The changes to IRS Form 990, Return
of Organization Exempt from Income
Tax, beginning with tax year 2008, are the most significant in the last 30 years.
Driven by Congressional concerns over
nonprofits being used as illegal tax shelters and as fund-raising vehicles for terrorist groups — as well as the Pension Protection Act of 2006 — these changes will
require more transparency and disclosure.
“These changes are important to all of us
— nonprofit employees, board members
and donors alike,” says Harry Cendrowski,
CPA/ABV, CFE, CVA, CFD, CFFA, managing member of Cendrowski Corporate
Advisors LLC. “In addition, if you’re
involved with a small, community-based
nonprofit, such as your child’s soccer
league, you’ll want to know about the
changes required of these organizations,
as well.”
Smart Business asked Cendrowski how
nonprofit reporting will be different from
this point forward.
What are some of the major changes?
The new governance section, Part VI,
requires information about the organization’s governing body, its governance and
management policies, and its disclosure
practices. Governance policies and practices are not required by law, but the IRS
recognizes that a nonprofit is more likely
to report its activities correctly if it has
policies and practices in place.
How detailed does the information in the
governance section have to be?
The organization will now have to make
declarations regarding officers and board
members who receive salary or payments.
In the past, only salary had to be disclosed. Now, information on consulting
and other relationships must be disclosed,
as well. Before, the organization was only
required to disclose the officers. Now, it
has to disclose the number of board members and how many of those members are
independent (the standard of independence is that you can’t receive more than
$10,000 per year, nor can you or any member of your family be involved in a transaction worth more than $10,000 per year).
This is significant in that it will reveal how
many, if any, board members are personally benefiting from being involved with
the organization. Form 990 is a public document. Most charities post it on their Web
site or list it on www.guidestar.org, which
maintains information on charities. This is
where the transparency comes in. If you
have a board of 20, but only three are
independent, how does that look? As you
can see, the new requirements aren’t just
for the government but also for people
choosing where to donate.
What do nonprofits need to watch out for?
Be aware of the new compensation
reporting requirements. The new form
requires you to report on a calendar year
basis for officers, employees, trustees. You
will have to list base compensation and
bonuses, deferred compensation, nontaxable benefits and other compensation, and
report on compensation practices.
Be aware of any nondirect relationships
with officers and board members. For
example, board members who receive endowments or who have additional business relationships with the charity will
cause additional scrutiny by the IRS and
donors.
Do you have any advice for preparing for the
transition?
Meet with your internal staff and
accountant now to identify what new
information will be needed and to determine who will collect it and how. You’ll
need to gather information from officers
and governing body board members —
maybe obtain declarations. Have a workshop or webinar with your employees and
governing body so they’re clear on the
changes. The changes may result in you
realizing you need to make adjustments in
your record-keeping system. If you’re not
documenting all board meetings, make
sure this is one of the first things you
begin to do.
The IRS realizes the changes will take
time to adapt to. There is a three-year transition period in place, and you may be able
to file Form 990-EZ in lieu of Form 990. A
phase-in chart is available in the charities
and nonprofits section of www.irs.gov.
Will anything new be required of small nonprofits that never had to file in the past?
Small organizations whose gross receipts are normally $25,000 or less are now
required to electronically submit Form
990-N, also known as the e-Postcard. The
IRS sends reminder notices but often has
outdated contact information on file. An
organization that fails to file the required
e-Postcard for three consecutive years will
automatically lose its tax-exempt status. If
you’re involved with any small, nonprofit
community groups, make sure the main
contact person is aware of this new
requirement. Form 990-N can easily be
filed at www.epostcard.form990.org.
HARRY CENDROWSKI, CPA/ABV, CFE, CVA, CFD, CFFA, is a managing member of Cendrowski Corporate Advisors LLC. Reach him
at (866) 717-1607 or [email protected] or go to the company’s Web site at www.cca-advisors.com.
