1 What You Need to Know About the Redesigned Form 990 Cordelia A. Glenn, Esq.AOPO 2008 January Directors' Workshop Park City, Utah January 10, 2008

2 Overview  First complete overhaul in nearly 30 years  Draft form and instructions released June 14, 2007  3-month comment period  IRS incorporated many comments into final draft  Final form released December 19, 2007  Final instructions anticipated spring 2008  First use: 2008 tax year (returns filed in 2009)  For non-calendar year fiscal years: tax years beginning in 2008

3 Overview  3 guiding principles  Enhance Transparency  Key transparency tool relied on by IRS  Present “realistic picture” of organization  Promote Compliance  Vehicle for IRS to efficiently “assess risk of noncompliance”  Minimize Burden  Material change only for organizations with complex compensation arrangements, related entity structures, and “activities that raise compliance concerns”

4 Overview  Why start preparing now?  More like SEC disclosure document than tax return  Reponses to certain questions could:  Trigger audit or enforcement action by IRS  Provide people unfriendly to the organization with ammunition for negative publicity; whistleblower awards provide financial incentive  By identifying and resolving potential problem areas in advance, your organization can:  Mitigate risk of negative publicity or unwanted AG attention  Turn Form 990 into positive PR tool

5 Overview  Old Form  9-page core form  2 schedules, 36 possible attachments  New Form  11-page core form completed by all exempt orgs  Includes summary of key info on first page  16 schedules focusing on “areas of interest”  To be completed as needed (trigger questions)

6 Core Form  Parts I & II  Summary of key information & signature block  Part III  Mission, program changes, and program service accomplishments (narrative format)  Part IV  37 trigger questions for schedules  Part V  Questions flagging other potential compliance and filing obligations

7 Core Form  Part VI  Governance, management, public disclosures  Part VII  Compensation of officers, directors, key employees, highest compensated employees, independent contactors  Part VIII  Statement of revenue  Part IX  Statement of functional expenses

8 Core Form  Part X  Balance sheet  Part XI  Financial statements and reporting

9 Schedules to New Form 990  A: Public Charity Status & Public Support*  B: Contributors*  C: Political Campaign and Lobbying Activities*  D: Supplemental Financial Statements*  E: Schools  F: Activities Outside U.S.  G: Fundraising & Gaming*  H: Hospitals  I: Grants*  J: Compensation Info*  K: Tax-Exempt Bonds  L: Transactions with Interested Persons*  M: Non-Cash Contributions*  N: Liquidation, Dissolution  O: Supplemental Info*  R: Related Organizations*

10 Mission and Achievements  Mission Statement (Core Parts I & III)  First thing reviewers will see on summary page  Provides opportunity to “tell your story” and provide context for all other info in form  Changes in Activities (Core Part III)  Describe new activities, changes in activities  Exempt Purpose Achievements (Core Part III)  Describe achievements for 3 largest programs by expenses

11 Disqualified Persons  Many Questions (Core Part IV, IX, X & Schedule L)  Excess benefit transactions (current and prior)  Outstanding loans (to or from)  Payment of compensation

12 Disqualified Persons  Do you know who your disqualified persons are?  Any person who was, at any time during a 5-year look back period ending on the date of the transaction:  In a position to exercise substantial influence over the organization (e.g., D&O, senior managers, facts & circumstances)  Family members of such persons  Companies 35% controlled by foregoing

13 Governance, Policies, Disclosures  Somewhat controversial  Does IRS have authority?  Could create de facto legal requirements and lead to presumption of wrongdoing.  IRS position:  “Independent governing body and well-defined governance and management policies and practices increase the likelihood that an organization is operating in compliance with federal law.”  Form educates organizations about best practices.  Form provides opportunity to explain responses.

14 Governance (Core Part VI.A)  Independent Directors (also in Core Part I)  How many voting directors? How many independent?  In draft instructions, “independent” means:  Not a compensated employee  Does not receive compensation or other payments as an independent contractor  Does not receive, directly or indirectly, material financial benefits from the organization  Not a spouse, sibling, parent or child of foregoing  Definition may be revised in final instructions.

