What Form 990 Changes Could Mean to Your Organization
IRS Form 990 for tax-exempt organizations is a work in progress, and the IRS previously redesigned the form in 2008. After issuing a draft of the 2010 form to incorporate changes to language that has been problematic in the past, the service posted a final 2010 core form and related schedules to their website (www.irs.gov) at the end of December. McGladrey national lead for Exempt Organization Technical Tax Services James P. Sweeney recently hosted a webinar detailing these changes and their possible effects on organizations.
Core form changes
A new box has been created for 501(c)(3) organizations under Item I “Tax-exempt status” in the core Form 990 header. It is apparent that such organizations had experienced difficulty filling in information in the prior form presentation.
Part I, Summary
Part I, line 5 includes a clarification to previous wording involving how many individuals were employed in calendar year 2010. This helps to explain whether the number of employees at the end of the reporting period was at the conclusion of the tax reporting year or total employees within the period. Users of the forms tended to misinterpret the information and filers of the form had difficulty determining at what point in the year the number of employees should be reported.
The clarification is now in line with the instructions, indicating the number of employees that were issued a W-2 via the W-3 transmittal for the calendar year ending with or within the reporting year.
Line 7a has also been clarified, stating “Total unrelated business revenue from Part VIII, column (C), line 12.” In previous versions of the form, this line stated “Total gross unrelated business revenue from Part VIII, column (C), line 12.” There was some confusion over what exactly needed to be entered in that line because Part VIII, the statement of revenue on the core form, has items of gross income that are not accounted for in column (C) which could potentially be treated as unrelated business income subject to tax. Removing the word “gross” provides clarity as to what is needed in line 7a.
Lines 7a and 7b are key elements in Part I and are expected to often come under scrutiny from the IRS. For instance, if the total listed in line 7a is a six- or seven-figure amount with a relatively low figure in line 7b listed as unrelated business taxable income, the IRS may take a second look. Too much of a discrepancy could indicate a few different things, sometimes an overzealous allocation of expenses to offset unrelated business income flows or just incorrect allocations of overhead to reduce tax exposure.
Part II, Signature Block
There are also proposed changes to the signature block on page one, including a few interesting items. There is a new section for paid preparers which may fall in line with the new Preparer Tax Identification Number (PTIN) program where preparers are required to pay a registration fee of $64.25 on an annual basis to secure their PTIN.
Also included in the paid preparer area is a block to print or type the preparers’ name. This new area should help remove all doubt regarding illegible signatures. Under the new program, there is going to be a higher amount of monitoring of paid preparers. The block regarding whether the IRS can discuss the return with the preparer remains, but it is not in any way intended to take the place of Form 2848, Power of Attorney. The authorization for the IRS to discuss a return lasts until the due date of the next year’s return, not including extensions.
Part III, Statement of Program Service Accomplishments
A change to the header of Part III includes a check box to declare whether any information in this section is further explained in Schedule O (this checkbox approach also has been included in Part V, VI, VII and XI). There are certain areas of Part III that will require a Schedule O response. One of those areas is in line 2, asking whether the organization undertook any significant program services not listed on Form 990 or 990-EZ. Another is in line 3, where the organization is asked whether they ceased conducting or made any significant changes to program services. If the answer is “yes” to either of these questions, a description is required on Schedule O. Lines 2 and 3 are very important and will allow the IRS to continue to use Form 990 as its primary compliance tool in determining why an organization should remain tax-exempt.
Part IV, Checklist of Required Schedules
In Part IV, line 4 is changed to highlight whether the organization has engaged in lobbying activities or had a 501(h) election in effect during the tax year. If either one of these options applies, the organization must fill out Schedule C, Part II. This is the first year that a reference to a 501(h) election has been included in the core form. Line 5 includes a change in wording regarding the proxy tax regarding 501(c)(4), 501(c)(5) and 501(c)(6) organizations and whether they receive membership dues, assessments or similar amounts, adding a reference to Revenue Procedure 98-19 to increase clarity. This revenue procedure provides exceptions to reporting for these types of exempt organizations.
Line 11 includes yes and no answers, which were not included on the previous form. By evolving from the 2009 form’s bullet point format and allowing specific answers, the IRS hopes to achieve better tracking of responses and specifically which parts of Schedule D are being filled in.
In line 12, a highly contentious question was included in the form designed in 2008, asking whether an organization received a GAAP financial statement. After the 2009 form included a question regarding consolidated statements, the 2010 form has dropped the reference to line 12A and just made this a two-part question, a separate financial statement question and a consolidated statement question. Of course, if an organization received both kinds of audited financial statements, they could answer “yes” to both questions.
