Transcript IRS FORM 990 - Michael Malamut

Updating Nonprofit Governance
to Address the New Form 990
Michael E. Malamut
Kopelman and Paige, P.C.
Boston
Massachusetts Nonprofit Network
Strengthening Nonprofits in an Age of
Precious Resources
October 24, 2008
TABLE OF CONTENTS
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Reasons to Implement form 990 Policy Directives
Form 990-EZ Eligibility
Form 990-EZ Changes
Form 990-EZ Schedules
Phase-In to Full Form 990
Form 990, Part VI, Governance
Form 990, Part VI, Sec. A, Governing Body
and Management
Directors & Independent Directors
2008 Instructions for Form 990 Glossary
Director or Trustee
Independent Voting Member
Reasonable Effort
Governing Document Changes
Instructions for Form 990 Part VI Line 4, Changes to
Organizational Documents
5
7
8
9
10
12
13
14
16
16
17
19
20
22
•Minutes
•Instructions for Form 990 Part VI, Line 8, meaning
of contemporaneous
•Chapter Relations Policies
•Form 990 Review
•Form 990 Part VI, Sec. B Policies
•Standard Policies: Conflict of Interest,
Whistleblower, Document Retention
•2008 Instructions for Form 990 Glossary
conflict of interest policy
family member
business relationship
•A Pair of SOX: Whistleblower & Document
Retention Policies
•Form 990 Schedule J, Part I, Compensation
•Compensation Policy
•Joint Venture Policy
•Form 990, Part VI, Sec. C, Disclosure
•Governance Disclosure Policy
•Form 990, Part XI
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25
26
28
29
30
32
32
33
34
35
36
37
39
40
41
42
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Audit Committee Charter
2008 Instructions for Form 990 Glossary
audit committee
Form 990 Schedule M, Non-Cash Contributions
Gift Acceptance Policy
IRS Advisory Committee on Tax Exempt and
Government Entities (ACT)
Conclusion
Future Trends
What to do for Mid-Size to Large Nonprofits
What to do for Small and Small, Small
Nonprofits
Where to Go
IRS Information on Form 990 Governance
Issues
Brief Biography
43
45
45
46
47
48
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54
55
56
57
59
60
Reasons to Implement Form 990
Policy Directives
• Governance practices referred to in the Form
are not mandates.
• Donors, ratings agencies, and local tax and
nonprofit governance regulators can be
expected to review governance responses on
the Form 990 in their evaluations.
• The IRS may also use responses to evaluate
which returns warrant more careful review or
possible audits.
• Gadflies and disgruntled members can be
expected to review nonprofit organizations’
publicly available Form 990 filings.
• For these reasons, exempt organizations
filing the new Form 990 are strongly
encouraged by the reporting requirement
to adopt policies that will allow them to put
down the “right” answers to the
governance questions.
Form 990-EZ Eligibility
May file 990EZ for:
If gross
receipts are:
And if total
assets are:
2008 Form
(generally filed
in 2009)
2009 Form
(generally filed
in 2010)
2010 and later
Forms
>$25,000 and
<$1,000,00
<$2,500,000
>$25,000 and
<$500,000
<$1,250,000
>$50,000 and
<$200,000
<$500,000
Form 990-EZ Changes
• The Form 990-EZ has also been revised, but
much more modestly than the Form 990.
• Similar information to that required under the
old Form 990-EZ is still required, but previously
it was requested in unstructured narrative
format. Now 7 Schedules from the Form 990
are incorporated, in full or modified format, in
the Form 990-EZ.
• Schedule L, Transactions with Interested
Persons, relates to conflict of interest policies.
• The other Form 990-EZ Schedules do not have
significant governance policy implications.
Form 990-EZ Schedules
 Schedules based on Form 990 Schedules
included in the Form 990-EZ are:
• Schedule A Public Charity Status
• Schedule B Contributors
• Schedule C Campaign and Lobbying Activities
• Schedule E Schools
• Schedule G Fundraising
• Schedule L Transactions with Interested
Persons
• Schedule N Liquidation, Termination, and
Disposition of Assets
Phase-In to Full Form 990
• Because of the phase-in of the new Form 990, it
will apply to 2008 tax year returns for most large
exempt organizations ($1,000,000 in gross
receipts or $2,500,000 in assets).
• For the 2009 tax year, the new Form 990 will
apply to organizations with at least $500,000 in
gross revenues or $1,250,000 in assets, with
limited exceptions.
• For the 2010 tax year, intended as final phasein, almost all exempt organizations with gross
receipts above $200,000 or assets over
$500,000 will be covered.
