Firms claim redesigned form for nonprofits is time- and labor-intensive
Aside from the headaches of having to fundraise during a time when more donors are keeping their checkbooks closed, now not-for-profits have to contend with a new Form 990 - one that many say is tedious, time-intensive and generally more challenging.
CPAs who work with nonprofit clients have been doing some handholding and prep work with them - especially the larger organizations - on how to handle the revised version of the form, which was first issued in 2007. Smaller organizations - those with gross receipts of between $500,000 and $1 million - will be required to file the new 990 beginning next tax year.
According to the Internal Revenue Service, the form had not been revised since 1979, and was created to be consistent with their guiding principles of "transparency, compliance and burden minimization." The old form failed to recognize changes in tax law and the increasing size, diversity and complexity of the nonprofit sector.
While most CPAs will agree that transparency and compliance have been increased with the issuing of the new form, the burden has not been minimized.
"With all due respect to the IRS, they should not make those statements with a straight face, because there is no group of nonprofit executives in America they could say that to without being laughed out of the room," said Michael Batts, founder and managing shareholder of Orlando, Fla.-based Batts, Morrison, Wales & Lee, a firm specializing in nonprofit clients. "There might be some very valid reasons for the expansion of the new 990, but to say it has streamlined or minimized the burden on the organization that's filing is a preposterous statement."
WORK = TRANSPARENCY
However, minimizing doesn't mean reducing, according to Lois Lerner, director of exempt organizations for the IRS. "It means, in the context of what we're developing, let's figure out a way to create the least amount of burden to still meet the transparency and promote compliance goals that we have."
Lerner recognized that the change will have some organizations doing more under this form than others, yet points out that there is a three-part phase-in period - according to size - to help these groups transition. In this first year, only the largest organizations are responsible for the form.
"I'm not surprised that people are saying, 'Boy this first go-around is really a lot of work we didn't have to do before,'" Lerner said. "But I think once they've done that, next year for the next organizations, it will be simpler because they will have the systems in place."
The new version includes a core form of 11 pages and up to 16 schedules, or additional questionnaires to fill out depending on how a previous answer is addressed. Organizations complete only the schedules that apply to them.
"The 990 was overhauled tremendously," echoed Tene Thomas, a CPA and principal at McConnell & Jones LLP in Houston. "To me, this can be viewed as a tool to promote the organization's mission, their accomplishments, their programs, so that's good. But minimizing the burden, that's where the controversy is. My question is, minimizing the burden to whom?"
Thomas said that the burden is essentially lessened for the IRS, because it helps them identify taxpayers who are not compliant or who are a high-risk audit. "It certainly doesn't minimize the burden for the organization itself and the governing board," she said. "It increases their burden, really. Board members ... need to know how to navigate this 990, they need to understand the organization's mission, their activities, how financials relate to those activities, how they relate to the mission, as well as the tax laws that are applicable."
The focus of the new form is examining conflicts of interest, ethics and other policies, according to Stephen Mannhaupt, a partner and the not-for-profit niche leader at Grassi & Co. in Lake Success, N.Y. He said that the revision is an opportunity for nonprofits to focus on improvements and transparency. "Whether it's re-examining executive pay or vendor choices, the result should be a 'cleaner' not-for-profit environment," he said. "We feel the new 990 is a wake-up call for many organizations and should be viewed as an opportunity, not a burden."
The IRS's Lerner agreed: "The other thing this form does that the previous form did not is it actually requires much more of a conversation within the organization. The old form was filled out by the CPA based on numbers; the new form requires the organization and board to actually participate in the process."
CLIENT EDUCATION NEEDED
Monic Ramirez, tax manager for Ireland San Filippo in Morgan Hill, Calif., said that the biggest challenge is educating clients.
"The 990 tended to be an afterthought for a lot of board members, except for the one person that has to work with us on it," Ramirez said. "Now I think they are a little bit more concerned, realizing there is a lot more liability and compliance issues that are coming out and being brought to the IRS's attention."
The IRS sanctioned a graduated transition period that allows organizations to use a form called the Form 990-EZ, a truncated version of it larger sibling. For those returns filed this year, organizations with gross receipts of more than $1 million or total assets over $2.5 million will be required to file the new Form 990. For the 2009 tax year, or returns filed in 2010, organizations with gross receipts more than $500,000 or total assets over $1.25 million will be required to file the updated version.
Beginning with the 2010 tax year, the IRS said that the filing thresholds will be set permanently at $200,000 in gross receipts and $500,000 in total assets. Very small tax-exempt organizations - those with tax receipts of $25,000 or less - need to submit an electronic form called the 990-N or e-Postcard.
"The very small nonprofits are able to take advantage of the shorter form," said Phil Hunrath, partner-in-charge of the nonprofit practice at Fazio, Mannuzza, Roche, Tankel, LaPilusa in Springfield, N.J. "But for larger organizations, the form has substantially increased the amount of disclosure. It's put not-for-profits almost on a par with publicly held corporations, asking a lot of questions about their governance, their policies and much more specific questions about their finances." He said that filling out the form isn't necessarily the hard part, it's collecting the necessary information that can be challenging - and time-consuming.
PROACTIVE MEASURES
As a result of this, McConnell & Jones sends out a "pre-organizer" to help clients gather the information needed to fill out the form.
At Batts' firm, systems have been put in place to help the process. For instance, sample policies have been created for clients to use as guidelines: "Our firm developed a number of sample policies and procedures that we've shared with our clients for them to evaluate together with their legal counsel, which at least gives them a starting point."
The form digs for answers to questions regarding information about activities outside of the U.S. and how an organization maintains those records and monitors those grants, according to Hunrath. It also asks nonprofit executives to disclose compensation of key employees and, if board members or trustees receive compensation, how that compensation is determined. It also asks if there is a compensation committee, and if there are any written employee contracts. Hunrath said that new questions have appeared surrounding governance, asking if there is a written conflict-of-interest policy and a whistleblower policy, how they are disclosed to the employee, and how they are enforced.
"[Clients] think it's overkill," he said.
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