The object of this book is to educate both new and experienced preparers to deal with the numerous changes relating to the filing of the 2008 Form 990 series of tax returns. While the old 990 had just two schedules to complete, the new form has 16 schedules. This book offers a practical, hands-on approach to completing the new challenging form. Major Topics: - Changes in filing requirements for Form 990 and 990EZ phased in thresholds - Electronic filing requirements - New: Preparation of the new required summary of the organization's mission, activities, and current and prior years' financial results - Revised: Statement of program service accomplishments - reporting of new, ongoing, and discontinued achievements and their related revenue and expenses - New: Statements regarding other IRS filings and tax compliance - New: Governance, management, and disclosure- information regarding governing body and its management, policies, and disclosure - Revised: Compensation schedules for offices, directors, and key employees

PREPARING THE NEW REDEFINED FORM 990 FOR NONPROFIT ORGANIZATIONS

By Stuart P. Sobel

AuthorHouse

Copyright © 2009 Stuart P. Sobel
All right reserved.
ISBN: 978-1-4389-5833-0

Contents

Chapter 1: Introduction to Redefined Form 990....................................................................1I. Why the dramatic change?......................................................................................1II. Who regulates the nonprofit sector?..........................................................................2III. Panel on Nonprofit Sector 2005 Report.......................................................................4IV. Planning for the quality preparation of Form 990.............................................................5V. Information Sources...........................................................................................7Chapter 2: 2008 General Instructions for Form 990................................................................8I. Overview of Form 990..........................................................................................8II. Analyzing who must file Form 990.............................................................................13III. Accounting periods and methods..............................................................................19IV. Specific filing requirements.................................................................................21Chapter 3: Specific Preparation Instructions for Parts I-XI of the 2008 Form 990 (Core Form).....................25I. Heading.......................................................................................................25II. Part I: Summary and Part II: Signature block.................................................................29III. Part III: Statement of program service accomplishments......................................................33IV. Part IV: Checklist...........................................................................................38V. Part V: Statements regarding other IRS filing and tax compliance..............................................45VI. Part VI: Governance, management, and disclosure..............................................................56VII. Part VII: Compensation......................................................................................70VIII. Part VIII: Statement of revenue............................................................................85IX. Part IX: Statement of functional expenses....................................................................99X. Part X: Balance sheet.........................................................................................111XI. Part XI: Financial statements and reporting..................................................................118Chapter 4: Specific Instructions for Schedules A-R...............................................................121I. Schedule A - Public charity status and public support.........................................................121II. Schedule B - Schedule of contributors........................................................................141III. Schedule C - Political campaign and lobbying activities.....................................................147IV. Schedule D - Supplemental financial statements...............................................................157V. Schedule E - Schools..........................................................................................166VI. Schedule F - Statement of activities outside of the United States............................................172VII. Schedule G - Fundraising or gaming activities...............................................................179VIII. Schedule H - Hospitals.....................................................................................189IX. Schedule I - Grants and other assistance in the United States................................................193X. Schedule J - Compensation information.........................................................................198XI. Schedule K - Supplemental information on tax-exempt bonds....................................................209XII. Schedule L - Transactions with interested persons...........................................................213XIII. Schedule M - Non-cash contributions........................................................................222XIV. Schedule N - Liquidation, termination, dissolution, disposition.............................................230XV. Schedule O - Supplemental information to Form 990............................................................236XVI. Schedule R - Related organizations and unrelated partnerships...............................................239Appendix A: Number of Nonprofit Organizations in the United States, 1996 - 2006..................................252Appendix B: Better Business Bureau Charitable Standards..........................................................254Appendix C: IRS Forms............................................................................................261Form 990 - Parts I - XI..........................................................................................262Schedule A.......................................................................................................273Schedule B.......................................................................................................277Schedule C.......................................................................................................281Schedule D.......................................................................................................285Schedule E.......................................................................................................290Schedule F.......................................................................................................291Schedule G.......................................................................................................295Schedule H.......................................................................................................298Schedule I.......................................................................................................302Schedule J.......................................................................................................304Schedule K.......................................................................................................307Schedule L.......................................................................................................309Schedule M.......................................................................................................310Schedule N.......................................................................................................312Schedule O.......................................................................................................315Schedule R.......................................................................................................316Form 990-EZ......................................................................................................320Form 990-T.......................................................................................................324

