IRS FORM 990

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IRS FORM 990 Powered By Docstoc
					Updating Nonprofit Governance
 to Address the New Form 990
      Michael E. Malamut
    Kopelman and Paige, P.C.
            Boston
Massachusetts Nonprofit Network
  Strengthening Nonprofits in an Age of
          Precious Resources
           October 24, 2008
           TABLE OF CONTENTS
•   Reasons to Implement form 990 Policy Directives        5
•   Form 990-EZ Eligibility                                7
•   Form 990-EZ Changes                                    8
•   Form 990-EZ Schedules                                  9
•   Phase-In to Full Form 990                              10
•   Form 990, Part VI, Governance                          12
•   Form 990, Part VI, Sec. A, Governing Body
      and Management                                       13
•   Directors & Independent Directors                      14
•   2008 Instructions for Form 990 Glossary                16
      Director or Trustee                                  16
      Independent Voting Member                            17
      Reasonable Effort                                    19
•   Governing Document Changes                             20
•   Instructions for Form 990 Part VI Line 4, Changes to
      Organizational Documents                             22
•Minutes                                              23
•Instructions for Form 990 Part VI, Line 8, meaning
  of contemporaneous                                  25
•Chapter Relations Policies                           26
•Form 990 Review                                      28
•Form 990 Part VI, Sec. B Policies                    29
•Standard Policies: Conflict of Interest,
   Whistleblower, Document Retention                  30
•2008 Instructions for Form 990 Glossary              32
   conflict of interest policy                        32
   family member                                      33
   business relationship                              34
•A Pair of SOX: Whistleblower & Document
   Retention Policies                                 35
•Form 990 Schedule J, Part I, Compensation            36
•Compensation Policy                                  37
•Joint Venture Policy                                 39
•Form 990, Part VI, Sec. C, Disclosure                40
•Governance Disclosure Policy                         41
•Form 990, Part XI                                    42
•   Audit Committee Charter                       43
•   2008 Instructions for Form 990 Glossary       45
     audit committee                              45
•   Form 990 Schedule M, Non-Cash Contributions   46
•   Gift Acceptance Policy                        47
•   IRS Advisory Committee on Tax Exempt and
     Government Entities (ACT)                    48
•   Conclusion                                    52
•   Future Trends                                 54
•   What to do for Mid-Size to Large Nonprofits   55
•   What to do for Small and Small, Small
     Nonprofits                                   56
•   Where to Go                                   57
•   IRS Information on Form 990 Governance
     Issues                                       59
•   Brief Biography                               60
 Reasons to Implement Form 990
       Policy Directives
• Governance practices referred to in the Form
  are not mandates.
• Donors, ratings agencies, and local tax and
  nonprofit governance regulators can be
  expected to review governance responses on
  the Form 990 in their evaluations.
• The IRS may also use responses to evaluate
  which returns warrant more careful review or
  possible audits.
• Gadflies and disgruntled members can be
  expected to review nonprofit organizations’
  publicly available Form 990 filings.
• For these reasons, exempt organizations
  filing the new Form 990 are strongly
  encouraged by the reporting requirement
  to adopt policies that will allow them to put
  down the “right” answers to the
  governance questions.
       Form 990-EZ Eligibility
May file 990-      If gross        And if total
EZ for:            receipts are:   assets are:
2008 Form          >$25,000 and    <$2,500,000
(generally filed   <$1,000,00
in 2009)
2009 Form          >$25,000 and    <$1,250,000
(generally filed   <$500,000
in 2010)
2010 and later     >$50,000 and    <$500,000
Forms              <$200,000
       Form 990-EZ Changes
• The Form 990-EZ has also been revised, but
  much more modestly than the Form 990.
• Similar information to that required under the
  old Form 990-EZ is still required, but previously
  it was requested in unstructured narrative
  format. Now 7 Schedules from the Form 990
  are incorporated, in full or modified format, in
  the Form 990-EZ.
