Irs Form 990 Instructions

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 Pacific NW Assoc of Independent Schools (PNAIS)
            Business Officers Conference

    Governance Aspects
of the Redesigned Form 990
             and What are Best Practices?

                    presented by

            Howard Donkin, CPA

                     April 27, 2009

   A sustaining resource to the not-for-profit community
       Biographical Information
•   Partner, Jacobson Jarvis CPA’s
•   BA – Accounting - U of W, Seattle
•   WSCPA - NFP Committee
•   AICPA EO Tax Resource Panel
•   AICPA 990 Redesign Task Force
•   Executive Alliance Public Policy Group
•   EO Tax Review – Advisory Board
             Recent Articles
•   “IRS Asks Governance Questions on the New
    Form 990, JJCo Communiqué.

• “IRS releases revised Instructions for Redesigned
  Form 990”, JJCo Communiqué
       2006 Predictions

• 90% chance your 990 will
  ask you to gather new
• 75% chance you will adopt a
  conflict of interest policy.
• 35% chance you will file
          Today’s Topics
• What are the Governance Aspects in the
 Redesigned Form 990?
• How will they impact your school?
• What are Best Practices?
• What can you do to prepare?
• Your questions?
          Optional Topics
              (if time allows)

• Property tax exemption update
• UPMIFA comes to Washington
• FAS 117-1
• Proposed legislation in Olympia
       How did we get here?
2004 Grassley white paper and hearings

2005 Independent Sector panel on

2007 Independent Sector report
    “Principles for Good Governance and
    Ethical Practice: Guide for Charities”

2008 ACT Report “IRS Role in Good
    Governance Issues”
Recent Quotes from IRS Officials
A well-governed charity is more likely to
   obey the tax laws, safeguard
   charitable assets, and serve
   charitable interests than one with
   poor or lax governance.

The IRS has no interest in telling charities
    how to run their organizations.

The question is no longer whether the IRS
    has a role to play in this area, but
    rather, what the role will be.
       Another Recent Quote
• “If a governing board tolerates
  a climate of secrecy or neglect,
  we are concerned that
  charitable assets are more likely
  to be diverted to benefit the
  private interests of insiders at
  the expense of public and
  charitable interests.”

IRS 2/4/08
       Another Recent Quote
• “While the tax law generally does
  not mandate particular management
  structures, operational policies, or
  administrative practices, it is
  important that each charity be
  thoughtful about the governance
  practices …..As a measure of our
  interest in this area, we ask about
  an organization’s governance.”

IRS 2/4/08
      Another Recent Quote
•   “Because there is no
    precedential federal tax law
    guidance that prescribes the
    appropriate standards for
    nonprofit governance, a number
    of my clients have raised
    questions about how to comply
    with the new IRS initiatives.”

Mark Owens, a DC lawyer specializing in
   nonprofit issues. 1/14/09
 How do we comply?

That’s why you are here !
3 things you need to know:
  • What are the Governance
  • What are Best Practices?
  • How do you prepare?
What “New” Form 990 ?

 Redesigned Form 990

11- Page “Core” Form
16 Schedules (A-R)

(Old Sch. A = New Sch. E)
 Redesigned Form 990

Some are not new, just
 same questions in
 different places,
(Old Sch. A = New Sch. E)
Where are the Governance

990 Part IV (Core, page 3&4)
Checklist of Required
Q27 – Grants or assistance to directors?
Q28 – Business relationships?

If yes, complete Schedule L,
  “Transactions with Interested Parties”.
  990 Part VI (Core, page 6)
Governance Questions
Section A: Governing Body & Management

Section B: Policies

Section C: Disclosure

        990 Part VI (Core, page 6)

    Governance Question #1

     What is the number of voting
     & “independent” board
Section A
            990 Part VI (Core,page 6)
    Governance Question #1

    How do you determine

Section A
                       IRS Says….
    IRS: The organization must make a
      “reasonable effort” to obtain the necessary
      information to determine the

    For instance, the organization may rely on
      information it obtains in response to a
      “questionnaire” sent annually to each
      member, containing instructions and
See sample questionnaire

Purpose: To make a
  “reasonable effort” to gather
  information needed to answer
  questions about conflicts of
  interest and independence.

