2008 Form 990 by JaymesChapman



The New IRS Form 990: What Does It All Mean for Your
Nonprofit Organization? A Comprehensive Overview and
By Jeffrey S. Tenenbaum, Kristen E. Sitchler and Aaron H. Hiller
Sep 9, 2008

The IRS retains the names of more than 1.3 million nonprofit entities in its master files. In 2004, the
most recent year for which data is available, the IRS received 364,601 Forms 990 and 142,269 Forms
990-EZ. And yet the Form 990 - the principal channel of communication between nonprofit
organizations and the federal government - has not been revised in any significant way for nearly 30

After months of deliberation and public comment, guided by the principles of "transparency,
compliance, and burden minimization," the IRS released the long-awaited final draft of the 2008 Form
990 in December of last year.1 In its new configuration, the 2008 Form 990 replaces the old 9-page form
and its 2 schedules with an 11-page "Core Form" and 16 schedules, each one keyed to a specific type
of nonprofit activity. In August 2008, after reviewing more than 600 pages of detailed public comment,
the IRS published the final version of instructions to accompany the new Form 990. Organizations
that operate on a January 1 fiscal year will file their first redesigned Form 990 by May 15, 2009.2

Although the 2008 Form 990 allows tax-exempt organizations to better describe their activities and
contributions to the community, it also requires organizations to provide significantly more
information than in previous years. The organizations best positioned to tell their own story in an
effective manner -- and least likely to be lost in the transition to a new reporting regime -- will be those
that educate themselves on the new requirements, implement policies and procedures that respond
to the constraints of the new form, and plan to track information not previously required by the IRS.

Core Form. Every organization filing a Form 990 must complete the 11-page Core Form, which has
been radically redesigned for use in 2008. Filers will find a summary of key information on the very
first page, designed to capture a "snapshot" of the organization’s basic financial, governance, and
operational structure. The IRS also has moved the "Statement of Program Service Accomplishments"
up to the second page of the form, bolstering claims that the new Form 990 allows a filing
organization to explain what it does before accounting for how it does it.

For example, both Part I and Part III of the new Core Form ask a filing organization to state its mission
and list its most significant activities. Prior to the release of the instructions, it seemed the IRS might
be satisfied with a simple restatement of the purposes recited in an organization’s articles of
incorporation. However, the instructions suggest that more specific information will be necessary.
According to both the instructions and its accompanying glossary, the organization’s reported
"mission statement" should establish "why the organization exists, what it hopes to accomplish, who
it intends to serve, and what activities it will undertake and where." The IRS has indicated that it may
list examples of program service accomplishments for particular sectors of the nonprofit community
or develop "service activity codes" to ease reporting burden, but adopted neither idea in the final
release of the 2008 instructions.

In Part VI, a new section entitled, "Statements Regarding Governance, Management, and Financial
Reporting," an organization must now describe the composition of its board of directors, its
governance and management structure, and its policies for promoting transparency and
accountability to members and beneficiaries. For example, Part VI asks the filing organization to
disclose the size of its board of directors, the proportion of the board that is independent, and
whether or not its directors or officers have family ties or business relationships with each other or
with key employees.

"Independent board member" is one of the more complicated terms outlined in the final instructions,
and the test for "independence" has changed since the first draft of the instructions was released in
April. A "member of the governing body" of an organization is "independent" if three conditions are
met at all times during the taxable year: (1) the member "was not compensated as an officer or other
employee of the organization or of a related organization"; (2) the member "did not receive total
compensation or other payments exceeding $10,000" from the organization, except as reimbursement
for expenses or reasonable compensation for "services provided in the capacity as a member of the
governing body"; and (3) neither the member, nor any family member of the member, "was involved
in a transaction with the organization (whether directly or indirectly through affiliation with another
organization) that is required to be reported in Schedule L for the organization’s tax year." Board
members do not lose their independence simply because they are major donors to the organization,
or because they receive certain benefits as general members of the organization. An organization
need not engage in more than a "reasonable effort" to obtain the information required to determine
the independence of its leadership, and may rely on the information provided by its directors and

Part VI of the Core Form also requires a filing organization to report any delegation of responsibilities
to a "management company." There has been some initial concern about the scope of this disclosure.
The final instructions to Part VI direct the filing organization to report use of a management company
or any other person that performs "management duties customarily performed by or under the direct
supervision of officers, directors, trustees, or key employees." These management duties may include
"hiring, firing, and supervising personnel, planning or executing budgets or financial operations, or
supervising exempt operations or unrelated trades or businesses of the organization." The final
instructions clarify that "management duties" do not include basic administrative services, such as
payroll processing, "that do not involve significant decision making." An organization need not report
the use of an investment management company, unless the organization itself provides such services
to others.

