What You Need to Know About the Redesigned Form 990

1. What You Need to Know Aboutthe Redesigned Form 990 Cordelia A. Glenn, Esq. AOPO 2008 January Directors' Workshop Park City, Utah January 10, 2008

2. Overview • First complete overhaul in nearly 30 years • Draft form and instructions released June 14, 2007 • 3-month comment period • IRS incorporated many comments into final draft • Final form released December 19, 2007 • Final instructions anticipated spring 2008 • First use: 2008 tax year (returns filed in 2009) • For non-calendar year fiscal years: tax years beginning in 2008

3. Overview • 3 guiding principles • Enhance Transparency • Key transparency tool relied on by IRS • Present “realistic picture” of organization • Promote Compliance • Vehicle for IRS to efficiently “assess risk of noncompliance” • Minimize Burden • Material change only for organizations with complex compensation arrangements, related entity structures, and “activities that raise compliance concerns”

4. Overview • Why start preparing now? • More like SEC disclosure document than tax return • Reponses to certain questions could: • Trigger audit or enforcement action by IRS • Provide people unfriendly to the organization with ammunition for negative publicity; whistleblower awards provide financial incentive • By identifying and resolving potential problem areas in advance, your organization can: • Mitigate risk of negative publicity or unwanted AG attention • Turn Form 990 into positive PR tool

5. Overview • Old Form • 9-page core form • 2 schedules, 36 possible attachments • New Form • 11-page core form completed by all exempt orgs • Includes summary of key info on first page • 16 schedules focusing on “areas of interest” • To be completed as needed (trigger questions)

6. Core Form • Parts I & II • Summary of key information & signature block • Part III • Mission, program changes, and program service accomplishments (narrative format) • Part IV • 37 trigger questions for schedules • Part V • Questions flagging other potential compliance and filing obligations

7. Core Form • Part VI • Governance, management, public disclosures • Part VII • Compensation of officers, directors, key employees, highest compensated employees, independent contactors • Part VIII • Statement of revenue • Part IX • Statement of functional expenses

8. Core Form • Part X • Balance sheet • Part XI • Financial statements and reporting

9. A: Public Charity Status & Public Support* B: Contributors* C: Political Campaign and Lobbying Activities* D: Supplemental Financial Statements* E: Schools F: Activities Outside U.S. G: Fundraising & Gaming* H: Hospitals I: Grants* J: Compensation Info* K: Tax-Exempt Bonds L: Transactions with Interested Persons* M: Non-Cash Contributions* N: Liquidation, Dissolution O: Supplemental Info* R: Related Organizations* Schedules to New Form 990

10. Mission and Achievements • Mission Statement(Core Parts I & III) • First thing reviewers will see on summary page • Provides opportunity to “tell your story” and provide context for all other info in form • Changes in Activities (Core Part III) • Describe new activities, changes in activities • Exempt Purpose Achievements(Core Part III) • Describe achievements for 3 largest programs by expenses

11. Disqualified Persons • Many Questions(Core Part IV, IX, X & Schedule L) • Excess benefit transactions (current and prior) • Outstanding loans (to or from) • Payment of compensation

12. Disqualified Persons • Do you know who your disqualified persons are? • Any person who was, at any time during a 5-year look back period ending on the date of the transaction: • In a position to exercise substantial influence over the organization (e.g., D&O, senior managers, facts & circumstances) • Family members of such persons • Companies 35% controlled by foregoing

13. Governance, Policies, Disclosures • Somewhat controversial • Does IRS have authority? • Could create de facto legal requirements and lead to presumption of wrongdoing. • IRS position: • “Independent governing body and well-defined governance and management policies and practices increase the likelihood that an organization is operating in compliance with federal law.” • Form educates organizations about best practices. • Form provides opportunity to explain responses.

14. Governance (Core Part VI.A) • Independent Directors(also in Core Part I) • How many voting directors? How many independent? • In draft instructions, “independent” means: • Not a compensated employee • Does not receive compensation or other payments as an independent contractor • Does not receive, directly or indirectly, material financial benefits from the organization • Not a spouse, sibling, parent or child of foregoing • Definition may be revised in final instructions.

