Deconstructing Form 990 Featured

8:00pm EDT April 25, 2008

The Internal Revenue Service (IRS) is in the process of redesigning the Form 990 — Return of Organization Exempt from Income Tax.

The redesign of Form 990 is based upon three principles: to enhance transparency, which will in turn provide the IRS and the general public with a more realistic picture of the organization; to promote compliance by accurately reflecting operations in order for the IRS to efficiently assess the risk of noncompliance; and to minimize the burden on filing organizations.

“In addition, organizations that were not required to report in the past to the IRS — those with gross receipts of less that $25,000 — are now required to file Form 990-N, Electronic Notice (e-Postcard for Tax-Exempt Organizations not required to File Form 990 or 990-EZ),” says Victoria Milana Odom, a certified public accountant and tax manager at Briggs & Veselka Co.

Smart Business spoke with Odom about Form 990 and why organizations need to be aware of it in today’s tax world.

Why is the Form 990 so important?

The benefits of the redesigned Form 990 are for the end users of the return, donors and the IRS. The information on the first page of the new form is a summary of the information presented throughout the return, in a format that will be standard for all filing organizations. End users will now be able to determine the organization’s mission and significant accomplishments, as well as major categories of income and expense with comparisons for both the current and prior year at a single glance. The new form is also presented in such a way that all required supplemental schedules will now be reported by completing a checklist of required schedules. This checklist will provide a view of whether the filing organization is conducting activities that raise tax compliance concerns, such as lobbying or political activities, transactions with interested persons and major dispositions of assets.

What problems or issues can arise from it?

The problems that can arise from the redesigned Form 990 are as follows:

  • An organization will be required to report its revenue in greater detail. There will be more time spent providing revenue generated from federated campaigns, membership dues, fund-raising events and government grants as well as receipts from related organizations. Program revenue will need to be reported by specific program area and not in total.

  • An organization will now be required to report on new expense categories that have not been required to be itemized in the past, such as costs for information technology, fees for various services, and grants or assistance from both inside and outside the United States.

  • The definition of related organizations takes on a whole new meaning. The IRS has defined a related organization as either a tax-exempt or taxable organization related to the tax-exempt organization in one or more of the following ways: one organization owns or controls the other; the same person(s) owns or controls both organizations; the organizations have a relationship as a supporting and supported organization; the organizations use a common paymaster; the other organization pays part of the compensation that the organizations would otherwise be contractually obligated to pay; and the organizations conduct joint programs or share facilities or employees. The key problem with related organizations is now the ‘control’ issue. For example, one organization may have a board member who is employed by one of the organization’s vendors. If this were the case, the organization would be required to report on the Form 990 not only the salaries and/or payments made to the related organization but also any income received by the ‘shared member’ from the related organization.

How can the problems be solved?

The organization can review its accounting systems now to determine what changes will need to be made to its chart of accounts to deliver the more detailed reporting. In addition, an organization should download a copy of the Dec. 19, 2007, draft Form 990 to start collecting the additional information it will need to provide to its outside accountants. By being proactive on this, the organization can hold down the costs that will be involved in the preparation of the 2008 Form 990. The new Form 990 can be downloaded from the IRS Web site at www.irs.gov/charities/index.html. The organization can also begin working with board members and key employees to determine if there are any related party issues. Foremost, the tax-exempt organization should contact its outside accountants to determine what will be required of it for the 2008 reporting year. It should be prepared for all of the additional reporting that will be required and start gathering the information that will be necessary to file a complete and accurate Form 990.

VICTORIA MILANA ODOM is a certified public accountant and tax manager at Briggs & Veselka Co. Reach her at (713) 667-9147 or vodom@bvccpa.com.