• This phase-in period gives organizations limited
time to implement governance policies called for
in the new Form.
• Organizations that have not yet started to
prepare for the new Form 990 should start
thinking about how to perform a real governance
review.
• Sample policies are readily available online and
in commercially available publications.
Form 990 Part VI Sec. A
Directors & Independent
Directors
• The Form 990 inquires about the total number of
directors and the number of independent
directors who meet the definition in the
instructions.
• Comparison of the numbers readily discloses
the percentage of independent directors.
• After commentary during the Form 990 revision
process, the definition of independent excludes
ordinary members of membership associations
and substantial donors who do not have other
transactions with the organization.
•Organizations may consider amending their
bylaws or adopting nomination policies to
encourage board composition with a high
percentage of members meeting the
instructions’ definition of independent.
2008 Instructions for Form 990 Glossary
director or trustee A member of the
organization’s governing body, but only if the
member has any voting rights. A member of an
advisory board that does not exercise any
governance authority over the organization is not
considered a director or trustee.
2008 Instructions for Form 990 Glossary
2008 Instructions for Form 990 Glossary
2008 Instructions for Form 990 Glossary
Governing Document Changes
• Narrative description is required for all significant
changes in an organization’s “organizational
documents.” This includes constitution, bylaws,
articles of incorporation or organization, and, for
trusts, a trust instrument or declaration of trust.
• Nonprofit organizations contemplating any bylaw
change must review the instructions: (1) to
determine if the change is significant; and (2) to
consider the public perception of its narrative
description of the change.
• This requirement will undoubtedly
discourage bylaws amendments, and will
encourage migration of provisions from
bylaws, which are reportable, to policies,
which are not reportable.
Instructions for Form 990 Part VI Line 4
Changes to organizational documents. The organization must
report significant changes to its organizing or enabling document by
which it was created (articles of incorporation, association, or
organization; trust instrument; constitution; or similar document), and to
its rules governing its affairs commonly known as bylaws (or regulations,
operating agreement, or similar document). Report changes made since
the prior Form 990 was filed, or that were not reported on any prior
Form 990. Do not report changes to policies described or established
outside of the organizing or enabling document and bylaws (or similar
documents), such as adoption of, or change to, a policy adopted by
resolution of the governing body that does not entail a change to the
organizing document or bylaws.
Minutes
• The Form asks whether the organization
contemporaneously documents its board
meetings and meetings of committees with
power to act.
• These questions encourage boards and
board committees to formalize the
recording of their procedures and to
determine what level of detail they want in
the minutes.
• It may encourage adoption of minutes
policies or adoption by reference of a
parliamentary authority that prescribes
standardized methods for recording and
adopting minutes.
• Parliamentary authorities with guidance on
minutes include Robert’s Rules of Order
Newly Revised, Alice Sturgis’s Standard
Code of Parliamentary Procedure, Ray
Keesey’s Modern Parliamentary
Procedure, and Donald Tortorice’s Modern
Rules of Order.
Instructions for Form 990 Part VI Line 8
For this purpose, contemporaneous means by
the later of (1) the next meeting of the governing
body or committee (e.g., approving the minutes
of the prior meeting), or (2) 60 days after the
date of the meeting or written action. If “No,”
explain in Schedule O the organization’s
practices or policies, if any, regarding
documentation of meetings and written actions
of its governing body and committees with
authority to act on its behalf.
Chapter Relations Policies
• The Form asks whether multi-level associations
have policies and procedures to ensure
consistency throughout the organization.
• This will encourage central or superior
organizations within multi-level associations to
adopt chapter relations policies (or unit, division,
lodge, constituent, component, regional, or local
relations policies, as the case may be).
• Similarly, associations will be encouraged
to adopt bylaws provisions and consistent
sample chapter (or other appropriate unit)
charters and bylaws with stronger
oversight provisions.
Form 990 Review
• The Form asks whether each member of the
Board reviewed the final draft of the Form 990
before it was filed and requires a narrative
description of the review process.
• Cursory submission to Board members
immediately before filing, just to be able to
answer “yes,” will not look good.
• Boards will need to consider adopting a Form
990 review policy that provides adequate time
for meaningful review and a method for allowing
feedback and revisions based on Board input.
Form 990 Part VI Sec. B
Standard Policies: Conflict of Interest,
Whistleblower, Document Retention
• The Form 990 asks whether organizations have
conflict of interest, whistleblower, and document
retention/destruction policies.
• Conflict of interest policies have long been a
good governance standard and are prescribed
for many nonprofit organizations by state statute,
for example in New York.
