Client Alert

After more than a year of deliberation, the IRS has finalized major changes to Form 990, the primary annual financial reporting document for non-profit organizations. The revisions are the first significant changes to Form 990 in nearly 30 years and place a greater reporting burden on non-profits, particularly in the areas of executive compensation and corporate governance.

The new Form 990 must be used for fiscal years that began in 2008. Non-profit organizations that operate on a Jan. 1st-Dec. 31st fiscal year will need to file a new Form 990 by May 15, 2009. Organizations operating on an alternate fiscal calendar year must file by the 15th day of the fifth month after the end of the fiscal year. All filing organizations must complete an 11-page Core Form. Additional information, requested on a variety of schedules, will be required from some organizations.

Corporate Governance
Does your company have a conflict of interest policy? A whistle-blower protection policy? A document retention and destruction policy? Those are among the questions non-profit organizations must answer on the new Form 990.

While the IRS does not specifically require any of these policies, they consider such policies to be important to the operations of a non-profit. The absence of such policies will not necessarily trigger an audit, but if there is an audit, their absence may well cause the IRS to take a closer look at the organization.

Having the proper policies on the books not only can prevent potential problems, but they also can serve as a “good faith” defense in case something unforeseen should happen, provided that the policy is followed.

The revised Form 990 also inquires about:

• The independence of the non-profit’s Board of Directors
• The outside relationships between board members
• The authority of members to elect the governing body and approve board decisions
• Whether or not meeting minutes are kept
• Whether or not an organization discloses its policies and financial statements to the public

The answer to these questions isn’t automatically “Yes.” Every board must determine the appropriate level of governance for their specific organization. However, these questions certainly should prompt serious internal discussion about the board’s policies and procedures, keeping in mind lawmakers’ push for greater transparency.

Executive Compensation
Similarly, the new Form 990 greatly increases the amount of information non-profits are required to disclose about executive employee compensation.

Under the new requirements, all tax-exempt entities must report their top five employee salaries. Previously, this level of reporting only was required of Section 501(c) (3) entities. The revised Form 990 also asks for information about how executive compensation is determined. For example, the form asks if comparability data or independent, outside opinions are part of the process.

In addition, if a non-profit has employees who earn more than $150,000 per year or $250,000 per year in total compensation (including expense reimbursements and fringe benefits), this organization must provide additional executive compensation details in the revised Schedule J. This reporting includes breaking down compensation by base pay, bonuses and incentives, deferred compensation and non-taxable benefits.

While the IRS does not place any limits or restrictions on non-profit executive compensation, the revised Form 990 makes such information much more visible to donors, the media and the general public. Boards of Directors need to carefully examine all aspects of executive compensation in light of this increased scrutiny.

As soon as possible, but certainly before beginning the process of completing the Form 990 for 2008, non-profit organizations should review all areas of policy and procedure related to corporate governance and executive compensation. If possible, this should be done with legal counsel because the 2008 Form 990 requires so much new information. Decision-makers should take care to not only comply with the new standards, but also consider the ramifications their practices will have in the arena of public opinion.