What Does Your 990 Say About You? River Networks River Rally 2012 May 5, 2012, Portland, Oregon Terry Miller

2 Agenda Today Historical Perspective, 990 Basics & IRS Filings Basics Main areas of interest to the public & stakeholders (funders) Program / Admin / Fundraising Compensation of Insiders, Staff Director, Senior Financial official Governance: Policies & Actual Procedures Lois Lerner 4/19/12 speech on governance & other matters Governance check-sheet December 2009 (Lerner: results) Income: Donated v. Earned Balance Sheet Strengths / Weaknesses Program Accomplishments: The Commensurate Test (Time Available) Whats IRS told us so far? EO Workplans and evolving Instructions Questions for public response Summer 2011

3 Historical Perspective: 2008 First Overhaul in 30 Years: Big Project IRS released Draft 990 June 2007 received over 800 formal comments, made some changes, but dug in its heels on governance Stated goals: 1. compliance, 2. transparency, and 3. no increase in burden #3 was subject of public derision WWID (What Would IRS Do?) Where there are not clear answers: default to Big 3 above (HT: Jane Searing & Eve Borenstein)

4 Comments Helped: Major changes from Draft to Final for 2008 IRS Steve Miller 10/22/07: …[from] the comments, we [made] some decisions: The so-called efficiency ratios will drop off the summary page; We will move the program service explanations up to the front; We will substantially re-format some of the more burdensome schedules; And we are considering what targeted transition relief we should provide.

5 Basics: 990, 990-EZ or 990-N? (What if none filed?) Transition Rules on filing thresholds are now finished: 2010 was final stage. From now on: File Form 990, unless: Form 990-N: Gross receipts ordinarily <$50K Form 990-EZ: Gross receipts ordinarily <$200K and Assets <$500K !! certain exceptions when the full 990 is required (e.g. Donor Advised Fund sponsoring organizations) Congress (Pension Protection Act PPA 2006) mandated:three years if no 990, lose exemption must re-apply By May 17, 2010, >300,000 orgs due to be automatically revoked IRS would have faced many of them re-applying, typically tiny, messy D-I-Y filings, so there was an extraordinary initial extension (not legislatively approved or authorized) a/k/a Filing Relief Program it worked! Only 257,000 actually revoked in early 2011, still daunting 380,000 revoked as of November 2011

6 IRS and the Automatic Revocations Select Check list at IRS.gov/charities searchable variously, combines with Pub 78 information As of 10/1/2011, 5,000 organizations had taken advantage of small organizations relief [for IRS!] program Reinstatement Process Special Relief Program – Notice Eligibility: no 990-series forms due prior to 2007, and eligible for 990-N in 2007, 2008 and 2009, and file new 1023 by 12/31/2012 with certain statement BENEFITS: $100 filing fee, retroactive reinstatement If not Eligible under , see Notice no reduced fee, no retroactive reinstatement, but guidance on how to claim reasonable cause for delinquent filings 4/2012: IRS announced it is surprised at number of claims of reasonable cause (Lerner speech)

7 Basics: Parts of the Core Form (2011) I & II Summary & Signature Block III Stmt of Program Service Accomplishments IV Checklist of Required Schedules (much improved) V Stmts Re: IRS Filings & Tax Compliance (evolving) VI Governance, Management & Disclosure (improved) VII Compensation of Ofcrs, Dirs, Ttees, Key Ees, Highest Comped Ees, and Indep Contractors VIII Statement of Revenue IX Statement of Functional Expenses X Balance Sheet XI Reconciliation of Net Assets (helpful) XII Financial Statements & Reporting

8 Basics: 16 Schedules [& how to remember] (based on trigger questions – various thresholds) (Not all schedules relevant for 990-EZ filers; none are relevant for 990-N filers) APublic Charity Status & Support [509( a ) status] (990 & EZ) B [ B ig] Contributors (no change; 990 & EZ) CPolitical Campaign & Lobbying Activity (990 & EZ) DSupplemental Financial Statement Detail (990 only) ESchools [Education] (990 & EZ) FForeign Activities & Grants (990 only)

9 Basics: 16 Schedules [& how to remember] GFundraising Events & Gaming (990 & EZ) HHospitals (990 only) IGrants In the U.S. (990 only) J[Justify?] Compensation (990 only) KBonds [ k is lawyer abbrev for contract] (990 only) LLoans and Insider Transactions (990 & EZ) MNon-Cash Contributions (990 only) NTermination / Disposition of Assets (990 & EZ) OOpen-Narratives (required/optional) (990 only) RRelated Organizations (990 only)

