Thanks for not deleting this–you won’t be sorry for several reasons starting with the fact that as a nonprofit organization you have all the business issues of a for-profit business with the extra layer of non-profit complexity added to it. And in Southern California there is a limited pool of experts to answer your needs.

As one of the largest providers of accounting services to nonprofit organizations in Southern California, we are often called upon as a resource in addressing business and accounting matters for a great variety of organizations, clients and non-clients alike. We have developed The Mission Statement to provide a proactive resource to many of you who are currently wrestling with such matters, or have yet to do so. We are excited to share our collective 50+ years of public and private experience in the nonprofit field with you in this e-format.

As always, if you have any further questions or ideas for future issues please let us know.

Tom Schulte
Partner-in Charge
Nonprofit Services Group

The last time IRS Form 990 was substantially revised, Jimmy Carter was living in the White House. Much has changed since then. So it only makes sense that nonprofits are getting a new Form 990 that better suits the public’s information needs.

Drafting an Answer

On June 14, 2007, the IRS published a draft version of the long-awaited Form 990 redesign. The goal is to release the final version of the updated form in late 2007, to be used during the 2009 filing year (for the 2008 tax year).

In its Redesign Form Teleconference on July 19, 2007, the IRS stated that the redesign was based on three guiding principles: enhancing transparency, promoting tax compliance and minimizing the burden on filing organizations.

To meet these goals, the IRS has revamped the layout of the form. It’s now composed of a core 10-page form that applies to all filers, with 15 additional schedules that apply to only specific organizations. The IRS estimates that 75% of organizations will have to file only one or two of the additional schedules. However, in reviewing the draft forms, many nonprofit experts agree that it appears that only small organizations with little complexity will fall into this category.

Dissecting the Form

The first page of the core form is a brief description of the entity and a summary of amounts from other places in the return. The purpose is to provide the reader with a snapshot of the efficiency and effectiveness indicators related to the entity. This allows comparisons between organizations to be made at a glance, enhancing the transparency of the reporting.

The remainder of the core form is devoted to promoting compliance through reporting: 1) detailed information about officers, directors and key employees, 2) revenue and expenses, and 3) program service accomplishments. A new portion on governance was added to identify potential compliance issues resulting from governance and management practices.

Schedules A and B still exist, though Schedule A has been revamped to focus entirely on the public charity status of a Section 501(c)(3) organization.

Following Through

Once the new Form 990 is finalized, take the time to familiarize yourself with it so your organization can react to any changes that would be beneficial, such as modifying your general ledger to capture additional information that will now be required. Also acquaint yourself with the governance disclosures so you can make desired changes to your governance policies. For example, one of the questions addresses whether you have a written whistle-blower policy. If your organization doesn’t have one, you might make that change.

Most of the policies and procedures in the governance section of the Form 990 aren’t required to maintain exemption, but remember: The eyes of the world will be looking at your responses. Additionally, you’ll want to thoroughly understand the revenue and expense reporting so that you can design your accounting system to capture the information required.

Understanding Will Ease Transition

The redesign of the Form 990 is a significant change. The more you understand about what the new form seeks to accomplish and how it’s structured, the smoother your transition to the new form will be.

IRS Examination of Nonprofits in 2007

By Renee Ordeneaux

The IRS conducted examinations of 7,580 exempt organization returns in 2007, a 7% increase over the 7,079 audits in 2006. The 2007 volume is a 53% increase over 2005, during which the IRS audited only 4,953 exempt organization returns, the lowest number over the past 10 years.

The IRS uses both examinations (audits) and compliance checks as part of its monitoring of nonprofit organizations. An examination consists of a review of taxpayer books and records to determine tax liability, and – in the case of tax-exempt organizations – qualification for tax-exempt status. Compliance checks are limited investigations designed to determine whether an organization is following recordkeeping and reporting requirements.

During 2006 and 2007, the IRS focused on executive compensation within the nonprofit sector. The service sent compliance check letters to 1,223 organizations, and then conducted examinations of 782 organizations. The IRS also looked at loans made to officers. According to the 2008 Implementing Guidelines, the IRS “did not uncover wide-spread excess benefit transactions or instances of self-dealing.” However, the project did result in the imposition of $21 million in excise taxes directed at many organizations.

Other audits occurred as a result of targeted initiatives by the IRS. The service selected 111 credit counseling organizations, which had been targeted by the IRS for several years, for audit in 2007. The IRS will examine another 80 of these organizations in 2008. Providers of seller-funded downpayments accounted for 200 audits. Another 100 audits were conducted on organizations that had deposited payroll taxes, but not filed the appropriate payroll tax returns.

For 2008, the IRS has identified the following compliance priorities in the nonprofit sector: a continuation of employment tax compliance; a research/compliance project on colleges and universities focusing on unrelated business income, use of endowments, and executive compensation; related party transactions in supporting organizations (500 reviews and 300 compliance checks); charitable remainder trusts; and conservation easements.