The New IRS Form 990
What do AIA components need to know?

by Terrence Canela, Esq.
Associate General Counsel

“We'll try to cooperate fully with the IRS, because, as citizens, we feel a strong patriotic duty not to go to jail.”
— Dave Barry

As you are probably aware, the Internal Revenue Service (IRS) generally requires organizations exempt from tax under Section 501(c) of the Internal Revenue Code to file an annual tax return on IRS Form 990. After a period of significant revision to the Form 990, as well as a period of input and feedback from the public, the nonprofit community, and the various states, the IRS released the new 2008 Form 990 in December 2007. The changes are substantial. Designed to underscore the principles of enhancing transparency, promoting tax compliance, and minimizing the burden on the filing organization, the 2008 Form 990 requires organizations to provide greater breadth and depth of detail into their operations.

This article is to help familiarize AIA components with some of the key changes to the 2008 Form 990 and to get AIA components thinking ahead about what they will be reporting in 2009. For details, visit the IRS Web site.

Some introductory points to bear in mind:

• You will use the 2008 Form 990 when you file tax returns in 2009. For returns filed this year, you will use the old 2007 Form 990.
• Even though you have a year, given the changes to the 2008 Form 990, start looking at the new Form 990 now to get familiar with what you will need to report in 2009. For more information, don’t hesitate to contact the AIA Office of General Counsel.
• The Form 990 you file is a public document. You should be mindful that with increased reporting on the 2008 Form 990, the IRS will not be alone in scrutinizing the information provided. With recent scandals involving corporate wrongdoing, the public is wary of corporate activity, which includes that of nonprofit organizations. State attorneys and public watchdog groups may be interested in your 2008 Form 990 disclosures, especially in the area of management, governance, and compensation reporting.
• There are still some ambiguities in the form, but the IRS has not yet issued instructions for completing the 2008 Form 990. The IRS indicates it will do so in early 2008. When issued, the instructions should provide further assistance on how to respond to some of the unclear parts of the form.

What’s new?
A longer and more comprehensive form: The previous Form 990 was a 9-page form with two schedules. The 2008 Form 990 is an 11-page form with 16 schedules. Organizations reporting on the 2008 Form 990 will be asked to answer a variety of new questions about how their management and governance operate, what policies and procedures they have in place, and how their programs work. The idea underlying these questions is to ensure that organizations are conducting their businesses in an appropriate manner, underscoring the IRS’s belief that the existence of an independent governing body and well-defined governance and management policies and practices increases the likelihood that an organization is operating in compliance with federal tax law. The new questions ask about the organization’s board composition and independence; its governance, management structure, and policies; and whether (and if so, how) the organization promotes transparency and accountability to its constituents or beneficiaries. The questions include:

• Did any officer, director, trustee, or key employee have a family relationship or a business relationship with any other officer, director, trustee, or key employee?
• Were minutes taken at meetings of the board of directors and committees of the board?
• Does the organization have a written conflict of interest policy and does the organization regularly and consistently monitor and enforce compliance with the conflict of interest policy?
• Does the organization have a written document retention and destruction policy?
• Describe your three largest programs.

These and the other new, probing questions were designed in part to achieve the IRS’s goals of “transparency” and “compliance.” Answering in the negative to some of the questions does not amount to an admission of unlawful activity. For example, you are not legally required to have a written conflict of interest policy. Be aware, however, that some who read the report—given that the Form 990 is a public document—might draw unfavorable conclusions depending on how you complete the form. AIA components must understand and deal with these questions well before filing in 2009.

Increased reporting of executive compensation. Again, in its efforts to ensure transparency and compliance, the IRS requires increased reporting of compensation you pay officers, directors, and employees. This will be of special interest to larger components. When calculating compensation, you must also include an estimate of nontaxable benefits, e.g., retirement plan contributions, health-club dues reimbursement, and first-class travel. You will be required to report how you determined compensation amounts and whether the process for determining the compensation included review and approval by independent persons, use of comparability data, and “contemporaneous substantiation of the deliberation and decision.” In particular, larger AIA components will want to pay attention to the reporting requirements of this last point, because how executive compensation is determined may be a point of curiosity for audiences beyond the IRS.

Smaller organizations can opt out—for now
Phase-in of filing requirement for small organizations. To address transition concerns expressed by various commentators, the IRS will phase in the new form over a three-year period by allowing some organizations to continue using the Form 990 EZ, the abbreviated short form, which contains far fewer disclosure requirements. Smaller organizations will have the option to file either the new Form 990 or the Form 990-EZ for 2008, 2009 and 2010 tax years if it satisfies both the gross receipts and assets tests in the table below.

What to keep in mind
Wider audience. The 2008 Form 990, like the previous Form 990s, is a public document. As mentioned before, the IRS will not be the only ones who may be looking at this document. Public advocacy watchdog groups, state attorneys general, and even an organization’s own membership may be among those interested in seeing what an organization reports on the 2008 Form 990. It is critical to be mindful of those who may read your Form 990s and of what they may conclude from the information you provide.

Become familiar with the 2008 Form 990 ASAP. Making the 2008 Form 990 work to your benefit and not to your detriment depends on your familiarity with what needs to be reported in 2009. If your board or board committees do not keep contemporaneous minutes, you may want to start doing that right away. If you do not have a written conflict of interest policy, now might be the time to put one together.

Paint a picture. There are numerous opportunities in the 2008 Form 990 and its schedules to provide supplemental open-ended information to the IRS, and, more importantly, to the public audience. Critics of the form specifically asked the IRS to include areas on the form so that organizations could provide narrative responses to some of the questions. Savvy organizations will use these opportunities to tell their story and highlight the positive aspects of their efforts.