10 IRS Basics: How many determinations? (~65,000 in FY10, 44% got questions) (this graphic from FY11 workplan; Lerner speech: about 60,000 per year)

11 IRS Basics: EO Division of TE/GE (exams staff is on the rise) Rulings & AgreementsExams Education & Outreach Director's OfficeTotal Director:David Fish Nan Downing Melanie Partner Lois Lerner

12 IRS Basics: How many exams? (11,699 exams, 3,194 compliance checks; % exams rising)

13 IRS strongly prefers e-filed returns Easier to manage, profile, and fewer errors; 27% of s and 14% of 990EZs were e-filed Paper filed 990s had errors 28% of the time, and 990EZs 29% of the time, just on initial review, while e-Filed 990s had errors just 2% of the time, and 990EZs just 1% of the time What errors? Mismatched Name/EIN Missing Schedules (especially Schedule O) Inconsistencies in reporting of revenues, expenses and assets …. expect to see mandatory e-filing for more filers

14 IRS: What schedules are actually filed?

15 So What Does it Say About us? Program / Admin / Fundraising Definitions / Source Authority Public Perception Compensation of Insiders, Staff Director, Senior Financial official Not likely an issue for this group (unless too little!) Governance: Policies & Actual Procedures Trickier than it might seem Income: Donated v. Earned Support v. Revenue Balance Sheet Strengths / Weaknesses Program Accomplishments: The Commensurate Test

16 Program / Admin / Fundraising a/k/a Functional Accounting GAAP: Key Distinction: Program v. Supporting Program Functions often sub-programs for restriction / donor intent reasons, or to communicate the range of work to the public & stakeholders [common] Supporting Functions Management & General [often a/k/a Admin or G&A] Fundraising Membership Development [more on this in a bit]

17 GAAP Definition: Mgt & General a/k/a Admin Management & General (FASB ASC ) a.Oversight b. Business management c. General recordkeeping d. Budgeting e. Financing … f. Soliciting [income other than gifts grants & contributions] … g. Disseminating [info to public on stewardship of contributed funds] h. Announcements concerning appointments i. The Annual Report j. Related administrative activities k. All mgt & admin except for direct conduct of program or fundraising activities.

18 GAAP Definition: Fundraising & Membership Development Fundraising (FASB ASC ) a. Publicizing and conducting fundraising campaigns b. Maintaining donor mailing lists c. Conducting special fundraising events d. Preparing & distributing fundraising manuals, instructions & other materials e. Conducting other activities involved with soliciting contributions from individuals, foundations, government agencies, and others. Membership Development Activities (FASB ASC ) a. Soliciting for prospective members and membership dues b. Membership relations c. Similar activities.

19 Shorthand Program - everything that is not Mgt&Gen or Fundraising a note on everything that is not XYZ Mgt & Gen All financial management All costs of the board, meetings, D&O insurance Possibly office of CEO in big organizations Corporate legal, general management, general financing P.R. for the overall organization (not public education) Chasing & managing earned Income Fundraising Chasing donations (of Money AND Time)

20 Difficult Issues Joint Activities / Joint Costs Guidance difficult due to abusive practices SOP 98-2 / FASB ASC to -55 Accounting for Costs that Include Fundraising and in to -167 Outreach about both the organization and river / watershed issues Is that mere public relations? Recruiting new members first a membership is substantially a donation so more like fundraising than management & general second, what about building the base or increasing public awareness? Recruiting volunteers volunteer for the organization narrowly? or to benefit the public? mobilization?

21 Public / IRS Expectations Program = Good, Supporting = Bad Charity Navigator / Wise Giving Alliance / etc etc United Ways historically behind this Like choosing an airline for low maintenance expenditures! (H/T Bob Ottenhoff of Guidestar.org) Good news: watchdogs moving away from over-reliance on functional percentages (happy to a press release) Read: Nonprofit Starvation Cycle (easy to find on Web) Program 75-80% of Expenses is a good Target Core Form Part IX, Line 26 Col(b) / Line 26 Col(a) >= 75% IRS has been known to expect to see Fundraising Expenses of at least 5% of Donated Income Core Form Part IX, Line 26 Col(d) / Part VIII, Line 1 >= 5%