Finally, if an organization has local chapters, branches or affiliates, it must now use Part VI to report
whether it has written policies and procedures in place to ensure that the chapters are operated in a
manner consistent with the filing organization’s tax-exempt purpose.

Part VII, regarding "Compensation of Officers, Directors, Trustees, Key Employees, and Five Highest
Compensated Employees," has changed in more subtle ways. All tax-exempt entities -- not simply
501(c)(3) organizations -- are now required to report the five highest employee salaries. The
threshold for that reporting requirement has been raised from $50,000 to $100,000. When accounting
for executive compensation, filers will now use Form W-2 and Form 1099 information as a starting
point, but must also report "other" compensation, such as retirement plan contributions, deferred
compensation, and health and welfare benefits in order to allow for a more complete picture of the
compensation package. Organizations may provide a reasonable estimate of nontaxable fringe
benefits when an actual dollar amount is unavailable. According to the final instructions, Part VII does
not require filers to list any item of compensation that does not exceed $10,000 in value - although
Schedule J may still require these items to be reported, as described below.
Although the current Form 990 also calls for information about "key employees," many in the tax-
exempt community have called for a more specific explanation of the term. According to a recent
press release, the IRS "really struggled" with an appropriate description. The final definition of "key
employee" differs significantly from the test provided in the April draft instructions: a key employee
(1) "had reportable compensation exceeding $150,000 for the year (the '$150,000 Test')"; (2) "had or
shared organization-wide control or influence similar to that of an officer, director, or trustee, or
managed or had authority or control over at least 10% of the organzation’s activities (the
'Responsibility Test')"; and (3) was "within that group of the organization’s top twenty highest paid
employees for the year (the 'Top 20 Test')."

One of the most popular and least complicated additions to the 2008 form is Part IV, "Checklist of
Required Schedules," designed to provide the IRS with a broad overview of an organization’s
activities and to assist organizations with completing the proper sections. By answering this series of
questions, a tax-exempt organization verifies which of the 16 Form 990 schedules it is required to

Public Charity Status and Public Support. Prior to the release of the 2008 form, Schedule A - which
must be completed by all 501(c)(3) public charities - required information regarding numerous topics
unrelated to the basis of the organization’s public charity status, such as information about lobbying
activities and transactions with non-charitable tax-exempt organizations. The redesigned Schedule A
now focuses exclusively on public charity status; questions on unrelated topics have been moved to
other schedules. In addition, the public support testing period has been lengthened from four to five
years (to simplify the process and allow for the eventual elimination of the advance ruling process),
the public support test for 509(a)(1) organizations has been separated from the support test for
509(a)(2) organizations, and space has been added for a narrative explanation to justify the "10%
facts and circumstances" test, if applicable.

Political Campaign and Lobbying Activities. Since the Form 990 was first drafted, tax-exempt
organizations have grown increasingly adept at participation in lobbying and political activities. The
redesigned form incorporates expanded questions about lobbying and political expenditures and
activities into a new Schedule C. Of note, the IRS has added questions regarding the transfer of funds
between tax-exempt organizations and so-called "527 organizations," and non-501(c)(3) tax-exempt
entities will now be required to provide more extensive reporting of lobbying and political campaign

Statement of Activities Outside of the United States. In order to provide a more complete picture of an
organization’s international activities, Schedule F now requests information about tax-exempt
organizations that raise funds, make grants, or conduct trade, business or other activities outside of
the United States. Organizations with more than $10,000 of aggregate expenses or revenues from
foreign activities will be required to describe their operations on a region-by-region basis, and to
provide information regarding grants or assistance made to foreign governments, organizations and
individuals. These reporting requirements are expected to result in new recordkeeping practices for
entities with substantial overseas activities.