• Schedule L, Transactions with Interested
  Persons, relates to conflict of interest policies.
• The other Form 990-EZ Schedules do not have
  significant governance policy implications.
     Form 990-EZ Schedules
 Schedules based on Form 990 Schedules
  included in the Form 990-EZ are:
• Schedule A Public Charity Status
• Schedule B Contributors
• Schedule C Campaign and Lobbying Activities
• Schedule E Schools
• Schedule G Fundraising
• Schedule L Transactions with Interested
  Persons
• Schedule N Liquidation, Termination, and
  Disposition of Assets
     Phase-In to Full Form 990
• Because of the phase-in of the new Form 990, it
  will apply to 2008 tax year returns for most large
  exempt organizations ($1,000,000 in gross
  receipts or $2,500,000 in assets).
• For the 2009 tax year, the new Form 990 will
  apply to organizations with at least $500,000 in
  gross revenues or $1,250,000 in assets, with
  limited exceptions.
• For the 2010 tax year, intended as final phase-
  in, almost all exempt organizations with gross
  receipts above $200,000 or assets over
  $500,000 will be covered.
• This phase-in period gives organizations limited
  time to implement governance policies called for
  in the new Form.
• Organizations that have not yet started to
  prepare for the new Form 990 should start
  thinking about how to perform a real governance
  review.
• Sample policies are readily available online and
  in commercially available publications.
Form 990 Part VI Sec. A
     Directors & Independent
             Directors
• The Form 990 inquires about the total number of
  directors and the number of independent
  directors who meet the definition in the
  instructions.
• Comparison of the numbers readily discloses
  the percentage of independent directors.
• After commentary during the Form 990 revision
  process, the definition of independent excludes
  ordinary members of membership associations
  and substantial donors who do not have other
  transactions with the organization.
•Organizations may consider amending their
bylaws or adopting nomination policies to
encourage board composition with a high
percentage of members meeting the
instructions’ definition of independent.
 2008 Instructions for Form 990 Glossary

director or trustee A member of the
organization’s governing body, but only if the
member has any voting rights. A member of an
advisory board that does not exercise any
governance authority over the organization is not
considered a director or trustee.
2008 Instructions for Form 990 Glossary
2008 Instructions for Form 990 Glossary
2008 Instructions for Form 990 Glossary
 Governing Document Changes
• Narrative description is required for all significant
  changes in an organization’s “organizational
  documents.” This includes constitution, bylaws,
  articles of incorporation or organization, and, for
  trusts, a trust instrument or declaration of trust.
• Nonprofit organizations contemplating any bylaw
  change must review the instructions: (1) to
  determine if the change is significant; and (2) to
  consider the public perception of its narrative
  description of the change.
• This requirement will undoubtedly
  discourage bylaws amendments, and will
  encourage migration of provisions from
  bylaws, which are reportable, to policies,
  which are not reportable.
Instructions for Form 990 Part VI Line 4
Changes to organizational documents. The organization must
report significant changes to its organizing or enabling document by
which it was created (articles of incorporation, association, or
organization; trust instrument; constitution; or similar document), and to
its rules governing its affairs commonly known as bylaws (or regulations,
operating agreement, or similar document). Report changes made since
the prior Form 990 was filed, or that were not reported on any prior
Form 990. Do not report changes to policies described or established
outside of the organizing or enabling document and bylaws (or similar
documents), such as adoption of, or change to, a policy adopted by
resolution of the governing body that does not entail a change to the
organizing document or bylaws.
                 Minutes
• The Form asks whether the organization
  contemporaneously documents its board
  meetings and meetings of committees with
  power to act.
• These questions encourage boards and
  board committees to formalize the
  recording of their procedures and to
  determine what level of detail they want in
  the minutes.
• It may encourage adoption of minutes
  policies or adoption by reference of a
  parliamentary authority that prescribes
  standardized methods for recording and
  adopting minutes.