Chapter One

Introduction to Redefined Form 990

I. Why the dramatic change?

A. Overview of the nonprofit sector

A look at the astounding growth of the nonprofit sector in the United States and throughout the world will show why the changes in the IRS Form 990 are warranted. For example, in 1996 there were 1,084,939 organizations in the United States; ten years later the total number of organizations had grown to 1,478,194, an increase of 36.2 percent. More significant is the increase in the number of public charities. In 1996 there were 535,930 501(c)(3) public charities, and by 2006 there were 904,313 or a 68.7 percent in just 10 years. However, the most impressive statistic of all is the increase in private foundations during that same 10-year period. The number of private foundations grew from 58, 774 in 1996 to 109,852 in 2006 - a whopping 86.9 percent increase!

The United States is not the only country with a large number of nonprofit organizations. In 2006 Russia was estimated to have 277, 000 and India was estimated to have between one and two million nongovernment organizations.

Economic conditions in the United States have resulted in numerous business failures, and the nonprofit sector is feeling the fallout. Established nonprofits are beginning to lose the support that they have counted on for years. Charities have long relied on foundations for funding, but because of the conditions in the stock and securities markets, many foundations no longer have the monetary resources to provide for grants and other forms of funding. Over the next few years nonprofit organizations will continue to feel the impact of the economic downturn.

The nonprofit entities themselves have an impact on the economic system. IRS calculations show that the total revenue for all public charities exceeds 1.15 trillion dollars. Nonprofits and charitable organizations, which provide supplemental support to both the government and private sectors, play a significant role in American society.

It is important for the charitable sector to maintain the highest levels of integrity and credibility. While the nonprofit sector must remain independent, it is appropriate for government to provide oversight and, where necessary, enforcement. Nonprofit organizations should be held to a higher standard than their for-profit counterparts, and as fiduciaries of other people's money, they must exercise duty of care.

The huge growth of the nonprofit sector in such a short period of time has influenced Congress and the IRS to greatly modify the reporting requirements for nonprofit organizations. Government has determined that the Form 990 series of tax returns is the strongest method to communicate to all sectors of society what is transpiring in aggregate and specific accomplishments of respective organizations. Since Form 990 returns are public documents, the information they contain is available to anyone who wishes to review them. By expanding the amount of information that is to be reported in Form 990, the transparency of organizations will increase.

Appendix A contains a breakdown of the numbers and types of U.S. organizations as gathered by the National Center for Charitable Statistics. The breakdowns of the different types of entities reflect considerable growth in a number of specific sectors.

The reasons for the increasing numbers of nonprofit organizations in the United States and nongovernment organizations throughout the world are many and varied. The perception that government has the responsibility to provide humanitarian services to those who are in need has existed for a very long time. However, many problems or socioeconomic conditions cannot be addressed because governmental agencies, restricted by funding, do not have the necessary resources to deal with them. The nonprofit sector developed as a place where government and the private sector could collaborate to improve socioeconomic conditions and enhance the quality of life.

The increase in the number of organizations has resulted in some duplication of provided services which in turn have resulted in excess administration costs and a reduction of the funds that are available for program services. There is a dire need for enhanced monitoring of the nonprofit sector to create an effective utilization of resources and eliminate waste. The revised Form 990 will aid in monitoring programs and offer many opportunities to improve the nonprofit sector.

II. Who regulates the nonprofit sector?

Both federal and state governmental agencies are charged with monitoring and regulating the activities of nonprofit organizations. At the federal level the Internal Revenue Service's Division on Tax-Exempt and Government Entities has the responsibility for reviewing applications for tax-exempt status, auditing a sampling of the Forms 990 filed, and enforcing the requirements imposed on organizations by the tax code. The IRS is also authorized to assert penalties for noncompliant organizations and, as a last resort, to revoke an organization's tax-exempt status.

