The Internal Revenue Service in April released new draft instructions for its recently-revamped Form 990 for non-profit organizations – and its looking for a lot more information about the inner workings of non-profits.
While the original form contained nine pages and two additional schedules, the reworked form’s 11 pages are supplemented with 16 additional schedules.
The IRS said the change is designed to increase fiscal transparency.
The new tax filing requirements will also increase the amount of publicly available information on non-profits – right down to what top executives are paid and whether a group has an ethics policy.
The rules, which will go into effect next year when groups file their 2008 returns, have attorneys and non-profit officials working quickly to bring their accounting practices in line.
Some organizations said the forms will require them to take a hard look at their non-revenue related policies – even in areas not traditionally regulated by the IRS.
“Many of the questions that must be answered in the new form are not questions within the legal mandate of the IRS to regulate,” said Ann Beltran, policy analyst for the Washington, D.C.-based National Council of Nonprofit Associations, an association of small and mid-size non-profit groups. “They are really questions that get to heart of good governance, but they are things that the IRS can’t really do anything about.”

Fostering public trust

IRS officials said one goal of the new forms is to increase transparency.
“Tax-exempt organizations provide tremendous benefits to the people and communities they serve, but their ability to do good work hinges upon the public’s trust,” IRS Commissioner Doug Shulman said in announcing the draft instructions in April. “The new Form 990 will foster this trust by greatly improving transparency and compliance in the tax-exempt sector. Public comment on the draft instructions will help the IRS to minimize the reporting burden on tax-exempt organizations, which is another important goal.”
The number of changes depends on what kind of non-profit is involved.
For example, while non-profit organizations with gross receipts of less than $25,000 had been exempt from filing requirements, now all organizations will be required to file some version of Form 990.
However, private foundations with less than $25,000 in gross receipts can file the shortened Form 990-N and some organizations with less than $1 million in receipts can file the slightly longer Form 990EZ.
Hospitals will be required to submit information about their charitable activities and the subsidized care they offer. Other filing requirements for hospitals will be phased in over the next several tax years in order to minimize potential burdens.
The new forms allow organizations to supplement their filing information with narrative explanations of their responses and organization operations.
The IRS made several changes to the revamped Form 990 after it was released in draft form last year, eliciting comments from hundreds of non-profit organizations, attorneys, accounting groups, academics and public officials.
Lois Lerner, director of the IRS’s Tax-Exempt Organizations division, said those comments helped the agency create a form that achieved transparency while considering the potential burdens on non-profits.
“Public input resulted in a form that meets the needs of tax-exempt organizations,” she said. “We hope for similarly useful comments about the draft instructions.”
Beltran said the changes in the form alleviated some small non-profit groups’ concerns. “Because of the many comments before the form was released, the [IRS] created a new threshold level for who files which forms,” she said.
As a result, an estimated 350,000 smaller tax-exempt groups will be able to file the less complicated Form 990EZ – about 150,000 more than had been using the shorter form in recent history, Beltran said.

Act now to avoid problems later

The changes don’t exactly make the new forms a piece of cake. They still increase filing requirements for an already complicated form.
“We are not starting from a simple form or something that everyone understood,” said Adelbert “Lorry” Spitzer, a partner in the Boston office of Ropes and Gray, who represents larger non-profits. “There is much about this form [that] was giving people a lot of heartache already, and that continues with the new form.”
Some of the revisions require private tax-exempt groups to take a hard look at their operations with an eye toward making changes in everything from accounting practices to expenditure policies, Spitzer said – and the time to do that is yesterday.
For example, while most non-profit groups file according to the fiscal year, which usually starts on July 1, the new form requires some information – such as the amount and source of compensation for top non-profit executives – to be provided according to the calendar year.
Groups that have not yet made accounting changes with this change in mind are already almost five months behind, Spitzer said.

Opportunity to ‘tell your story better’

Some of the most controversial changes involve detailed questions about a host of matters – from the amount of compensation key organization officials receive to fundraising sources to whether an organization has an ethics policy in place.
Another controversial question asks whether the organization picks up the tab for perks such as first-class airline seats, social club dues or personal services.
Although the IRS states that the answer to such questions will not trigger audits, groups may still want to cut down on perks as much as possible.
“If you are at all interested in how you appear to the public, you want to answer: ‘No, we don’t provide maid services,’” Spitzer said. “The IRS wants people to adopt what it thinks are good practices. And there is concern that [certain answers] could be a potential audit trigger, although the IRS zealously polices its audit criteria.”
The narrative sections in the new forms also provide an opportunity for non-profits to paint themselves in a more complete – and positive – light.
“What the new Form 990 is designed to do is to enable the non-profit to tell its story better,” Beltran said. “It enables the non-profit, on the first page of the form, to put as much good information as it can about its activities.”
To help non-profits prepare themselves for the new forms, accounting firms, attorney groups and other organizations have been hosting seminars, webinars and other forums to educate tax-exempt groups about what they can do.