Is your board independent?
 What is “IRS” Independence?

1. Not a School employee or of a
   related organization.
2. Didn’t get over $10,000 of pay or
   other payments, and
3. Wasn’t involved in a transaction
   reportable on Schedule L
   (Interested Party)

Case study: You are a voting member of the
   board and a partner (more than 5%) in a law
   firm that charged $120,000 for legal services
   in a court case? What if you were not a

Answer: Schedule L instructions say greater than
   5% ownership and $10,000.

            990 Part VI (Core,page 6)
    Governance Question #2

    Did any officer, director, trustee or
     key employee have a family or
     business relationship?

    How do you determine this?
Section A
What is an officer, director, trustee or
  key employee?

Handout defines TDOKE’s

Family or Business Relationship

What is a “family” relationship?

What is a “business” relationship?

       See Questionnaire for definitions.

      Horizontal Relationship

Case Study: Bob & Steve are board members of
   the school. Bob owns a car dealership and
   sells Steve a $45,000 car. Did they have a
   business relationship?

Answer: It is not a reportable relationship
   because it was in the ordinary course of
   business at same terms as public.

                                              10, 11
            990 Part VI (Core,page 6)
    Governance Question #10

    Question 10 – Describe the process used to
     review the Form 990 before it was filed?

    Schedule O.

Section A
       Washington State Law
          (has a similar requirement)

Washington State Charitable Solicitations Act
   (RCW 19.09)

Currently in rulemaking (effective 2010).

Issue – Tier 2 independent reviewer must be a
    person familiar with reviewing 990’s but
    can’t be a board member.
            990 Part VI (Core,page 6)
    Policy Question #12
    Do you have a Written Conflict Policy?

    Do you ask directors each year?

    Do you monitor and enforce compliance?
    (Describe on Sch. O )

Section B
    What’s in a Conflict Policy?

•   Define conflicts,
•   Identify who is covered,
•   Facilitate disclosure, and
•   Specify procedures for
    managing a conflict.
IRS model in the instructions for the Form 1023
    application. See Handout.                     12
            990 Part VI (Core,page 6)
    Policy Question #13
    Do you have a written
       Whistleblower Policy?

    Was the policy in place as of the last day
      of your tax year?
    See IRS instructions page 18-19.
Section B
            990 Part VI (Core,page 6)
    Policy Question #14
    Do you have a written
    Document retention and
     destruction Policy?

    See instructions page 18-19.
Section B
            990 Part VI (Core,page 6)
    Policy Question #15
    Do Compensation Decisions
       include three things?
    - Advance approval (independent)
    - Comparable data
    - Written decision
    Describe Process on Schedule “O”.

Section B
            Rebuttable Presumption
    Of Reasonableness
    1. Compensation is presumed reasonable
       by the IRS if you follow the three rules
       listed above.
    2. Use a Checklist
    3. Think about a Compensation Committee

Section B
            990 Part VI (Core,page 6)
    Policy Question #16(b)
    Do you have (need) Joint Venture
    Only if you answer yes to 16(a).

    If yes, is it written?
    See IRS instructions page 19
Section B
• A series of events have come
  together and changed our
• More changes are ahead
• Here are my predictions for
  you in 2010

        2010 Predictions
• 90% chance the IRS 990
  instructions will be revised.
• 95% chance your Endowment
  footnote will be longer.
• 99% chance some of these Best
  Practices will not be appropriate
  for your school.
 What can you do to prepare?
• Find resources & stay informed
• Evaluate “Best Practices”
• Make a cost-benefit analysis of
  Best Practices
• Make Policies that fit your needs
• Keep your board informed


Email or call (206) 628-8990
           Links to Reading
• “Principles for Good Governance – A Guide for
• “Advisory Committee on Tax – Report on IRS Good
  Governance Issues” June 11, 2008
• “IRS Form 990 Instructions”
• “IRS Asks Governance Questions”
• Sample policies at Board Source”

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