February 17, 20091

1
Prepare For The New 990

• Presented by
• HEATHER L. CAMPBELL, Esq.
• DORSEY WHITNEY LLP
• 801 Grand Avenue, Suite 3900
• Des Moines, Iowa 50309
• Ph [phone]

2
Learning Objectives

• At the end of this session, you will be able to
• Recognize key changes on the new Form 990
• Take steps now to prepare for the new Form 990 as
  it relates to compensation and governance

3
Agenda

• Background
• Overview of new Form 990
• Compensation Reporting In Depth
• Policy Reporting
• Additional Schedules
• Questions

4
Background

• IRS has approximately 1.3 million exempt
  organizations on its master file (not including
  churches)
• Last major redesign of the Form 990 was in 1979

5
Redesigned Form 990 - Overview

• Stated goals or guiding principals of redesign
• Increased transparency
• Provide the IRS and stakeholders a clear picture
• Increased compliance
• New form provides more data to demonstrate that
  assets are used for the exempt purpose
• Minimize the recordkeeping and filing burden

6
Accountability and Transparency

• Todays environment
• Non-profit financial scandals
• For-profit financial scandals
• Sarbanes-Oxley
• Public disclosure of 990/rise of Guidestar
• Legislative scrutiny

7
Where are we today?

• Final draft released December 20, 2007
• Draft instructions issued April 2008 with comment
  period that ended June 1, 2008. Final
  instructions August 2008
• Effective for 2008 filings (first due May 15,
  2009)
• Delay until 2009 filings for most questions on
  Schedule H (Hospitals) and Schedule K (Tax Exempt
  Bonds)

8
Transitional Relief

• Form 990-EZ may be filed instead of Form 990

9
Impact of Changes

• Reporting burden will increase for all
  organizations especially those with complex
  activities/structures
• Organizations may not currently have systems in
  place to gather the information required to be
  reported
• Organizations must begin to implement systems to
  gather the required data
• Organizations should review policies and process
  when addressing narrative questions within the
  filing which will allow for a favorable reporting

10
990-EZ

• Streamlined, four page form
• Part I- Revenue, Expenses
• Part II- Balance Sheets
• Part III- Statement of Program Service
  Accomplishments
• Part IV- List of Officers, Directors, Trustees,
  key Employees (and compensation)
• Part V- Other Information
• Part VI- Section 501(c)(3)

11
990-N

• Filing required for organizations whose gross
  receipts are normally 25,000 or less
• File an electronic notice postcard to the IRS
  instead of a 990-EZ or 990
• Requires taxpayer identification number, legal
  name of organization, tax year, mailing address,
  any other names organization uses, name and
  address of principal officer, website address if
  applicable, and confirmation that organization
  meets the gross receipts test

12
990- The Form and Schedules

• Total number of pages included in the core form
  and all schedules 80!!!!

13
The Form and Schedules (continued)The
redesigned form consists of a 11-page core form
and 16 schedules.
14
The Form and Schedules (continued)
15
Core Form

• Part I Summary
• Part II Signature Block
• Part III Program Services Accomplishments
• Part IV Checklist of Required Schedules
• Part V Other IRS Filings and Tax Compliance
• Part VI Governance, Management, and
  Disclosures
• Part VII Compensation
• Part VIII Statement of Revenues
• Part IX Statement of Functional Expense
• Part X Balance Sheet
• Part XI Financial Statements and Reporting

16
Most Significant Changes

• Front page summary snapshot
• New governance section
• New schedules to replace existing unstructured
  attachments with formal schedules
• Focus on compensation and excess benefit
  transactions
• Noncash contribution reporting
• Hospital reporting
• Tax exempt bonds arbitrage and private use
  focus

17
Form 990 Part I - Summary

• Description of organizations mission
• Snapshot of additional information related to
  activities and governance
• Number of voting members of governing body
• Number of independent members of governing body
• Total number of employees
• Total number of volunteers
• Total unrelated business income
• Net unrelated business income