• Parliamentary authorities with guidance on
  minutes include Robert’s Rules of Order
  Newly Revised, Alice Sturgis’s Standard
  Code of Parliamentary Procedure, Ray
  Keesey’s Modern Parliamentary
  Procedure, and Donald Tortorice’s Modern
  Rules of Order.
Instructions for Form 990 Part VI Line 8

 For this purpose, contemporaneous means by
 the later of (1) the next meeting of the governing
 body or committee (e.g., approving the minutes
 of the prior meeting), or (2) 60 days after the
 date of the meeting or written action. If “No,”
 explain in Schedule O the organization’s
 practices or policies, if any, regarding
 documentation of meetings and written actions
 of its governing body and committees with
 authority to act on its behalf.
    Chapter Relations Policies
• The Form asks whether multi-level associations
  have policies and procedures to ensure
  consistency throughout the organization.
• This will encourage central or superior
  organizations within multi-level associations to
  adopt chapter relations policies (or
  unit, division, lodge, constituent, component, regi
  onal, or local relations policies, as the case may
  be).
• Similarly, associations will be encouraged
  to adopt bylaws provisions and consistent
  sample chapter (or other appropriate unit)
  charters and bylaws with stronger
  oversight provisions.
           Form 990 Review
• The Form asks whether each member of the
  Board reviewed the final draft of the Form 990
  before it was filed and requires a narrative
  description of the review process.
• Cursory submission to Board members
  immediately before filing, just to be able to
  answer “yes,” will not look good.
• Boards will need to consider adopting a Form
  990 review policy that provides adequate time
  for meaningful review and a method for allowing
  feedback and revisions based on Board input.
Form 990 Part VI Sec. B
 Standard Policies: Conflict of Interest,
  Whistleblower, Document Retention
• The Form 990 asks whether organizations have
  conflict of interest, whistleblower, and document
  retention/destruction policies.
• Conflict of interest policies have long been a
  good governance standard and are prescribed
  for many nonprofit organizations by state statute,
  for example in New York.
• The Form 1023 application for 501 (c) (3) status
  has for several years suggested that applicants
  adopt a conflict of interest policy.
• Nonprofits with conflict of interest policies
  need to consider revising the policies in
  light of the new Form 990 instructions.
• For nonprofits that have not yet adopted a
  conflict of interest policy, it is time to do so.
  The policy should incorporate the
  minimum requirements set out in the
  Instructions.
 2008 Instructions for Form 990 Glossary

• conflict of interest policy A policy that defines conflict of interest,
  identifies the classes of individuals within the organization covered
  by the policy, facilitates disclosure of information that may help
  identify conflicts of interest, and specifies procedures to be followed
  in managing conflicts of interest. A conflict of interest arises when a
  person is in a position of authority over an organization, such as an
  officer, director or manager, may benefit financially from a decision
  he or she could make in such capacity, including indirect benefits
  such as to family members or businesses with which the person is
  closely associated. For this purpose, a conflict of interest does not
  include questions involving a person’s competing or respective
  duties to the organization and to another organization, such as by
  serving on the boards of both organizations, that do not involve a
  material financial interest of, or benefit to, such person.
2008 Instructions for Form 990 Glossary

 family member, family relationship
 Unless specified otherwise, the family of
 an individual includes only his or her
 spouse, ancestors, brothers and sisters
 (whether whole or half blood), children
 (whether natural or
 adopted), grandchildren, great
 grandchildren, and spouses of
 brothers, sisters, children, grandchildren, a
 nd great grandchildren.
 2008 Instructions for Form 990 Glossary
business relationship Business relationships between two persons include the
    following:
1) One person is employed by the other in a sole proprietorship or by an organization
    with which the other is associated as a trustee, director, officer, key employee, or
    greater-than-35% owner.