15 Governance (Core Part VI.A)  Review of Form 990  Provided to governing body before filing? Note: Draft asked whether the board reviewed the Form 990 prior to filing.  Describe review process. To whom is the form provided? When it is provided? What is the level of review?

16 Policies (Core Part VI.B)  Conflict of Interest Policy  In writing? Annual disclosure of interests?  Describe how you monitor and enforce policy.  IRS wants to know how an organization actually implements its conflicts policy (i.e., that the policy isn’t just collecting dust).

17 Policies (Core Part VI.B)  Whistleblower Policy  Does the organization have a written policy?  SOX makes it illegal to punish whistleblowers who risk their jobs by reporting suspected illegal activities.  Policy not legal requirement but “communicates strong culture of legal compliance and ethical integrity”  Policy should provide procedures for employees to report in confidence suspected financial impropriety or misuse of resources.

18 Policies (Core Part VI.B)  Document Retention & Destruction Policy  Does the organization have written policy?  SOX makes it illegal to destroy documents in anticipation of a federal investigation.  Policy not legal requirement, but auditors often recommend it.  Policy should set schedule for maintenance/ destruction of documents by type and prohibit destruction of records (including and other electronic records) relating to potential litigation.

19 Policies (Core Part VI.B)  Compensation  Must describe process for determining compensation of CEO/Executive Director and other key employees.  Does process include:  Review and approval by independent persons  Comparability data  Contemporaneous substantiation of deliberation and decision

20 Disclosure (Core Part VI.C)  Form 1023, Form 990, Form 990-T  Available in own website, another’s website, and/or upon request?  Note: Disclosure required by law.  Governing Documents, Conflict of Interest Policy, Financial Statements  Describe how made available to the public.  Note: Disclosure not required by law, but promotes transparency & inspires greater confidence in the organization.

21 Compensation (Core Part VII, Schedule J)  Big changes in reporting of compensation of directors, officers, key employees, highest compensated employees & independent contractors  Use of Form W-2 and Form 1099 data to reduce subjectivity  More details required for compensation paid to: Former D&O, key employees, and HCEs Current D&O, key employees, and HCEs receiving more than $150,000 in total compensation Persons receiving compensation from an unrelated org for services provided to the reporting org

22 Audit & Audit Committee (Core Part XI)  Independent Accountant  Compilation, review, or audit of financial statements performed by independent accountant?  Definition of “independent accountant” to be clarified in final instructions.

23 Audit & Audit Committee (Core Part XI)  Audit Committee  Does the organization have a committee responsible for oversight of audit, review, or compilation of financial statements and selection of independent accountant?  Required by some states under certain circumstances (e.g., CA).

24 Fundraising (Schedules G, M)  Criticism that fundraising is misreported  Lack of transparency on use of funds raised  Concern about overvalued non-cash contributions  Additional information required for use of professional fundraisers, special events, and gaming ($15,000 threshold)  Note re: reporting of gaming activities: Schedule asks whether organization is licensed by the applicable state(s) to operate gaming activities.

25 Fundraising (Schedules G, M)  Non-cash contributions ($25,000 threshold)  Does the organization have a gift acceptance policy requiring review of non-standard contributions?  New reporting requirements may result in new recordkeeping practices and additional burden.

26 Recommendations  Educate board and management  Consider trial run to identify & correct potential problem areas, develop explanations  Will expose areas needing additional recordkeeping  Consider involving legal counsel  Work on mission statement, program descriptions  Will set the stage for all info in Form 990  Identify disqualified persons & update list annually  Examine board independence

27 Recommendations (cont.)  Examine and formalize Form 990 review process  Prepare and present policies to Board for approval  Conflict of Interest  Whistleblower  Document retention and destruction  Compensation review  Gift acceptance  Consider public disclosure practices

28 Recommendations (cont.)  Consider formation of Audit Committee & examine relationship with auditor  Review financial arrangements with disqualified and interested persons  Restructure problematic arrangements if possible  For organizations conducting solicitations and gaming in connection with fundraising  ensure appropriate state licensure

29 Recommendations (cont.) OVERALL GOAL: Present as good a public profile as possible.