22 Form 990 Core Form, Pg 9 Part VIII Statement of [Support &] Revenue Donated Earned

23 Form 990 Core Form, Pg 10 Part IX Statement of Functional Expenses a/k/a Program / Admin / Fundraising

24 Governance Tax Code doesnt mention, so why do they care? Risk Assessment Lois Lerner, addressing state Attorneys General: Some folks would argue that we have gone beyond where we should be going with such questions, Lois G. Lerner, director of the Exempt Organizations Division of the IRS… We disagree; we think that governance is a very big part of accountability, said Ms. Lerner. There is some argument that this is only the purview of the states. The IRS believes it is your purview but it is also of interest to us.… Ms. Lerner said governance policies are one factor that figure into risk models that the IRS uses to help decide which organizations we should use our scarce resources on when selecting charities for review. -- From Governance Is Key Issue in Regulating Charities, IRS Official Tells State Leaders, Chronicle of Philanthropy, 10/16/07

25 Governance Counterpoint: Bruce Hopkins …organization was denied…tax-exempt status, in part because…it did not adopt a conflict-of-interest policy and it lacks an independent board. …This attempt to invoke the private benefit doctrine is ludicrous. That doctrine is to be applied when there is actual private benefit. It is not to be invoked on the basis of wild speculation, such as the possibility that the organizations assets could be used to benefit one or more board members. … It is imperative that this matter be advanced to the courts, where this arbitrary and capricious policy can be stopped. -- Bruce Hopkins, in Nonprofit Counsel, October 2008 (Wiley Periodicals), commenting on PLR

26 IRS: Lois Lerner speech 4/19/12 1 Worth a close read; on and in supplemental materials Speech to the Georgetown tax conference Topics Covered in Lerners Speech 1.SSNs reported on 990s in error oWARNING: NEVER required on 990; Chronicle of Philanthropy found 20% had at least one; concern over identity theft 2.Governance and results from the Dec 09 check sheet 3.Diversions of Assets 4.Unexpected things organizations have been doing with Form 990-N 5.Determinations Process [and delays]

27 IRS: Lois Lerner speech 4/19/12 2 Governance and results from Check Sheet referred to 990 Part VI as the Crown Jewel of IRS efforts to use governance practices as a risk assessment tool for non- compliance ACT, others, cautioned and/or pushed back on IR Lerner asserts they have done lots of training and understand one size does not fit all Lerner acknowledges did not have actual data to back up assertion that poor governance = high risk non-compliance, so: Governance Check Sheet released December 2009 Lerner says it mimics 990 Part VI [if only!] Check Sheet worth an immediate read 1300 have now been collected in the course of public charity audits; regression analysis has been performed where there was sufficient data Lerner acknowledged that the population selected for exam is not statistically representative [but clearly goes on to infer substantive conclusions!]

28 IRS: Lois Lerner speech 4/19/12 3 Governance and results from Check Sheet (cont) Statistically significant correlation between these governance practices and good tax compliance Has written mission statement Always uses comparability data when making compensation decisions Has procedures in place for the proper use of charitable assets 990 reviewed by the entire board of directors She double-emphasized this last one Fully in keeping with year-by-year tweaking of the question and the instructions Inverse: Stat Sig Correlation between control concentrated in one or few individuals and bad tax compliance SAFE ASSUMPTION IMHO: These governance questions now become the main audit flag issues on Part VI

29 IRS: Lois Lerner speech 4/19/12 4 Governance and results from Check Sheet (cont) NOT Statistically significant correlation between these governance practices and good or bad tax compliance Conflict of interest policies I wondered about adopt, file and forget Organizations that never or only occasionally use comparability data to set compensation Voting board members having outside family & business relationships I wish theyd just stop talking about non-voting Board members Example of being ahead of their skis – similar to re-defining officer when its an important legal term Another safe assumption IMHO that these questions will be lower risk Lerner quite pleased that results supported her assumption of correlation, and is assigning TE/GE to figure out how to gather a statistically representative sample – best guess FY13 EO work plan Questionnaires or Compliance Checks, random

30 Governance Policies Board-adopted Mission Statement Contemporaneous minutes (of Board & Committees of the Board) less is more on formal minutes Conflict of Interest Policy, with at least Annual Declarations IRS view: money; other issues worth considering Procedure for monitoring & dealing with conflict disclosure & recusal Whistleblower Policy Document Retention & Destruction Policy (and practice!) Compensation: Procedure over Policy Comparison with written comparables Gift Acceptance Policy – why, when? (990 Sched M if over $25K) Chapters/Affiliates charitable / mission compliance Conservation Easements monitoring (if any) Reimbursements: Accountable Plan (more about procedure)