2) One person is transacting business with the other (other than in the ordinary course of
    either party’s business on the same terms as are generally offered to the
    public), directly or indirectly, 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 $10,000 in the aggregate during the
    organization’s tax year. Indirect transactions are transactions with an organization
    with which the one person is associated as a trustee, director, officer, key
    employee, or greater-than-35% owner.
3) The two persons are each a director, trustee, officer, or greater than 10% owner in the
    same business or investment entity. Ownership is measured by stock ownership
    (either voting power or value) of a corporation, profits or capital interest in a
    partnership or limited liability company, membership interest in a nonprofit
    organization, or beneficial interest in a trust. Ownership includes indirect ownership
    (e.g., ownership in an entity that has ownership in the entity in question); there may
    be ownership through multiple tiers of entities.
  A Pair of SOX: Whistleblower &
   Document Retention Policies
• Whistleblower and document
  retention/destruction policies are fallout
  from Sarbanes Oxley (SOX), which
  applies its whistleblower and document
  destruction sanctions to nonprofits.
• The Form 990 encourages those nonprofit
  organizations that have not yet adopted
  such policies to do so in the near future.
Form 990 Schedule J
       Compensation Policy
• Executive compensation has been a
  significant issue for exempt organizations
  since the introduction of intermediate
  sanctions.
• A number of the high profile nonprofit
  scandals, such as American University
  and United Way, have involved
  compensation.
• The Form asks for a narrative description of the
  organization’s executive compensation
  procedures and suggests certain basic
  parameters: review and approval by
  independent persons, use of comparability
  data, and contemporaneous substantiation of
  the deliberation and decision (minutes and
  compensation committee reports).
• These details encourage the adoption of a
  formal compensation process complying with the
  terms suggested in the Form.
         Joint Venture Policy
• If the organization engages in most forms
  of joint ventures or other joint investments,
  whether with nonprofit or for-profit
  partners, it must disclose whether it has a
  joint venture policy in place.
• The questions and instructions define such
  a policy as one that safeguards the
  organization’s tax-exempt status during its
  participation in the endeavor.
Form 990 Part VI Sec. C
 Governance Disclosure Policy
• A further question requests a narrative response
  to how the organization makes its governing
  documents, conflict of interest policy, and
  financial statements available to the public.
• Despite the ready availability of Form 990s gratis
  online through GuideStar, another question
  inquires about how the organization
  disseminates is Form 990.
• Nonprofits need to think about regularizing the
  disclosure of their significant governing
  documents.
Form 990 Part XI
     Audit Committee Charter
• The Form asks, in Part XI, whether the
  filing organization has an audit committee
  to review its outside audit.
• Not any committee denominated the “audit
  committee” will do.
• The instructions include a detailed
  description of a compliant audit committee.
• Nonprofits need to think about:
 adding a standing audit committee if they do not
 already have one,
re-structuring their existing audit committee to
 meet the definition if they have one, or
explaining in narrative why they think their
 current audit committee structure works better
 for them than one that meets the definition in the
 instructions.
2008 Instructions for Form 990 Glossary

• audit committee A committee, generally
  established by the governing body of an
  organization, with the responsibilities to
  oversee the organization’s financial
  reporting process, monitor choice of
  accounting policies and principles, monitor
  internal control processes, and oversee
  hiring and performance of any external
  auditors.
Form 990 Schedule M
      Gift Acceptance Policy
• If the organization has received more than
  $25,000 in noncash contributions or
  contributions of art or historic
  items, regardless of value, it must
  complete Schedule M. Schedule M in turn
  inquires whether an organization that
  receives nonstandard gifts has a gift
  acceptance policy.
                 Conclusion
• The IRS has become the leading impetus
  behind governance reform for nonprofit
  organizations.
• Many smaller nonprofits that prepare their own
  returns or that work with accountants or lawyers
  unfamiliar with the new form will only become
  aware of the new governance suggestions while
  they are filing their first post-2008 tax return.
