The new discussion draft Form 990, dubbed "the biggest thing the Exempt Organizations Division at the IRS has done in the last quarter century," by division director Lois Lerner, could be both a boon and a burden for preparers.The Internal Revenue Service hopes that the form, already released for comment, will be ready for use for tax year 2008.

"The tax-exempt sector has changed markedly since Form 990 was last overhauled more than a quarter of a century ago," said Acting IRS Commissioner Kevin Brown. "We need a Form 990 that reflects the way this growing sector operates in the 21st century. The new 990 aims to give both the IRS and the public an improved window into the way tax-exempt organizations go about their vital mission."

Although Sens. Chuck Grassley, R-Iowa, and Max Baucus, D-Mont., wrote the Treasury Department in May urging it to update the form, the revision was in the works for some time, according to Suzanne Ross McDowell, a partner in the Washington office of Steptoe & Johnson LLP and a member of the IRS Advisory Committee on Tax-Exempt and Government Entities, which presented recommendations in June 2006.

"It's a major redesign of the form that has been in the works for years," she explained. "The form has been tweaked year after year, and it reached the point where it was not well organized. Questions on the same or similar subjects were in different parts of the form as a result of IRS rules for forms. When they want to add something to an existing form, they end up having to put it in a place where it's not entirely logical."

"It's really a big thing," said Susan Cobb, counsel in the Tax Practice Group at the Washington office of Powell Goldstein LLP. "We're just now digesting the minutiae. Over the years, the IRS has revised the form in a piecemeal fashion. They've just added the changes brought about by the Pension Protection Act of 2006. Now they've taken the whole form, built in those changes and added a combination of new and previous but revised structural changes."

The first page of the form is a summary of the rest of the form. Among its questions, it asks the organization's mission; its three most significant activities; the number of independent members of its governing body; the number of individuals receiving more than $100,000; the highest compensation amount; the compensation of officers, directors, trustees and other key employees; contributions and grants; program service revenue; membership dues and assessments; investment income; management and general expenses; and fundraising expenses as a percentage of contributions.


"Researchers and the press will only look at the summary sheet, so practitioners and exempt organizations should look carefully at that page and comment on it if they don't think the information required is an accurate measure of the organization's performance as a charity," advised McDowell.

Cobb, however, is wary of the comment period's tight timetable. "They want to use the new form for the 2008 year, with a May 15, 2009, filing date," she said. "So they want all the comments in by Sept. 15. That's a lot to digest by then."

A number of the questions have nothing to do with taxes, but are an attempt to zero in on issues that the IRS seeks to bring into the open, McDowell noted. "It's significant that there is an entire section on governance," she said. "It asks if the organization has a written conflict-of-interest policy, a written whistleblower policy and a document retention policy. All of these questions were inspired by Sarbanes-Oxley."

Although Sarbanes-Oxley applies to the public company sector, those problems also affect the exempt organization area, according to Geralyn R. Hurd, an executive in the Tax Services Group at Crowe Chizek's Chicago office. "It traces back to Sarbanes-Oxley," she said.

The governance questions in Part III are typically related to state law requirements, according to Cobb. "The IRS admits they don't have any enforcement in this area, but they're still asking the questions. Form 990s are public documents available for anyone to see. The questions aren't really part of the tax law, so they're getting beyond what was in the form before."

"Schedule A delves into public charity status. It's attempting to examine support to make sure the organization is really public. It may replace the old advance ruling process," she said. "Schedule L is an interesting schedule on loans. It's been a big concern with many nonprofits making loans to insiders. They've also added Schedule R on related organizations. They want to know any relationships the nonprofit has with any other entity it controls or is involved with, such as a partnership or a sole member of an LLC."

"Tax arbitrage - using tax-exempt bond proceeds and placing them in investments with a greater return than the interest that would be paid on the bond itself - is another issue that is hot on the Hill and is reflected in this 990," pointed out Ann Thomas of the Tax Practice Group at Powell Goldstein. "There's a lot in the form that asks an exempt organization to provide written narratives. Those that are able to afford people to craft that language may be in a better position."


The redesign of the form is based on three guiding principles, according to the IRS's Lerner: enhancing transparency, promoting compliance and minimizing the burden on filers.

"Most organizations should not experience a change in burden," she said. "However, those with complicated compensation arrangements, related-entity structures and activities that raise compliance concerns may have to spend more time providing meaningful information."

Nevertheless, Cobb believes that many organizations will need help. "There will be a lot more nonprofits that will have to hire professionals to help with this form," she said. "It should provide a lot of work for accountants."

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