Hospitals. Any organization that "operates or maintains a facility to provide hospital or medical care"
is required to complete a new and somewhat controversial Schedule H. The final instructions key the
definition of "hospital" to state licensure requirements - i.e., a "any facility that at any time during the
year was, or was required to be, licensed, registered, or similarly recognized by a state as a ‘hospital’"
must disclose its charity care policy, its billing and collection practices, and any outstanding joint
venture or management company agreements it may have with third party entities. Hospitals also
must report aggregate amounts of bad debt expenses and Medicare reimbursements. At least in part
because of the comprehensive nature of this inquiry, the IRS has decided to phase in the application
of Schedule H. While a filing organization may submit as much information as it would like, only Part
V of Schedule H -- detailing the scope and location of certain hospital facilities -- is due in 2008.
Reporting pursuant to the full Schedule H will be required in 2009.
Executive Compensation. As discussed above, executive compensation reporting is required for two
types of compensation -- "reportable compensation" and "other compensation" -- and the final
instructions provide definitions, examples, and other guidance for both terms. Officers, directors and
employees who earn more than $150,000 in reportable compensation (as reflected on Forms W-2 or
1099) or $250,000 in total compensation (including nontaxable fringe benefits and expense
reimbursements) will trigger more detailed reporting requirements in a redesigned Schedule J,
including breaking out base compensation, bonus and incentive compensation, other compensation,
deferred compensation, certain nontaxable benefits, and compensation reported in prior Forms 990.
While the final version of Schedule J eliminates the reporting of de minimis fringe benefit and
nontaxable expense arrangement/reimbursement amounts that had been included in the draft
version of the new Form 990, certain arrangements that may raise "tax compliance and transparency
concerns" must now be reported, including payments for first-class or charter travel, travel for
companions, tax indemnification and gross-up payments, discretionary spending accounts, housing
allowances and payments for the business use of a personal residence, health or social club dues or
fees, and personal services (such as those of a maid, chauffeur or chef). The final instructions require
filers to report such arrangements even if they are subject to the "$10,000-per-item Exception" and are
not listed in Part VII of the Core Form.

The double counting of deferred compensation - requiring deferred compensation to be reported
both in the year earned and the year paid - has been controversial, as it can lead to the perception
that an individual’s compensation (in a single year and on a cumulative basis) is greater that it
actually was. While the IRS believes that such double reporting is necessary for "transparency and
compliance reasons" and is not eliminating this requirement, a new column was added to the final
Schedule J to report amounts that also were reported in a prior year.

Transactions with Interested Persons. The old form required disclosure of transactions between the
organization and its "insiders," including excess benefit transactions, grants and other business
arrangements. Schedule L has been restructured to incorporate all such conflict-of-interest reporting
in a single location. The final instructions indicate that the purpose of Schedule L is determine the
independence of members of an organization’s board of directors.

Non-Cash Contributions. The old Form 990 failed to capture an accurate picture of the non-cash
contributions received by exempt organizations, even when these contributions provided substantial
benefit to the organization. The IRS added Schedule M to collect information about non-cash
donations ranging from clothing and household goods to intellectual property, real estate, and
easements. Quantity reporting is not required for some contributions; an organization need only
check a box to show that it has received clothing, appliances, books, or publications. When quantity
reporting is required, it should be based on the number of contributions made, as opposed to the
number of items contributed.

Supplemental Information. One of the most significant criticisms of the old form was its inability to
depict the full scope and impact of an organization’s activities. The new Form 990 contains a new
Schedule O, allowing electronic filers up to two pages to respond to each question on the form, and
an additional two pages to present any other information it might want to include in the overall

For example, the "Summary" portion of Part I requires the filing organization to estimate its total
number of volunteers. In the new Schedule O, organizations may -- but are not required -- to explain
how the number of volunteers was determined, and the types of services or benefits that such
volunteers might provide. The final instructions help clarify the reporting required here by defining a
"volunteer" as any individual, full-time or part-time, who provides any volunteer service to an
organization during the reporting year. The instructions also note that an organization that does not
keep records of volunteer activities may use any reasonable method to estimate its total number of

Related Organizations and Unrelated Partnerships. The IRS added Schedule R to capture the
increasingly complex organizational structure of many tax-exempt entities, and to improve
transparency with respect to partnerships, limited liability companies, and other related
organizations. The schedule is designed to add a new dimension of scrutiny in assessing an
organization’s compliance with its tax-exempt purposes and, in the case of 501(c)(3) organizations,
the potential for private inurement and private benefit (the ban on private inurement applies to other
categories of tax-exempt organizations as well).