• Many such organizations have gone about their
  missions quietly and effectively for years without
  governance review or policy drafting.
• Nonprofits will now have to create more
  formalized systems, but ones that work for them.
• Because Form 990 responses refer to the end of
  the tax year and not the date of filing, these
  organizations may have to respond:
• “No, but …” in the first year of phase-in, with an
  explanation that:
 the relevant policy was adopted after the end of
  the tax year, but before filing, or
 remains under study and is expected to be
  finalized shortly.
               Future Trends
• In future years, nonprofits required to file the full
  Form 990 will need to be up to speed.
• The IRS has signaled that the “right” answer
  may not be enough.
• The IRS has indicated that the next concern is
  implementation.
• The new Form 990 already asks a question
  relating to implementation of conflict of interest
  policies.
• Investment policies will inevitably be a focus of
  concern.
    What to Do for Mid-Size to
       Large Nonprofits

• Nonprofits that have not yet started to prepare
  for the new Form 990 should start thinking about
  how to perform a real governance review.
• The phase-in period gives mid-size nonprofits,
  subject to the temporary Form 990-EZ expanded
  coverage, a limited time to implement
  governance policies called for in the new Form.
       What to Do for Small and
       Small, Small Nonprofits
• Even small nonprofits ($50,000–$200,000 in annual
  gross revenues), subject to the Form 990-EZ after full
  phase-in, remain subject to certain Form 990 schedules
  and governance “best practices” trickle down from larger
  organizations.
• Small, small nonprofits (under $50,000 in annual gross
  revenues), subject to the Form 990-N e-postcard after
  full phase-in, should still undergo periodic governance
  review out of concern for liability and fiscal responsibility.
  They will be under pressure to adopt governance “best
  practices” used by larger organizations.
               Where to Go
• Sample policies are readily available online and
  in commercially available publications.
• For a review of online and commercial sources
  for sample nonprofit governance policies, see
  www.michaelmalamut.com/resources.
• Reviews include policy sample packages
  prepared by the American Bar
  Associations, ASAE (formerly American Society
  of Association Executives), and BoardSource
  (formerly National Center for Nonprofit Boards).
• Increasing transparency encouraged by the
  Form 990 means more organizations will post
  their governance policies online.
• “Off-the shelf” Form 990 governance policies
  typically need to be adapted to an organization’s
  culture and longstanding way of doing business.
• Sensitive guidance by professionals familiar with
  the issues raised by the Form 990 and current
  “best practices” in nonprofit governance may
  help nonprofits work through the review and
  updating process.
        IRS Information on Form 990
             Governance Issues
• The 2008 Form 990 and instructions are available on the
  IRS website at
  http://www.irs.gov/charities/article/0,,id=185561,00.html.
• Links to background papers and commentary on the
  draft form and instructions are available at
  http://www.irs.gov/charities/article/0,,id=181089,00.html
  and
  http://www.irs.gov/charities/charitable/article/0,,id=18589
  2,00.html.
• The June 11, 2008, ACT report is available at
  http://www.irs.gov/pub/irs-tege/tege_act_rpt7.pdf.
          Brief Biography
Michael E. Malamut of Kopelman and
Paige, P.C. of Boston is Vice Chair of the
American Bar Association Business Law
Section’s Nonprofit Organizations
Committee and Co-Chair of the Nonprofit
Governance Subcommittee. He is one of
the few lawyers nationwide with top
credentials as a professional
parliamentarian.
Michael E. Malamut
Attorney-at-Law
Kopelman and Paige, P.C.
101 Arch Street, 12th Floor
Boston, MA 02110-1162
617-556-0007 (main)
617-654-1712 (direct)
617-838-8657 (mobile)
617-654-1735 (fax)
mmalamut@k-plaw.com
http://www.k-plaw.com
http://www.michaelmalamut.com

				
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