• The Form 1023 application for 501 (c) (3) status
has for several years suggested that applicants
adopt a conflict of interest policy.
• Nonprofits with conflict of interest policies
need to consider revising the policies in
light of the new Form 990 instructions.
• For nonprofits that have not yet adopted a
conflict of interest policy, it is time to do so.
The policy should incorporate the
minimum requirements set out in the
Instructions.
2008 Instructions for Form 990 Glossary
• conflict of interest policy A policy that defines conflict of interest,
identifies the classes of individuals within the organization covered
by the policy, facilitates disclosure of information that may help
identify conflicts of interest, and specifies procedures to be followed
in managing conflicts of interest. A conflict of interest arises when a
person is in a position of authority over an organization, such as an
officer, director or manager, may benefit financially from a decision
he or she could make in such capacity, including indirect benefits
such as to family members or businesses with which the person is
closely associated. For this purpose, a conflict of interest does not
include questions involving a person’s competing or respective
duties to the organization and to another organization, such as by
serving on the boards of both organizations, that do not involve a
material financial interest of, or benefit to, such person.
2008 Instructions for Form 990 Glossary
family member, family relationship
Unless specified otherwise, the family of
an individual includes only his or her
spouse, ancestors, brothers and sisters
(whether whole or half blood), children
(whether natural or adopted),
grandchildren, great grandchildren, and
spouses of brothers, sisters, children,
grandchildren, and great grandchildren.
2008 Instructions for Form 990 Glossary
business relationship Business relationships between two persons include the
following:
1) One person is employed by the other in a sole proprietorship or by an organization
with which the other is associated as a trustee, director, officer, key employee, or
greater-than-35% owner.
2) One person is transacting business with the other (other than in the ordinary course of
either party’s business on the same terms as are generally offered to the public),
directly or indirectly, in one or more contracts of sale, lease, license, loan,
performance of services, or other transaction involving transfers of cash or property
valued in excess of $10,000 in the aggregate during the organization’s tax year.
Indirect transactions are transactions with an organization with which the one person
is associated as a trustee, director, officer, key employee, or greater-than-35%
owner.
3) The two persons are each a director, trustee, officer, or greater than 10% owner in the
same business or investment entity. Ownership is measured by stock ownership
(either voting power or value) of a corporation, profits or capital interest in a
partnership or limited liability company, membership interest in a nonprofit
organization, or beneficial interest in a trust. Ownership includes indirect ownership
(e.g., ownership in an entity that has ownership in the entity in question); there may
be ownership through multiple tiers of entities.
A Pair of SOX: Whistleblower &
Document Retention Policies
• Whistleblower and document
retention/destruction policies are fallout
from Sarbanes Oxley (SOX), which
applies its whistleblower and document
destruction sanctions to nonprofits.
• The Form 990 encourages those nonprofit
organizations that have not yet adopted
such policies to do so in the near future.
Form 990 Schedule J
Compensation Policy
• Executive compensation has been a
significant issue for exempt organizations
since the introduction of intermediate
sanctions.
• A number of the high profile nonprofit
scandals, such as American University
and United Way, have involved
compensation.
• The Form asks for a narrative description of the
organization’s executive compensation
procedures and suggests certain basic
parameters: review and approval by
independent persons, use of comparability data,
and contemporaneous substantiation of the
deliberation and decision (minutes and
compensation committee reports).
• These details encourage the adoption of a
formal compensation process complying with the
terms suggested in the Form.
Joint Venture Policy
• If the organization engages in most forms
of joint ventures or other joint investments,
whether with nonprofit or for-profit
partners, it must disclose whether it has a
joint venture policy in place.
• The questions and instructions define such
a policy as one that safeguards the
organization’s tax-exempt status during its
participation in the endeavor.
Form 990 Part VI Sec. C
Governance Disclosure Policy
• A further question requests a narrative response
to how the organization makes its governing
documents, conflict of interest policy, and
financial statements available to the public.
• Despite the ready availability of Form 990s gratis
online through GuideStar, another question
inquires about how the organization
disseminates is Form 990.
• Nonprofits need to think about regularizing the
disclosure of their significant governing
documents.
Form 990 Part XI
Audit Committee Charter
• The Form asks, in Part XI, whether the
filing organization has an audit committee
to review its outside audit.
• Not any committee denominated the “audit
committee” will do.
• The instructions include a detailed
description of a compliant audit committee.
• Nonprofits need to think about:
 adding a standing audit committee if they do not
already have one,
re-structuring their existing audit committee to
meet the definition if they have one, or
explaining in narrative why they think their
current audit committee structure works better
for them than one that meets the definition in the
instructions.
