Preparing for the new Form 990: Governance issues
By Steven L.F. Ho
The Internal Revenue Service has released a new Form 990 and accompanying instructions for the 2008 tax year. The new form has received significant publicity in the exempt organizations sector as it is the first major change in almost 30 years.
Exempt organizations will begin using the new Form 990 in 2009 for tax years ending in 2008, with a two-year phase-in for smaller organizations. Nonprofits should begin reviewing the governance questions in advance of filing the Form 990 so that they can make appropriate decisions on any necessary changes to their governance policies.
Among other numerous changes, the Form 990 adds a new governance section and additional governance-related questions throughout the form. As noted in the instructions, these governance questions require the disclosure of information that is not required by the Internal Revenue Code. Nevertheless, the IRS believes the existence of an independent governing body and well-defined governance policies will improve tax compliance. Thus, it is attempting to regulate in this area by requiring disclosure of information.
Although the governance questions do not have any “right” or “wrong” answers, the fact that the questions are being asked implies certain minimum expectations by the IRS. How the IRS will use the responses is not clear, but organizations that lack “acceptable” governance practices could be singled out for closer review or audit. An organization’s responses to these questions are also likely to be scrutinized by the organization’s members, donors and funders, the state Attorney General and other interested parties.
Accordingly, in anticipation of filing the new Form 990 in 2009, nonprofits should review the governance questions in advance and consider how a “negative” response to a question will be viewed. Organizations can then evaluate whether they should adopt policies or procedures which would allow for a “positive” response to the question.
The following are some of the governance questions in the new Form 990 that should be reviewed and compared to the organization’s existing policies and procedures in advance of the filing of the form:
>> Conflict of Interest Policy: Part VI, Line 12 asks whether the organization has a written conflict interest policy, whether it requires annual disclosure of interests that could give rise to conflicts and whether the organization regularly monitors and enforces compliance with the policy. Many exempt organizations already have a conflict of interest policy in place; however, the policy should be reviewed after considering the information required to be disclosed elsewhere in the Form 990. For example, Schedule L requires the disclosure of transactions with “interested persons,” which includes both current and former directors, officers, key employees and family members. Since some of these “interested persons” may not be covered by the organization’s existing conflict of interest policy, the organization may want to consider whether transactions with all “interested persons” should be covered by the policy.
>> Whistleblower Policy: Part VI, Line 13 asks whether the organization has a written whistleblower policy. The instructions to Form 990 state that a whistleblower policy encourages staff and volunteers to come forward with credible information on illegal practices or violations of adopted policies of the organization. The instructions also note that the Sarbanes-Oxley Act imposes criminal liability on exempt organizations for retaliation against whistleblowers who report federal offenses.
>> Document Retention and Destruction Policy: Part VI, Line 14 asks whether the organization has a written document retention and destruction policy. The instructions to Form 990 state that a document retention and destruction policy identifies the record-retention responsibilities of staff, volunteers, board members, and outsiders for maintaining and documenting the storage and destruction of the organization’s documents and records. The instructions also note that the Sarbanes-Oxley Act imposes criminal liability on exempt organizations for destroying records with the intent to obstruct a federal investigation.
>> Board Minutes: Part VI, Line 8 asks whether the organization contemporaneously documented board and committee meetings. The instructions to Form 990 state that “contemporaneous” means by the next meeting or 60 days after the date of the meeting, whichever is later. This question applies to all meetings of the board and all committees with authority to act on behalf of the board. Organizations may want to consider adopting standard practices for the recording and approval of minutes.
>> Executive Compensation: Part VI, Line 15 asks whether the process for determining the compensation for the CEO, executive director and other key employees included in the deliberation and decision: review and approval by independent persons; comparability data; and contemporaneous substantiation. This question probes whether the organization complied with the “rebuttable presumption of reasonableness” safe harbor contained in the intermediate sanctions regulations. These procedures may be included in the organization’s executive compensation policy or the Board’s compensation committee charter.
>> Expense Reimbursement: Schedule J, Part I, Line 1 asks whether the organization has a written policy regarding the payment or reimbursement of certain business expenses, including first class travel, companion travel, tax indemnification payments, discretionary spending account, housing allowance, business use of personal residence, health or social club dues and personal services.
>> Chapters and Affiliates: Part VI, Line 9 asks whether the organization has written policies governing the activities of chapters, affiliates and branches to ensure that their operations are consistent with those of the parent organization. The Form 990 instructions state that these polices may include required provisions in the chapter’s articles of organization or bylaws, a manual provided to chapters, a constitution or similar documents.
>> Joint Ventures: Part VI, Line 16 asks if the organization participated in any joint ventures and whether it has a written policy requiring the organization to evaluate its participation in joint venture arrangements under federal tax law and take steps to safeguard the organization’s exempt status with respect to such arrangements. The instructions to the Form 990 contain a broad definition of “joint venture” to include any joint ownership or contractual arrangement through which there is an agreement to jointly undertake a specific business enterprise, investment or exempt-purpose activity without regard to: (1) whether the organization controls the venture or arrangement, (2) the legal structure of the venture or arrangement, or (3) whether the venture or arrangement is taxed as a partnership or corporation.
>> Gift Acceptance: Schedule M, Part I, Line 31 asks whether the organization has a gift acceptance policy that requires the review of any non-standard contributions.
>> Form 990 Review: Part VI, Line 10 asks for a description of the organization’s process to review the Form 990 and whether the Form 990 was provided to the board before it was filed. Organizations may want to consider adopting policies and procedures to document their Form 990 review process.
>> Audit of Financial Statements: Part XI, Line 2 asks whether the organization’s financial statements were audited, reviewed or compiled by an independent accountant and whether the organization has a committee that assumes responsibility for oversight of the audit, review or compilation and the selection of the independent accountant. The instructions to Form 990 define an “audit committee” as a committee with the responsibilities to oversee the organization’s financial reporting process, monitor choice of accounting policies and principles, monitor internal control processes and oversee hiring and performance of external auditors. Whether these responsibilities are undertaken by an audit committee or by the full board, guidelines setting forth the committee’s responsibilities should be contained in an audit committee charter or other comparable policy document.
>> Disclosure of Information: Part VI, Line 19 asks whether and how the organization makes its governing documents, conflict of interest policy and financial statements available to the public. Neither federal nor Hawaii law requires that an organization make these documents available to the public. If, however, an organization decides to do so, is should consider establishing a policy that covers the type of documents that will be made available, how they will be made available and any associated costs to be charged.
Steven L.F. Ho is an attorney with Torkildson, Katz, Moore, Hetherington & Harris, a Honolulu law firm, and a member of the HANO board of directors.
