July 18, 2013

Preparation of Form 990, Return of Organization Exempt from Income Tax, is an annual exercise for nonprofit organizations in completing the 12-page form – plus related schedules. 

The form provides financial, governance and operating information about the organization not only to the IRS but to the public as well.Form 990

The return was last redesigned in 2008 to promote transparency and improve compliance. More in-depth information is required now than in previous versions, and revisions continue to modify and clarify reporting requirements in the related schedules and instructions. 

Since the redesigned form was introduced, the IRS has used the expanded data to better identify patterns of noncompliance and to understand the causes. The effectiveness of this process relies on accurate reporting.

Because of the new ways that the IRS is analyzing return data and selecting organizations for review, it is more important than ever that organizations follow instructions, compute properly and report accurately. The IRS 2013 work plan includes continued use of Form 990 information in compliance efforts.

The bottom line is that the IRS uses Form 990 responses to select returns for examination, so a complete and accurate return is in the organization’s best interest. Inaccurate or incomplete reporting may give the appearance of noncompliance, and that may lead the IRS to examine an organization unnecessarily, so attention to detail is important.

Compliance Checks

IRS review of Form 990 includes both compliance checks and traditional examinations.

In a typical compliance check, an organization is contacted by letter when an apparent error is discovered. Compliance check questionnaires also are used to study parts of the tax-exempt community or specific cross-sector practices.

On the other hand, traditional examinations, namely audits, determine an organization’s continued qualification for tax-exempt status. In 2012, the IRS used data from Form 990 to test for indicators of potential noncompliance in:

  • Sources and uses of funds in the charitable sector and their relationship to charitable accomplishments
  • Transparent reporting of compensation paid to officers, directors, trustees and key employees
  • Possible impermissible political campaign intervention
  • Accuracy of reporting unrelated business income subject to tax

Changes to Form 990

Form 990 is being used by the IRS to implement the provisions of the Affordable Care Act of 2010, known as ObamaCare, by revising Form 990 Schedule H Hospitals and the instructions to enable hospital organizations to report whether and how they are complying with new requirements for tax-exempt hospitals.

Significant changes were made in 2012. Filers were reminded not to include Social Security numbers of officers, directors, trustees or key employees in Form 990, since the form is open to public inspection.

Clarification was provided that only hospital organizations should attach a copy of their most recent audited financial statements to Form 990.

Other organizations that obtain audited financial statements complete a reconciliation of both revenue and expenses per financial statements with revenue and expenses per the return. An expanded disclosure asks whether financial statements were compiled, reviewed, or audited on a separate or consolidated basis.

New lines are provided for net unrealized gains and losses on investments, donated services and use of facilities, investment expenses and prior period adjustments. Additional information on grants or assistance from foreign organizations or individuals is required.

If an amount exceeds 10 percent of total functional expenses, additional disclosure is required. Revenue from and interests in joint ventures or other partnerships can be reported from the organization’s books and records rather than from the Schedule K-1 tax report it receives. The definition of “professional fundraising services” now includes preparation of applications for grants or other assistance.

The donor acknowledgement of a contribution in the name of one of its programs should indicate the organization’s name. For substantiation of charitable contributions on a donor’s tax return, the IRS continues to strictly apply the law that a written acknowledgement from the charity must be obtained before the donor’s tax return is filed, and must state whether any goods or services were provided in exchange for the contribution.

With respect to governance, management and disclosure, the instructions clarify what information on management companies should be provided. In the area of compensation of officers, directors, trustees, key employees, highest compensated employees and independent contractors, reporting of average hours per week worked for related organizations is requested, in addition to hours worked for the filing organization.

This article was originally posted on July 18, 2013 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at marketing@grfcpa.com.