31 Form 990 Core Form, Pg 6 Part VI Governance, Management, and Disclosure

32 Others Income: Donated v. Earned Earlier Slide #22 Support v. Revenue Support / Donations / Gifts / Contributions / Grants Revenue / Earned / Fees / Exchange Transactions Reciprocal Benefit vs. Public / Charitable Balance Sheet Strengths / Weaknesses Program Accomplishments: The Commensurate Test This section of the 990 is often ill-attended Primary chance to tell your story Gets reworked and sold by Guidestar et al to funders

33 Summary: What to Look For? Think like a reporter; dont worry about IRS: Does it tell your story right? Make Page 1 headline look good – Mission or highlight Be sure you have a Board-adopted Mission on Page 2 Does the total spent make sense for the accomplishments listed? Put some oomph in your program accomplishments Check to see if Program >= 75% of Total Expenses Check to see if Fundraising >= 5% of Donated Income Review list of Officers, Directors/Trustees, make sure that Senior management official Senior financial official …are properly reported Look at your Balance Sheet like a skeptic: will you survive? Review Part VI Governance Questions – fix any wrong answers Step back 15 paces and think: Do you say no lobbying yet have it all over your website? Are you related to any organizations with board overlap? Better to learn the rules than stick head in sand !

34 Form 990 & Schedules: Broad Changes since 2008 also Questions IRS posed for Public Comment Summer 2011

35 Broad Changes : clarifies ALL 990 filers owe Schedule O 2009: clarifies that: organizational termination, new programs, and changes to governing documents, must all be reported on 990, not by letter to IRS (IRS continues to mention this in speeches about 2010) (Parts I, III, VI) 2010: changes Schedule O to only for Core Form narrative responses & explanations (for accessibility) 1.Core Form headers have checkboxes required if Schedule O has information (Parts III,V,VI,VII,XI,XII and IX in 2011) 2.Continuation forms are eliminated; duplicate main pages if needed (Schedules F-1,I-1,J-1,J-2,N-1,R-1) 3.New narrative sections so that O will be just for Core Form on (Schedules E,G,K,L,R)

36 Broad Changes 2 RE-emphasized in 2010 Instructions that Governance Policy Questions Yes/No are only Yes if the Board adopted the policy before the end of the tax year TIP: be sure to be familiar with the two-page December 2010 IRS Governance Check Sheet for its auditors to use; it goes beyond 990 questions in some respects (!) Transition provisions on Schedules H (Hospitals) and K (Bonds) are over (2009); full Schedules now due BUT, due to Affordable Care Act (healthcare reform), 2010 Calendar 990s with Schedule H were automatically extended 90 days and could not be filed prior to July 1 (ACA: facility-by- facility vs. EIN-by-EIN exemption), also audited financials are now required to be attached to 990 (2010); UPDATE: one part of Schedule H still optional

37 Comments Requested Summer Part VII Compensation: Should various compensation thresholds be increased, decreased or left as-is? (Part VII instructions / definitions) Should O & DTs paid via Management Companies be better disclosed than present instructions to use Section B? (Part VII instructions) Part VIII Income: Should government awards reported as revenue on Line 2 require more disclosure, or should all government awards be reported on 1e? (request for comment did not address impact on Schedule A public support) (Part VIII instructions / definitions) Part XII Financial Reporting Should Question 2d be changed from asking whether reviewed or audited statements were issued on a separate basis to audited on a separate basis?

38 Comments Requested Summer Schedule D Part XI (Net Asset adjustments) Should this be dropped now that it is redundant with Core Form Part XI? Schedule F Foreign Activities Should Name & EIN of foreign grantees on Part II be required (un-shade Cols 1a/b), or should Columns 1a/b be removed? Should Schedule F require indirect foreign expenses? (F.I.3.) Schedule L Transactions with Interested Persons Want comments on pros & cons of excluding bank deposits (e.g. when banker is on organizations Board) from definition of reportable transactions

39 Comments Requested Summer Schedule R Related Organizations Whether overly burdensome in certain situations; cites: associations of churches, hospital systems, chapters of national organizations, and certain foreign affiliates, CRTs & VEBAs regarding privacy

40 Questions? (full-size copy of these slides and other materials are online at ) Terry Miller or FYI: to submit comments (I believe at any time) on Form 990: Stephen Clarke, ,