18
Form 990 Part I Summary (continued)

• Revenue and expenses and balance sheet reporting
  in summary
• 2 year comparison

19
Form 990 Part III Program Accomplishments

• Description of organizations mission
• Description of three largest programs
• Measured by expenses incurred
• Reporting of expenses including grants
• New reporting of revenue derived from the
  activity
• Organization should present accomplishments for
  each program including statistical data to
  support how the program is fulfilling the
  organizations exempt purpose

20
Form 990 Part IV Checklist of Required
Schedules

• 37 questions to determine which of the schedules
  must be completed

21
Form 990 Part VIII Statement of Revenue

• Requires contributions, gifts, grants and other
  similar amounts to be detailed as
• Federated campaigns
• Membership dues
• Fundraising events
• Related organizations
• Government grants
• Other

22
Form 990 Part IX Functional Expenses

• Grants/assistance
• Fee for services
• Management
• Legal
• Accounting
• Lobbying
• Professional fundraising
• Investment management
• Other
• Travel/entertainment for public officials

23
Form 990 Part X XI Financial Reporting

• Part X - Balance Sheet
• Similar to prior 990
• Part XI Financial Statements
• Questions regarding an audit of financials

24
Compensation Reporting Within the Filing
Intermediate Sanctions Focus

• Public relations nightmares
• American University
• Smithsonian
• IRS migration from education to enforcement
• Compliance initiative
• State regulators
• Lack of independence of the board and executive
  committee

25
Redesigned Form 990

• Increased focus on compensation and transactions
  with insiders
• Policies
• Process
• Reporting
• Automatic excess benefit transactions

26
Schedule L Transactions with Interested Persons

• Transactions with insiders continue to be a focus
• Reporting includes
• Excess benefit transactions ((c)(3) and (c)(4)
  organizations only)
• Transactions with officers, directors, and key
  employees (i.e. loans, grants, business
  transactions)

27
Form 990 Part VII Compensation

• Disclosure of compensation and other financial
  arrangements with officers, directors, key
  employees and highly compensated independent
  contractors
• Calendar year W-2/1099 compensation reporting
• Other compensation retirement/fringe benefits
• Includes the reporting organization and related
  organizations

28
Form 990 Part VII Compensation (continued)

• Listing of individuals include
• All current officers, directors, trustees, and
  key employees
• Top five highest paid employees with compensation
  greater than 100,000
• Former officers, key employees or highest paid
  employees with compensation greater than 100,000
• Five year look back period
• Former directors or trustees with compensation
  greater than 10,000
• Five year look back period
• Top five highest paid independent contractors
  with compensation greater than 100,000

29
Officer

• Elected or appointed to manage organizations
  daily operations (i.e. president, vice president,
  secretary or treasurer)
• May be determined by reference to organizational
  documents, bylaws or resolutions of Board of
  Directors
• Includes individuals required by state law
• Includes the organizations top management
  official

30
Key Employee

• Employee of the organization who has
• Responsibilities, powers or influence over the
  organization as a whole that is similar to those
  of officers, directors or trustees
• Manages a discrete segment or activity of the
  organization that represents 5 or more of the
  activities, assets, income or expenses of the
  organization, as compared to the organization as
  a whole
• Has or shares authority to control or determine
  5 or more of the organizations capital
  expenditures, operating budget or compensation of
  employees
• May include individuals within disregarded
  entities

31
Key Employee (continued)

• Does not include
• Persons with reportable compensation from the
  filing and related organizations that does not
  exceed 150,000
• Threshold is currently being reevaluated
• Management companies and similar entities that
  are independent contractors

32
Schedule J - Compensation Information

• Required to be completed if Part VII includes
• Any former officer, director or trustee, key
  employee, or highest compensated employee
• Individuals whose reportable compensation and
  other compensation (i.e. benefits) from the
  organization and related organization is greater
  than 150,000
• Any person who receives or accrues compensation
  from any unrelated organization for services
  rendered to the organization