2008 Instructions for Form 990 Glossary
• audit committee A committee, generally
established by the governing body of an
organization, with the responsibilities to
oversee the organization’s financial
reporting process, monitor choice of
accounting policies and principles, monitor
internal control processes, and oversee
hiring and performance of any external
auditors.
Form 990 Schedule M
Gift Acceptance Policy
• If the organization has received more than
$25,000 in noncash contributions or
contributions of art or historic items,
regardless of value, it must complete
Schedule M. Schedule M in turn inquires
whether an organization that receives
nonstandard gifts has a gift acceptance
policy.
Conclusion
• The IRS has become the leading impetus
behind governance reform for nonprofit
organizations.
• Many smaller nonprofits that prepare their own
returns or that work with accountants or lawyers
unfamiliar with the new form will only become
aware of the new governance suggestions while
they are filing their first post-2008 tax return.
• Many such organizations have gone about their
missions quietly and effectively for years without
governance review or policy drafting.
• Nonprofits will now have to create more
formalized systems, but ones that work for them.
• Because Form 990 responses refer to the end of
the tax year and not the date of filing, these
organizations may have to respond:
• “No, but …” in the first year of phase-in, with an
explanation that:
 the relevant policy was adopted after the end of
the tax year, but before filing, or
 remains under study and is expected to be
finalized shortly.
Future Trends
• In future years, nonprofits required to file the full
Form 990 will need to be up to speed.
• The IRS has signaled that the “right” answer
may not be enough.
• The IRS has indicated that the next concern is
implementation.
• The new Form 990 already asks a question
relating to implementation of conflict of interest
policies.
• Investment policies will inevitably be a focus of
concern.
What to Do for Mid-Size to
Large Nonprofits
• Nonprofits that have not yet started to prepare
for the new Form 990 should start thinking about
how to perform a real governance review.
• The phase-in period gives mid-size nonprofits,
subject to the temporary Form 990-EZ expanded
coverage, a limited time to implement
governance policies called for in the new Form.
What to Do for Small and Small,
Small Nonprofits
• Even small nonprofits ($50,000–$200,000 in annual
gross revenues), subject to the Form 990-EZ after full
phase-in, remain subject to certain Form 990 schedules
and governance “best practices” trickle down from larger
organizations.
• Small, small nonprofits (under $50,000 in annual gross
revenues), subject to the Form 990-N e-postcard after
full phase-in, should still undergo periodic governance
review out of concern for liability and fiscal responsibility.
They will be under pressure to adopt governance “best
practices” used by larger organizations.
Where to Go
• Sample policies are readily available online and
in commercially available publications.
• For a review of online and commercial sources
for sample nonprofit governance policies, see
www.michaelmalamut.com/resources.
• Reviews include policy sample packages
prepared by the American Bar Associations,
ASAE (formerly American Society of Association
Executives), and BoardSource (formerly
National Center for Nonprofit Boards).
• Increasing transparency encouraged by the
Form 990 means more organizations will post
their governance policies online.
• “Off-the shelf” Form 990 governance policies
typically need to be adapted to an organization’s
culture and longstanding way of doing business.
• Sensitive guidance by professionals familiar with
the issues raised by the Form 990 and current
“best practices” in nonprofit governance may
help nonprofits work through the review and
updating process.
IRS Information on Form 990
Governance Issues
• The 2008 Form 990 and instructions are available on the
IRS website at
http://www.irs.gov/charities/article/0,,id=185561,00.html.
• Links to background papers and commentary on the
draft form and instructions are available at
http://www.irs.gov/charities/article/0,,id=181089,00.html
and
http://www.irs.gov/charities/charitable/article/0,,id=18589
2,00.html.
• The June 11, 2008, ACT report is available at
http://www.irs.gov/pub/irs-tege/tege_act_rpt7.pdf.
Brief Biography
Michael E. Malamut of Kopelman and
Paige, P.C. of Boston is Vice Chair of the
American Bar Association Business Law
Section’s Nonprofit Organizations
Committee and Co-Chair of the Nonprofit
Governance Subcommittee. He is one of
the few lawyers nationwide with top
credentials as a professional
parliamentarian.
Michael E. Malamut
Attorney-at-Law
Kopelman and Paige, P.C.
101 Arch Street, 12th Floor
Boston, MA 02110-1162
617-556-0007 (main)
617-654-1712 (direct)
617-838-8657 (mobile)
617-654-1735 (fax)
[email protected]
http://www.k-plaw.com
http://www.michaelmalamut.com