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 firstname.lastname@example.org or go to the company’s Web site at www.cca-advisors.com.