A completely revised Form 990 will require an overhaul of internal policies and procedures for most tax-exempt organizations, according to Joyce Underwood, director of nonprofit taxation at BDO Seidman's Institute for Nonprofit Excellence.

The form, Return of Organization Exempt From Income Tax, is filed by most Section 501(c)(3) charitable organizations, as well as most other organizations that are exempt from tax under Section 501(a).

"With the end of the year approaching, tax-exempt organizations should put in place certain policies that the form questions," she advised.

The new form and its 16 schedules will apply to organizations filing calendar year 2008 returns in May 2009, and fiscal year 2009 returns, she noted.

Keith Kehrer, a tax attorney and partner in the St. Louis office of Bryan Cave LLP, agreed. "I advise tax-exempt clients to review their policies now, especially in the government, management and disclosure areas, and make appropriate changes before the end of 2008," he said. "Organizations have the choice now to adopt certain IRS recommendations or risk potential scrutiny. Some relatively easy and potentially prudent changes can help avoid raising red flags with IRS auditors."

The new 990 puts more emphasis on organizations' management policies and procedures, "putting teeth" into what were previously just recommended best practices. "But just how sharp the teeth are, and how deeply they bite, remains to be seen," said Kehrer. "The IRS came out with a best-practices list in February 2007, and a lot of tax-exempts ignored them. However, it's one thing for the IRS to come out with a list, and another for the IRS to have a form that says, 'These are recommendations and you have to disclose to the public whether you follow them and explain it if you don't.'"

The form asks numerous questions about governance, management and disclosure, as well as compensation of officers, directors, trustees, key employees, the highest compensated employees, and independent contractors.

"It's not just an accounting form anymore," said Elaine Waterhouse Wilson, a CPA and partner in Quarles & Brady's tax-exempt organizations practice in Chicago. "It's not just a tax return, it's a marketing document. You're saying to the public 'This is who we are.' It's advisable to get your PR people involved, as well as accountants and attorneys."


"A great concern among filers of the Form 990 is how an organization will be able to gather all the information that is requested about transactions with the organization and the relationships among its directors, officers and employees without overburdening them," said William F. Gaske, counsel at New York-based Patterson Belknap Webb & Tyler LLP.

"The new form requires organizations to disclose a wide array of relationships, arrangements and transactions involving conflicts of interest and independent decision-making by their governing bodies," he noted. "Part of the issue is how they're going to gather all this data. Organizations will need to adopt new procedures to collect the information and figure out what to do with it."

Although the old Form 990 required disclosures about relationships among directors, trustees, officers and key employees, the new form adds the categories of interested persons and independent directors, observed Gaske.

The new form consists of an 11-page core form, to be completed by each filer, and 16 different schedules designed to gather specific information in particular areas.

"Although the form asks organizations whether they have a written conflict-of-interest policy, the IRS does not require them to have it," said Underwood. "The IRS has indicated that at the end of an audit they will look back to key governance areas and see if there's a correlation between these and audits that go well. If there is a correlation, they may be stricter in the future in requiring these. They feel it's important to have well-run organizations, and they want to get some evidence to support that."

Underwood suggested that organizations that have an informal policy should consider actually putting the policy in place, and check if the board needs to approve it.

"Another area of concern is the calendar," she said. "Organizations need to be careful when they schedule their audit and tax preparation, so they have the time necessary to prepare this new form. The form asks whether a copy of Form 990 was provided to the organization's governing body before it was filed, and asks the organization to detail the process, if any, that it uses to review the form."

The IRS has provided transitional relief in the form of higher filing thresholds for Form 990-EZ, to allow time to adjust to the new Form 990, noted Underwood. For 2008, organizations with gross receipts between $25,000 and $1 million, and total assets less than $2.5 million, may file the Form 990-EZ. And Form 990-N may be filed for small organizations with gross receipts under $25,000.

"Form 990-N, an e-postcard, was introduced last year for small organizations," Underwood noted. "Under the Pension Protection Act of 2006, if an organization doesn't file for three years in a row, they'll lose their exemption. However, there is still an exclusion for churches and other organizations that otherwise would not be required to file."

Both Underwood and Kehrer recommended that exempt organization leadership become familiar with the new form before year's end. "Take a look at the questions it asks, and decide, for example, if it makes sense to adopt a written conflict-of-interest policy, or if existing procedures already take care of potential abuses," said Kehrer. "It's not too late to institute some of the policies. The form doesn't ask if you had them in place for the entire year, simply if they are in place at the end of the tax year."

"The absence of such policies will not necessarily lead to an audit," Kehrer said, "but the IRS has said it will use the information in conjunction with other information in the form and decide whether further investigation is warranted."

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