15. Governance (Core Part VI.A) • Review of Form 990 • Provided to governing body before filing? • Note: Draft asked whether the board reviewed the Form 990 prior to filing. • Describe review process. • To whom is the form provided? • When it is provided? • What is the level of review?

16. Policies (Core Part VI.B) • Conflict of Interest Policy • In writing? Annual disclosure of interests? • Describe how you monitor and enforce policy. • IRS wants to know how an organization actually implements its conflicts policy (i.e., that the policy isn’t just collecting dust).

17. Policies (Core Part VI.B) • Whistleblower Policy • Does the organization have a written policy? • SOX makes it illegal to punish whistleblowers who risk their jobs by reporting suspected illegal activities. • Policy not legal requirement but “communicates strong culture of legal compliance and ethical integrity” • Policy should provide procedures for employees to report in confidence suspected financial impropriety or misuse of resources.

18. Policies (Core Part VI.B) • Document Retention & Destruction Policy • Does the organization have written policy? • SOX makes it illegal to destroy documents in anticipation of a federal investigation. • Policy not legal requirement, but auditors often recommend it. • Policy should set schedule for maintenance/ destruction of documents by type and prohibit destruction of records (including e-mail and other electronic records) relating to potential litigation.

19. Policies (Core Part VI.B) • Compensation • Must describe process for determining compensation of CEO/Executive Director and other key employees. • Does process include: • Review and approval by independent persons • Comparability data • Contemporaneous substantiation of deliberation and decision

20. Disclosure (Core Part VI.C) • Form 1023, Form 990, Form 990-T • Available in own website, another’s website, and/or upon request? • Note: Disclosure required by law. • Governing Documents, Conflict of Interest Policy, Financial Statements • Describe how made available to the public. • Note: Disclosure not required by law, but promotes transparency & inspires greater confidence in the organization.

21. Compensation (Core Part VII, Schedule J) • Big changes in reporting of compensation of directors, officers, key employees, highest compensated employees & independent contractors • Use of Form W-2 and Form 1099 data to reduce subjectivity • More details required for compensation paid to: • Former D&O, key employees, and HCEs • Current D&O, key employees, and HCEs receiving more than $150,000 in total compensation • Persons receiving compensation from an unrelated org for services provided to the reporting org

22. Audit & Audit Committee (Core Part XI) • Independent Accountant • Compilation, review, or audit of financial statements performed by independent accountant? • Definition of “independent accountant” to be clarified in final instructions.

23. Audit & Audit Committee (Core Part XI) • Audit Committee • Does the organization have a committee responsible for oversight of audit, review, or compilation of financial statements and selection of independent accountant? • Required by some states under certain circumstances (e.g., CA).

24. Fundraising (Schedules G, M) • Criticism that fundraising is misreported • Lack of transparency on use of funds raised • Concern about overvalued non-cash contributions • Additional information required for use of professional fundraisers, special events, and gaming ($15,000 threshold) • Note re: reporting of gaming activities: Schedule asks whether organization is licensed by the applicable state(s) to operate gaming activities.

25. Fundraising (Schedules G, M) • Non-cash contributions ($25,000 threshold) • Does the organization have a gift acceptance policy requiring review of non-standard contributions? • New reporting requirements may result in new recordkeeping practices and additional burden.

26. Recommendations • Educate board and management • Consider trial run to identify & correct potential problem areas, develop explanations • Will expose areas needing additional recordkeeping • Consider involving legal counsel • Work on mission statement, program descriptions • Will set the stage for all info in Form 990 • Identify disqualified persons & update list annually • Examine board independence

27. Recommendations (cont.) • Examine and formalize Form 990 review process • Prepare and present policies to Board for approval • Conflict of Interest • Whistleblower • Document retention and destruction • Compensation review • Gift acceptance • Consider public disclosure practices

28. Recommendations (cont.) • Consider formation of Audit Committee & examine relationship with auditor • Review financial arrangements with disqualified and interested persons • Restructure problematic arrangements if possible • For organizations conducting solicitations and gaming in connection with fundraising  ensure appropriate state licensure

29. Recommendations (cont.) OVERALL GOAL: Present as good a public profile as possible.