Last month we began addressing leadership challenges facing nonprofits in 2009. We continue by focusing specifically on changes to the annual 990 reporting now required for all nonprofits.
In the past, many nonprofits considered the annual 990 reporting as an accounting exercise and left its completion to the finance committee or delegated it to external accountants. As of 2008 things changed dramatically at the Internal Revenue Service (IRS) and there are new requirements for completing and filing 990 reports. In addition to reporting on the finances of nonprofits, the new 990 seeks to document the governance practices of nonprofit organizations. IRS Commissioner Dough Shulman says, "the revised form will give the IRS and the public a much better view of how exempt organizations operate. The improved transparency provided by these changes will also benefit the tax-exempt community."
In case you don't know, a nonprofit's 990 is a public document and should be made available to anyone who asks for it. As a matter of fact, sites like www.guidestar.org post 990s for all nonprofit organizations. Many funders - individuals and institutions - review the 990s of charities before making their contribution. We advise nonprofits to post their 990s on their websites as a demonstration of their commitment to accountability.
The new 990 is now involving the Board at a much greater level - both in the completion of the form as well as in the scope of information reported in the 990. That's the primary focus of this article. Let's start by covering the basics of 990 reporting:
- All 501(c) organizations (except for churches, their integrated auxiliaries, and conventions or associations of churches) with annual gross receipts (AGR) more than $25,000 are required to file the Form 990 or 990-EZ.
- Organizations with annual gross receipts (AGR) more than $25,000 but less than $1 million may file the 990-EZ (a shorter version of the 990) as long as their total assets are less than $2.5 million.
- Organizations whose annual gross receipts (AGR) are normally $25,000 or less are required to electronically submit Form 990-N, also known as the e-Postcard.
Whatever version of the 990 you submit (e-Postcard, Form 990 or Form 990-EZ or 990-PF) it is due by the 15th day of the 5th month after the close of your fax (fiscal) year. If your 2008 tax year ended December 31, 2008, the 990 is due by May 15, 2009. If the regular due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. A business day is any day that is not a Saturday, Sunday, or legal holiday.
Any organization that fails to file required e-Postcards (or information returns - Forms 990 or 990-EZ) for three consecutive years will automatically lose its tax-exempt status. The revocation of the organization's tax-exempt status will not take place until the filing due date of the third year.
The new 990 asks significant questions pertaining to the governance function of the nonprofit. Among the most direct questions asked are these, "Was a copy of the Form 990 provided to the governing board before it was filed?" All organizations must describe in Schedule 0 the process, if any, the organization uses to review the Form 990 (Part VI, Section A, Line 10). Below is a sample response you might use if this applies to your organization.
The draft version of Form 990 is submitted by our accounting firm to the Finance Committee for review. The Finance Committee reviews the 990 for accuracy and makes a recommendation to the Board that the report be approved and submitted.
From my perspective it is very interesting to see the IRS weighing in (and they carry a lot weight) on what might be debated as best practices for boards. At times it's easy to have endless debate over whether or not a particular practice is a best practice or not. The IRS is bringing clarity to a lot of these issues in Part VI of the core document of Form 990. Here are a few of the questions you must answer about the governing board when you complete the 2008 Form 990. Let me remind you - Form 990 is a public document and this information will be readily available to interested parties via GuideStar or other sources.
- Enter the number of voting members of the governing body
- Enter the number of voting members that are independent
- Did any officer, director, trustee, or key employee have a family relationship or a business relationship with any other officer, director, trustee or key employee?
- Did the organization contemporaneously document the meetings held or written actions undertaken during the year by the following:
- The governing board?
- Each committee with authority to act on behalf of the governing board?
Translated into common language - the IRS wants to know the size of your board and if any board members are related by blood, marriage, or business. They also want to know if you keep minutes of board and committee meetings while they are happening and not reconstructing them later.
Under Section B the IRS asks about your written conflict of interest policy, your written whistleblower policy, and your written document retention and destruction policy. In other words, are you complying with Sarbanes-Oxley legislation? Form 990 also explores compensation for the chief executive and senior staff.
The IRS is now documenting the governance practices of your organization for the interested public - including current and potential donors. Don't panic and don't wait until the last minute to begin preparing your board for its role in governing the organization and reporting on its activities through the new 990.
Contact us if you need help to addressing any of these governance issues or developing your board to provide the leadership your organization and clients deserve.