Schedule R also requires organizations to provide information on related organizations and on
certain unrelated partnerships through which the organization conducts "significant" activities. The
final instructions define "related organizations" broadly: the term includes parent organizations,
subsidiaries, supporting organizations, and brother and sister organizations controlled by the same
entity as the filing organization. An organization that maintains a group exemption is not required to
list any of its subsidiaries; however, it is required to report any transactions with related
organizations in Part II of Schedule R.


With all of these changes now in effect, tax-exempt organizations should focus most immediately on
two distinct areas - their processes for approving executive compensation and their organizational

Approval of Executive Compensation. Because the 2008 Form 990 requires organizations to make the
details of its compensation packages available to the public, tax-exempt entities must make it a
priority to substantiate the reasonableness of executive salaries and benefits. An organization that
pays what may be viewed as excessive compensation risks affecting its public image and jeopardizes
future fundraising efforts and membership support.

While the Form 990 does not directly reference the "intermediate sanctions" rules applicable to
501(c)(3) and 501(c)(4) organizations, Section VI of the new form does ask if "the process for
determining compensation . . . include[s] a review and approval by independent persons,
comparability data, and contemporaneous substantiation of the deliberation and decision." The
Treasury Regulations set out the criteria necessary to create a "rebuttable presumption of
reasonableness" of compensation received by officers, directors and employees: The organization’s
governing body, or a committee of the governing body free of conflicts of interest with respect to the
transaction, must approve the compensation arrangement; The governing body or its committee
must have obtained and relied upon appropriate comparability or benchmarking data -- such as
industry surveys or compensation studies -- prior to making its decision; andThe governing body or
its committee must adequately document the basis for its decision at the time it is made.

Tax-exempt organizations that meet these three factors and qualify for the rebuttable presumption of
reasonableness likely create additional grounds to defend themselves against any additional scrutiny
imposed by the 2008 Form 990.

Organizational Governance. The IRS maintains that no particular policy or form of governance is
compelled as a matter of law, and encourages organizations to fully explain and provide the context
for their preferred method of administration. Nevertheless, the 2008 Form 990 asks for detailed
information about a filing organization’s leadership structure and its governance policies. As such,
both the IRS and the general public will be looking to see that the boards of directors make
independent judgments and exercise an undivided loyalty to the organization. Tax-exempt
organizations should review their procedures for board member election and qualification to ensure,
if at all possible, that the majority of the organization’s voting directors do not have relationships
with the organization that might compromise their objectivity (see the definition of "independent
board members," discussed above). Organizations should be prepared to explain who its board
members are, how the organization selects them, and why its process for choosing them is sound.

In addition, organizations should conduct a general review of existing governance policies and
practices, and consider adopting additional policies or guidelines as needed. Knowing that
information disclosed in the new Form 990 sets a tone with the public, organizations may wish to
adopt policies and procedures that lend increased transparency and trustworthiness to
compensation decisions, conflicts of interest, whistleblower protection, document retention and
      destruction, chapter governance, and participation in joint venture arrangements. All policies should
      be in writing, and their application and enforcement should be well documented.


      Tax-exempt organizations should realize that today’s activities will be those reported on the 2008
      Form 990. Therefore, organizations should take the time now to become familiar with the new form,
      and to review their relevant policies and procedures. Also considering conducting a "dry run"
      completion of the new form, to see how your organization’s profile will be reflected; this may enable
      you to make helpful changes before the end of the tax year. The 2008 Form 990 prompts tax-exempt
      entities to tell their stories in more scope and detail than ever before; those that tell their stories best
      will be those that become familiar with the document sooner and respond accordingly.


      For more information, please contact Mr. Tenenbaum, Ms. Sitchler, or Mr. Hiller at 202-344-4000 or at

      jstenenbaum@venable.com, kesitchler@venable.com, or ahhiller@venable.com.

      This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal

      advice can only be provided in response to specific fact situations.

          The 2008 Form 990, the final instructions, and additional IRS "Highlights" related to the changes

      discussed in this article are available at http://www.irs.gov/charities/article/0,,id=185561,00.html.
          Note that the new Form 990 does not apply to private foundations; the Form 990-PF has not been

      modified like the Form 990.

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