What Every Nonprofit Executive and Board Member Needs to Know About the IRS Redesigned Form 990
by Doug Anning and Tom Schenkelberg
On June 14, 2007, the IRS released a redesigned Form 990 to be filed by all nonprofit organizations. Here’s what you need to know about the form:
Who Has to File?
Generally, the rules on filing will not change. If your organization has not historically filed a Form 990 (because, for example, it is a government-owned hospital), it will likely not have to file the new form.
Corporate Governance
While Sarbanes-Oxley generally does not apply to nonprofit hospitals, the redesigned Form 990 asks a number of questions about corporate governance practices, a form of SOX-Lite. The form asks about a number of policies and procedures, and while adoption of these policies is not mandatory, failure to adopt them must be disclosed on the Form 990 and could cause others to perceive the nonprofit as non-compliant. Accordingly, we recommend that all nonprofit hospitals adopt the following policies mentioned in the redesigned Form 990: Conflicts of Interest Policy; Whistleblower Policy; Document Retention and Destruction Policy; Executive Compensation Policy and Procedure to Comply with IRS Rebuttable Presumption; Audit Committee Charter; Policy on Compilations, Reviews and Audits; Policy on Reimbursement of Travel and Entertainment Expenses; Investment Policy; Policy on Participation in Joint Ventures; Comprehensive Policy Regarding Compliance with 501(c)(3) Regulations; Policies Regarding Disclosures of Governance and Financial Documents to the Public.
Executive Compensation
The Redesigned Form 990 asks for significantly more disclosures regarding executive compensation, similar to the disclosure required by for-profit executives on SEC disclosure statements. This continues the heightened scrutiny that government regulators are paying to compensation in the nonprofit sector. Nonprofits will have to disclose base salary, incentive and bonus payments, severance and change-of-control payments, non-qualified deferred compensation, expense reimbursement and certain fringe benefits (such as first class travel, club dues and use of personal residences). With the heightened disclosure and scrutiny, nonprofit boards are going to have to implement a number of sound compensation policies and procedures. These should include: appointing a compensation committee of the board; adopting a compensation committee charter; adopting an executive compensation philosophy and policy; adopting a travel and entertainment expense reimbursement policy; obtaining data from compensation consultants on what peer organizations are paying peer executives; ensuring that board approval of executive compensation complies with the IRS rebuttable presumption safe harbor.
Other Operations
There are a number of schedules in the Re-designed Form 990 that nonprofits will have to prepare and file depending on their activities. These schedules will require disclosures regarding political campaign and lobbying activities, activities outside of the United States, fundraising and gaming activities, grantmaking activities, tax-exempt bond financing, acceptance of non-cash contributions (such as cars, art and real estate), dealings with related entities, and special schedules for schools and hospitals.
When Does the Form Become Effective?
The form is effective January 1, 2008 for calendar year nonprofits. For fiscal year nonprofits it is effective for the tax year that begins in 2008. For example, if the fiscal year runs from July 1 to June 30, the form becomes effective for the tax year beginning on July 1, 2008.
Doug K. Anning is Shareholder, Polsinelli Shalton Flanigan Suelthaus.
P | 816.360.4188
E | danning@polsinelli.com
Tom J. Schenkelberg, Practice Group Chair.
P | 816.360.4124
E | tschenkelberg@polsinelli.com