33
Schedule J - Compensation Information (continued)

• Whether substantiation is required before
  reimbursing or allowing expenses to be incurred
  by all officers, directors, trustees and
  CEO/Executive Director
• REMEMBER automatic excess benefit transactions
• Requires indication of the processes used in
  setting compensation for CEO/Executive Director
• Compensation committee
• Independent compensation consultant
• Comparison of Form 990 of other organizations
• Written employment contract
• Compensation survey or study
• Approval by the Board of Directors or
  compensation committee

34
Schedule J - Compensation Information (continued)

• The following disclosures are required
• Whether the organization provided any severance
  payments, supplemental nonqualified deferred
  compensation or equity-based compensation
  arrangement
• Whether any payments are contingent on revenue or
  net earnings
• Whether the organization provides any non-fixed
  payments
• Whether the organization made any payments
  subject to the initial contract exception
• Yes response to the above requires an
  explanation

35
Schedule J Compensation Reporting

• For those individuals requiring disclosure, the
  following must be disclosed
• W-2 and/or 1099 from Part VII must be broke down
  into based compensation, bonus/incentive
  compensation and other compensation
• Deferred compensation other than amounts included
  in the W-2
• Nontaxable benefits
• Compensation reported on prior Form 990

36
Form 990 Part VI Corporate Governance

• Governing Body and Management
• Number of voting members and independent members
  on board
• Business and family relationships among directors
  and officers
• Delegation of control to a management company
• Changes to organizational documents
• Whether organization has members or stockholders
  and their power to elect directors and approve
  other transactions
• Whether organization keeps minutes of board and
  committee meetings
• Whether there are local chapters, branches or
  affiliates
• Whether a copy of 990 is provided to governing
  board before it is filed
• Whether any director or officer cant be reached
  through organizations mailing address

37
Form 990 Part VI - Corporate Governance
(continued)

• Disclosures
• List states where 990 is required to be filed
• List how 1023, 990, and 990-T are disclosed (own
  website, another website, upon request)
• Describe how governing documents, conflict of
  interest policy and financial statements are made
  available to the public

38
Form 990 Part VI - Corporate Governance POLICIES

• IRS admits not all policies are required by law
• In public statements about the form, the IRS has
  indicated that exempt organizations that fail to
  indicate that they have followed recommended
  governance policies may be at a significantly
  greater risk of audit.

39
Form 990 Part VI - Corporate Governance
POLICIES (continued)

• Policies for which there is a yes or no
  question
• Conflicts of Interest Policy
• Whistleblower Policy
• Document Retention and Destruction Policy
• Compensation Policy
• Policy Requiring Safeguarding Exempt Status with
  Respect to Transactions and Arrangements with
  Joint Ventures and Subsidiaries Expense
  Reimbursement Policy
• Expense Reimbursement Policy (Schedule J)
• Gift Acceptance Policy (Schedule M)

40
Form 990 Part VI - Corporate Governance
(continued)

• Other Policies and Procedures Mentioned or
  Implied in Redesigned Form 990
• Conservation Easement Policy (applicable to
  conservation organizations)
• Policy Regarding Tax-Exempt Bond Compliance
  (applicable to organizations with tax exempt
  bonds)
• Community Benefit Report (applicable to
  hospitals)
• Charity Care Policy (applicable to hospitals)
• Debt Collection Policy (applicable to hospitals)

41
Conflict of Interest PolicyQuestions 12(a)(b)(c)
on Part VI, Section A

• Are officers, directors or trustees, and key
  employees required to disclose annual interests
  that could give rise to conflicts?
• Does the organization regularly and consistently
  monitor and enforce compliance with the conflict
  of interest policy? If yes, describe how this is
  done.
• Describe whether (and if so, how) the
  organization makes its conflict of interest
  policy available to the public (Part VI, Section
  C, 19)

42
Conflict of Interest Policy

• Legal Basis
• Arises out of duty of loyalty
• Required of directors under most states
  nonprofit corporation statutes