The IRS like many other federal agencies has been unable to sufficiently increase its staffing to monitor the rapidly growing number of U.S. nonprofit organizations. Although the number of nonprofit organizations grew exponentially between 1996 and 2006, IRS exempt organization staffing increased only about five percent during the period. The agency has embraced the expansion of Form 990, because it believes that the form will be an aid to monitoring and reviewing the operation of nonprofit organizations and that it will provide more information to the general public. The increased transparency of the entities should result in their improved operation.

State governments have their own laws governing the creation, operation, and dissolution of nonprofit organizations. In most states the attorney general bears the responsibility for enforcing the laws and investigating complaints of fraud or abuse. Organizations are generally formed through the office of their state's secretary of state. Charity regulators for the states monitor adherence to charitable solicitation laws, investigate complaints of fundraising abuse, and maintain lists of registered organizations.

Charity watchdog agencies supplement government oversight by monitoring the activities of nonprofit organizations. Some organizations that provide supplemental information:

a. GuideStar, which is the operating name of Philanthropic Research, Inc., a 501(c)(3) public charity, places copies of organizations' Form 990s on the internet for public inspection and analyzes the information that is provided by the respective organizations.

b. The Wise Giving Alliance of the Better Business Bureau, a 501(c)(3) public charity affiliate of the 501(c)(6) national organization, has created 20 measurable standards of charity accountability. The standards measure a charity's effectiveness. A charity may apply to the organization to gain certification as an accredited entity. The Bureau conducts an independent review of each applicant to determine whether the organization has met the standards and can be deemed as an accredited charity. The Better Business Bureau Standards may be found in Appendix B.

c. Charity Navigator reviews charity information and grades organizations based on the information they submit. The grades indicate Charity Navigator's appraisal of how well the organization is operating.

Foundations provide further regulation when they review grants for funding and evaluate the accomplishments and viability of entities that are soliciting grants. Even with all of the governmental and other agency review, the real responsibility for charity oversight remains with the "true" regulator, the donor, who gives money to a charity or provides support for other nonprofit organizations.

Form 990 is a major source of information for all regulators, because it provides an in depth analysis of the operation of each organization. By reviewing an organization's annual Form 990, individuals, organizations, and government agencies can obtain information about the entities that will enable them to make wise decisions regarding their level of support for an organization.

Unfortunately many fundraising campaigns result in greater sums of money going to the fundraisers than to the charities that are in dire need of the support. The oversight of charity fundraising campaigns is normally the responsibility of the respective state's attorney general's office, which cannot possibly investigate every problem with fundraising. Individuals can use a state attorney general's resources (website and publications) to monitor the activities of fundraisers and organizations in the state.

In many instances while the portions of funds that the fundraisers take comply with the law, the nonprofits do not receive an adequate share. The new Form 990 requires charities to disclose the results of their fundraising campaigns in more detail. The disclosures will assist individuals, who are constantly being asked by numerous organizations to support their causes. For example, donors might not appreciate 90 percent of all money being collected for a charity going to a private corporate fundraiser instead of going to the charity. Form 990 will give contributors information so that they can identify those organizations that receive the highest percentage of funds raised.

An obvious problem is whether individuals will actually take the time to review an organization's Form 990. Normally during the holiday season donors are inundated by charities asking for donations before the end of the year. After national disasters numerous causes request humanitarian support for people who are in dire need of immediate assistance. Organizations like universities that have received ongoing support from contributors try create feelings of guilt in donors if they do not continue to support the organization as they had in the past. Hopefully the IRS, charity watchdog agencies, educational institutions, and the entities themselves will encourage people to review organizations' Form 990, a document that provides an in-depth picture of an organization's accomplishments and, therefore, is a guide to wise charitable giving.

III. Panel on the Nonprofit Sector 2005 report

The results of a 2005 study conducted by the Panel on the Nonprofit Sector, which was created by Congress to study nonprofit governance, transparency, and accountability, was one of the biggest precipitators of the changes made to Form 990. Recommendations summarized in the panel's report include the following.

