more than $250 and review any non-standard contributions, real property, or vehicles.

  14. Adopt a conservation easement policy to provide for periodic monitoring, inspection, and enforcement.

  15. Adopt a policy to confirm that your tax-exempt bonds are in compliance.

  16. Exempt organizations must make publicly available their Forms 1023 or 1024 application for exempt status, and Forms 990 and 990-T for a period of three years from the date filed. They can be disclosed on your own Web site, another organization's Web site, or upon request. Be advised that organizations that do not make their information related to application for exempt status and annual information returns available for public inspection are subject to fines and penalties.

  17. You will be required to describe whether (and if so, how) you make your governing documents, conflict of interest policy, and financial statements (whether audited or not) available to the public. If no plan is in place to make these documents available to the public, put one together now.

  18. Set up a committee that is responsible under your governing documents or through delegation by your governing body for (i) overseeing the audit, review, or compilation AND (ii) the selection of an independent accountant.

© 2009, William Vaughan Company

The William Vaughan Company provides expertise in accounting, taxation, and business consulting services to a range of clients, including nonprofit organizations that receive private, public, and governmental funding.
Topics: Policy