43
Conflict of Interest Policy

• Components
• Should apply to directors and key employees and
  their family members
• Determination of existence of conflict is made by
  governing body
• Should apply to fiduciary and financial conflict
• Should require disclosure of conflict and
  abstention from voting on matter
• Consider whether directors should be required to
  leave the room

44
Conflict of Interest Policy

• Implementation
• Encourage persons subject to policy to err on
  side of disclosing conflict
• Require that persons subject to policy complete
  conflict of interest disclosure forms and update
  them in a timely manner
• Make conflict of interest policy available to
  public
• Consider standing agenda item

45
Whistleblower PolicyQuestion 13 on Part VI,
Section A

• Does the organization have a written
  whistleblower policy?

46
Whistleblower Policy

• Components
• Should set forth a formal process to deal with
  complaints and prevent retaliation, including
  identifying how the complaints should be reported
  and who should resolve the complaints
• Should encourage employees to report potential
  problems as soon as they arise (possibly offering
  the option of maintaining anonymity)
• Ensure protection from retaliation for those who
  choose to report concerns even if claims are
  unfounded (not only from termination but from
  other negative employment actions such as
  demotion, suspension or relocation, harassment,
  failure to consider the employee for promotion)
• Consider whether policy should apply to
  volunteers as well as employees

47
Whistleblower Policy

• Implementation
• Boards role is to ensure that there is a system
  in place to receive reports about what comes in
  through the system and make sure concerns are
  addressed
• A hot line may not be appropriate for all
  organizations, but a suggestion box or other
  means for employees to report concerns may
  suffice
• Need to investigate employee complaints and
  correct any problems or explain why corrections
  are not necessary.

48
Document Retention and Destruction
PolicyQuestion 14 on Part VI, Section A

• Does the organization have a written document
  retention and destruction policy?

49
Document Retention and Destruction Policy

• Components
• Should cover document integrity, retention and
  destruction
• Should cover financial records, significant
  contracts, real estate and other major
  transactions, employment files and fundraising
  obligations
• Should cover guidelines for handling electronic
  files and voicemail messages and cover back up
  procedures, and regular system reliability checks
• IRS Publication 4221, Compliance Guide for
  501(c)(3) Tax-Exempt Organizations provides
  further document retention detail

50
Document Retention and Destruction Policy

• Implementation
• If an official investigation is underway or even
  suspected, nonprofit management must stop any
  document purging in order to avoid criminal
  obstruction charges

51
Compensation PolicyQuestion 15 on Part VI,
Section A

• Did the process for determining executive
  compensation include a review and approval by
  independent persons, comparability data, and
  contemporaneous substantiation of the
  deliberation and decision? The organizations
  CEO, Executive Director or top management
  official? Other Officers or key employees?
• Describe the process.

52
Compensation Policy(aka Rebuttable Presumption
of Reasonableness Policy)

• Legal Basis
• Section 4958 of the IRC imposes taxes on persons
  approving compensation of disqualified persons
  if they approve unreasonable compensation
• Tax is on both person approving compensation and
  disqualified person
• In most cases, directors cannot be indemnified
  against tax
• A disqualified person includes
• Voting members of Board of Directors, President,
  CEO, COO, Treasurer, CFO
• Others who exercise substantial influence over
  the affairs of the organization determined on a
  facts and circumstances test
• Rebuttable presumption of reasonableness safe
  harbor

53
Compensation Policy (continued)(aka Rebuttable
Presumption of Reasonableness Policy)

• Components
• Compensation of disqualified persons is
  approved by Board of Directors/committee composed
  of individuals without conflict of interest
• Board relied on appropriate data as to
  reasonableness
• Board adequately documents the basis for its
  determination at the time it makes determination
  (not after the fact)

54
Appropriate Data

• Data is appropriate if, given the knowledge and
  expertise of its members, it has information
  sufficient to determine whether a compensation
  will result in the payment of reasonable
  compensation

55
Appropriate Data (continued)

• Relevant information includes
• Compensation levels paid by similarly situated
  organizations, both taxable and tax exempt, for
  functionally comparable positions
• The availability of similar services in the
  geographic area of the applicable tax exempt
  organization
• Current compensation surveys compiled by
  independent firms and
• Actual written offers from similar institutions
  competing for the services of the disqualified
  persons.