It is recommended for 501(c)(3) organizations seeking outside grant funding to fill in the reconciliation schedules on Part D if you answer “yes” to question 12b and “no” to 12a, although, the form and instructions list it as optional. Some grant making organizations like to see reconciliation of the numbers on the Form 990 to the audited financial statements, whether they are consolidated statements or not. Depending on the grant maker, unwarranted delays in issuing funds because of the lack of a reconciliation calculation on the filed form 990 should be avoidable.
In lines 14, 15 and 16, Schedule F is now referenced, requiring additional information for grantmaking procedures. This reminds individuals that they do need to provide their grantmaking procedures as a part of Schedule F if it is required to be filed. In addition, Schedule F now includes a new Part IV, regarding specific yes and no questions associated with the filing of foreign disclosure forms 926, 3520, 3520-A, 5471, 8621, 8865 and 5713. Organizations now will be required to know what they are invested in and state on Schedule F if they had entered into the listed transactions on the Schedule.
There is an additional line item for line 20, which looks at Schedule H for hospitals. Line 20b has been added, requiring hospital financial statements to be attached to Form 990 if the organization answers “yes” to question 20a. New health care regulations require that tax-exempt hospitals must submit this information going forward, so it is imperative that statements be completed prior to the Form 990 filing.
A new line 35b has been added, relating directly to controlled and controlling entity payments that are required to be reported.
Part V, Statements Regarding Other IRS Filings and Tax Compliance
Line 1a of Part V drops a reference to the “Annual Summary and Transmittal of U.S. Information Returns” and instead references only Form 1096. Line 1c applies to backup withholding rules for both lines 1a and 1b, so “yes” should be indicated if there are numbers in either of the previous boxes. Lines 7g and 7h both include clarifying language regarding whether organizations filed proper forms after receiving specific contributions.
Line 13 is a new item to Part V that looks at qualified nonprofit health insurance issuers, otherwise known as 501(c)(29) organizations. These organizations were authorized as tax-exempt in section 1322 of the 2010 Health Care Act, and code section 4958(e)(1) was amended to add these organizations to those that are deemed to be applicable tax-exempt organizations related to the excess benefits transaction tax. The definition of a qualified health plan can be found in section 1301 of the act. The legislation authorized $6 billion in funding and instructed the director of the Department of Health and Human Services to establish a co-op (consumer operated and oriented) plan to foster the creation of qualified not-for-profit health insurers to offer qualified health plans in the individual and small group markets. Generally, an organization will qualify as a not-for-profit health insurance provider if it meets a list of rules. Part V helps to ensure that these organizations maintain certain types of reserves that must be reported to comply with new statutory requirements.
Part VI, Governance, Management and Disclosure
Line 1a of Part VI clarifies that we are looking for the number of voting members of the governing body at the end of the tax year. This is different than the requirement in Part VII, where governing body members at any time during the year as well as highly paid individuals must be disclosed. Line 11 is a contentious topic, designed to show that Form 990 has been provided the governing body prior to filing. If a review process exists, it must be described in Schedule O. A formal review process by the entire board is not required, and this caused confusion in the past as some practitioners had advised organizations that such a review was mandatory. The instructions do clarify that if a copy of the filed Form 990 provided to the governing board is redacted in any manner, the guidelines specifically state: “Schedule B, contributors names and addresses are removed,” then organizations are not to answer “yes” to this question and must answer “no.” The instructions state that an EXACT copy of what was filed to the IRS is required to be shared with the governing body before the return is filed in order to answer “yes.”
Part VII – Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees and Independent Contractors
Line 1a drops a reference to Schedule J-2 if additional space is needed and this might indicate a Part VII continuation, which is a part of the core form instead of having to go to page 47 to see further highly compensated individuals or board members. The IRS has also numbered all the line items for persons required to be listed in Line VII (1-28 on both pages). Line 1b gives a subtotal for Part VII immediately and line 1c provides for a subtotal of any continuation sheets lending credibility to the expectation of continuation sheets for this part.
Part IX – Statement of Functional Expenses
In this part, line 24f for miscellaneous expenses has been changed to a 10 percent test, therefore, if the amount listed on line 24f totals over 10 percent of total expenses, they must be specifically listed on Schedule O.
Part X, Balance Sheet
Line 6 of Part X regarding balance sheet presentation now includes contributing employers and sponsoring organizations of 501(c)(9) voluntary employees’ beneficiary associations (VEBAs).
Part XI, Reconciliation of Net Assets
This part of the core form now includes a reconciliation of net assets that did not previously exist. This reconciles revenue and expense items with other changes in net assets.
There are also several changes to individual schedules in Form 990.
For more information, please contact McGladrey national lead for Exempt Organization Technical Tax Services James Sweeney at 703.336.6514.