A. Recommendations for Congressional action

1. Authorize funding for IRS to move ahead with mandatory electronic filing of Form 990 returns

The electronic filing of Form 990 will reduce IRS staffing needs. The savings in staff power could be applied to other IRS duties such as expedited treatment of applications for tax-exempt status or increased examinations of nonprofit organizations

2. Direct the IRS to require that the Form 990 series be signed under penalties of perjury

Signing a return under penalties of perjury should force individuals to make sure that the information that they submit is accurate and correct. The penalties for perjury should also be a strong inducement for organizations to be in compliance with the law and to provide accurate information.

3. Have the return signed by an officer of the organization

In some instances tax returns were signed by individuals who really did not have the authority to execute the document. For example, a director may have been asked to sign a return when the task really should have been assigned to the president or treasurer of the organization.

4. Amend federal tax laws to require organizations, even those with income under $25,000, to file an annual notice with the IRS that includes basic contact and financial information

Because of the $25,000 threshold, many organizations never filed current information with the IRS after they were formed and received their determination letters. The lack of filing information made it difficult for the IRS and others to obtain current information regarding these organizations. Form 990-N, which is new, was adopted for organizations to annually report their status to the IRS.

5. Amend federal tax laws to require charitable organizations to notify the IRS when they cease operations

States will often administratively dissolve an organization. While the reason for dissolution could be voluntary, it is often due to an organization's lack of responsiveness to state requirements. If an entity never files a Form 990, the IRS cannot know if it continues to legally exist. A lack of notification regarding an organization's cessation of activities causes potential problems for government agencies and donors alike.

6. Amend tax laws to extend present conduct penalties imposed on income tax preparers for omission or misrepresentation to Form 990 returns

Preparers of nonprofit returns should be held to the same standard of due diligence as preparers of forprofit returns.

B. Recommendations for Internal Revenue Service action

Revise Form 990 series to ensure accurate, complete, timely, consistent, and informative reporting.

Provide financial and program description summary information.

Separate information into distinct sections or schedules.

Information about an organization's purpose and program should be included on the first page of the forms.

Definitions of terms should be clear and consistent throughout the entire Form 990 series of returns.

Forms should be modified to provide clear information needed by other federal and state regulators to enforce laws governing charitable organizations.

Supporting organizations should provide specific information about whether or not they are operating as Type I, II, or III supporting organizations.

Organizations that own donor advised funds should be required to disclose the total number of funds it owns, the aggregate value of its assets held, and the aggregate contributions to or the grants made from those funds.

Organizations that make financial awards and grants to organizations should be required to provide specific information regarding the recipients of the awards.

Compensation information should be provided in more depth to require disclosure of compensation paid by the organization to all of its board members, trustees, chief executive officer, other officers, and its five highest compensated employees.

Forms 990 should disclose which board members are independent according to the definition added to the tax laws by Congress.

Require organizations that have their financial statements audited to complete the forms using the same accounting methods that were used to prepare their audited financial statements.

Conflict of interest policies and travel policies should be disclosed by the organizations, which should provide specific information regarding the travel costs of individuals.

The above list of recommendations is not all-inclusive.

A review of this text will show that literally all of the recommendations of the Panel of Nonprofit Sector on Governance, Transparency, and Accountability have been incorporated into the new Form 990 document. The increase in information that is required for the filing of the return will have a dramatic impact on the organizations and preparers of the document.

IV. Planning for the quality preparation of Form 990

While the reporting required in Form 990 unquestionably benefits the regulating governmental agencies, it also provides a vast amount of data that will benefit donors and other funders of organizations by giving them valuable information that they can use to make intelligent decisions regarding the causes they wish to support. Preparers of the new Form 990 will have a challenging task. In addition to the historical financial information reported in the prior form, the 2008 Form 990 requires a number of narrative descriptions. They will need to keep a good thesaurus and dictionary handy right next to their copy of the Internal Revenue Code.

As one reviews the new Form 990, it becomes apparent that the preparer of the return cannot wait until just a few days before the due date to prepare the document. It will take time to acquire the relevant information from various individuals in the organization. Therefore, preparation of Form 990 will require a unique partnering of the organization and the preparer of the return, who should establish a system for gathering all the information that is necessary to complete the form.

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