56
Adequate Documentation

• For a decision to be documented adequately, the
  written or electronic records of the authorized
  body must note
• The terms of the transaction that was approved
  and the date it was approved
• The members of the authorized body who were
  present during the debate on the transaction or
  arrangement that was approved and those who voted
  on it.

57
Adequate Documentation (continued)

• The comparability data obtained and relied upon
  by the committee and how the data was obtained
  and
• Any actions taken with respect to consideration
  of the transaction by anyone who is otherwise a
  member of the authorized body but who had a
  conflict of interest with respect to the
  transaction.

58
Adequate Documentation (continued)

• Record must reflect if the authorized body
  determines that reasonable compensation for a
  specific arrangement is higher or lower than the
  range of comparability data obtained
• Record must be prepared before the later of the
  next meeting of the authorized body or 60 days
  after the final action or actions of the
  authorized body are taken.
• Records must be reviewed and approved by the
  authorized body as reasonable, accurate and
  complete within a reasonable time period
  thereafter.

59
Expense Reimbursement PolicySchedule J,
Question 1(a)(b)

• Indicate whether the organization provided any
  of the following to officers and certain highly
  compensated persons listed on Form 990
• First class or charter travel
• travel for companions
• tax indemnification and gross-up payments
• discretionary spending account
• housing allowance or residence for personal use
• payments for business use of personal residence
• health or social club dues or initiation fees
• personal services (e.g., maid, chauffeur, chef)
• If yes, did the organization follow a written
  policy regarding payment or reimbursement or
  provision of the expenses

60
Expense Reimbursement Policy

• Legal Basis
• Total compensation paid to disqualified persons
  must be reasonable
• Nonprofit organizations are permitted to pay for
  or reimburse ordinary and necessary expenses
  incurred while carrying out the organizations
  activities, including the costs of travel
• Reimbursement should be consistent with recent
  IRS guidance on the required elements of an
  accountable plan expense reimbursement
• Otherwise, it must be reportable as taxable
  income to individual receiving such
  reimbursements, which means additional taxes must
  be withheld
• Accountable plan requires
• Business reason for the expense
• The employee adequately accounts for business
  expenses within a reasonable time
• The officer or employee returns any amount of
  excess reimbursement within a reasonable time

61
Gift Acceptance PolicySchedule M, question 31

• Does the organization have a gift acceptance
  policy that requires the review of any
  non-standard contributions?

62
Gift Acceptance Policy

• Components
• Organizations mission
• Purpose of gift acceptance policy
• Policy on gift restrictions
• Types of gifts and forms of gifts that
  organization will accept
• Reporting requirements
• Adherence to ethical standards
• Gift acceptance committee
• Annual review

63
Schedule G Fundraising or Gaming Activities

• Required to be completed if
• 15,000 or more paid to a professional fundraiser
• 15,000 or more in fundraising/gaming revenue
• Organizations must report types of activities
  used to raise funds
• Reporting of ten highest paid fundraisers with
  compensation of 5,000 or more
• Listing of all states organization is registered
  or licensed to solicit funds
• Reporting of top results of top two and all other
  events

64
Schedule I Grants and Other Assistance to Orgs,
Government, and Individuals in the US

• Requires detailed information on grants and
  assistance to governments/organization and
  individuals
• Organizations must note number of recipients
• (c)(3) organizations and government
• Individuals

65
Schedule K Tax-Exempt Bonds

• Requires information on outstanding tax exempt
  bond issues
• Detailed information required on outstanding bond
  issues greater than 100,000
• Information on use and investment of bond
  proceeds
• Disclosures of private use
• Arbitrage reporting and compliance
• Transitional rules
• 2008 reporting requires only Part I basic
  identifying 2009 entire schedule required

66
QUESTIONS?