NJAIS Trustee Enrichment Day The New 990: What A Board Member Should Know

1. NJAIS Trustee Enrichment Day The New 990: What A Board Member Should Know Richard Cohen, CPA Marvin Ungar, CPA November 8th, 2009

2. Redesigned Form 990 • First major redesign since 1979 • Effective for 2008 returns (filed in 2009) • IRS Guiding Principles: • Enhancing transparency to provide IRS and the public with a realistic picture of the organization • Promoting tax compliance by accurately reflecting the organization’s operations • Burden minimization on the filing organization for many, but not all organizations

3. Bob Ottenhoff - President and CEO, Guidestar July, 2008 Newsletter • Over 10 years ago, when Guidestar first started, transparency in the nonprofit sector was a revolutionary concept. It was nearly impossible to find good-quality nonprofit data. Posting IRS 990s on the Guidestar website in 1999 caused a stir, with lots of angry phone calls from nervous nonprofit leaders. • Today, transparency is considered an essential characteristic of a successful nonprofit organization. Donors and stakeholders expect a nonprofit to be open about its operations: informing us about mission, programs, people, and finances. I tell inquiring reporters that an organization that is unwilling—or sometimes unable—to be transparent is not necessarily doing something bad but probably requires further scrutiny, because transparency is so expected.

4. Who Is Looking at Your 990? Individual Donors Private foundations Corporate donors Watchdog groups State regulators Reporters IRS

5. Redesigned Form 990 • Core Form–(11 Pages – Parts I to XI) applies to all organizations • Schedules–(16 Schedules – A through R) relevant only to some organizations determined by: • Activities • Financial transactions • Tax classification under Section 501(c)

6. 2008 Form 990 Glossary IRS instructions include a 24-page glossary to help preparers and users understand a variety of technical terms used in the form.

7. Form 990-EZ

8. Three Main Parts Of Part VI Section A. Governing Body and Management Section B. Policies Section C. Disclosure

9. Governing Body and Management, Policies and Disclosure Even though certain governance, management, and disclosure policies and procedures may not be required under the Internal Revenue Code, the IRS considers such policies and procedures to generally improve tax compliance. Therefore, answering questions is required.

10. Size of Governing BodyGoverning Body and Management - # 1a • Record the number of voting members at the end of the year • State law generally requires 3 or more directors • The IRS believes Boards can be too small or too large • Small boards may not represent broad public interest and lack the required skills needed to adequately govern • Large boards may have a difficult time getting down to business and making decisions

11. Independent Voting MembersGoverning Body and Management # 1b Member is independent if all three conditions are met: • Not compensated as an officer or other employee by TEO or a related TEO • Not compensated as an independent contractor exceeding $10,000 during the year by the TEO or related TEO ( Director compensation or expense reimbursement is not counted toward $10,000 ) • Neither member nor family member was involved in a Schedule L transaction, which includes loans to/from TEO, grants or other assistance benefiting the person, and certain business transactions.

12. Independent Voting Members • IRS “Gold Standard” is an active, independent, and engaged Board of Directors • Independence generally not required by law • Why? Related or compensated directors are not as independent in their decision making

13. Family and Business Relationships among Officers, Directors or Key Employees - Governing Body and Management #2 Answer “yes” if any family or business relationship exists. • Family relationships include spouse, ancestors, siblings, children, grandchildren, and respective spouses. • Business relationship includes employment relationship where one party is a sole proprietor, officer or greater than 35% owner. • Business relationship includes two or more persons when each is a director, officer, or greater than 10% owner in the same business. • Transacting business with one another okay if in the ordinary course of business. • Reasonable effort standard in obtaining information can be relied upon. • Privileged relationship exception for attorney-client, doctor-patient, priest-penitent.

14. Delegate Control Over Management DutiesGoverning Body and Management #3 Answer ‘yes” if organization used a management company or other person to perform management duties usually performed by or under direct supervision of officers, directors, trustees or key employees. Such duties include hiring, firing, supervising personnel, planning or executing budgets or financial operations, supervising exempt operations or unrelated trades or businesses. Such duties do not include payroll processing or investment management.

15. Significant Changes to Organizational Documents - Governing Body and Management # 4 Refers to the “enabling document” by which it was created such as articles of incorporation and/or bylaws Report changes since prior 990 or those not reported on any prior 990 Do not report changes outside of enabling document that were adopted pursuant to resolution, such as creation of Audit Committee.

16. Significant Changes to Organizational Documents (cont.) Examples to report include changes to: • Organization’s exempt purpose or mission • Number, composition, qualifications, authority or duties of the governing body’s voting members, officers or key employees • Role of stockholders or membership on governance • Distribution of assets upon dissolution • Provisions to amend the enabling document • Quorum, voting rights or voting approval requirements of the governing body members or stockholders/membership • Policies or procedures contained within the organizing document or bylaws regarding compensation of officers, directors, or key employees, conflicts of interest , whistleblowers, or document retention and destruction • Composition or procedures contained within the organizing document or bylaws of an audit committee

17. Material Diversion of AssetsGoverning Body and Management # 5 Answer “Yes” if organization became aware of a material unauthorized diversion during year, whether or not diversion occurred during year. If “Yes”, explain nature, amounts or property involved, corrective actions taken and circumstances in Sch. O Do not identify person or persons committing diversion by name. Diversion of assets is often an embezzlement or theft. Diversion is considered material if gross dollar amount exceeds lesser of $250,000 or 5% of lesser of gross receipts or total assets.

18. Members or StockholdersGoverning Body and Management # 6 and #7 Answer yes if: • Organization is a stock corporation, partnership, joint venture or limited liability company; or a non stock non profit with members (# 6) , and yes to # 7 if such members:  • Elect governing body (a) • Approve board decisions (b)

19. Meeting DocumentationGoverning Body and Management # 8 Use any means permitted by State law such as approved minutes, e-mail strings. Document action taken, when it was taken, and who made decision. Contemporaneous means by later of next meeting or 60 days after meeting or written action. If no, explain in Schedule O explain organization’s practices re: documenting, if any.

20. Any Local Chapters, Branches, Affiliates?Governing Body and Management #9 Written policies and procedures needed to insure consistency Written policies and procedures may include articles of organization or bylaws, a manual, constitution or similar document. If no, explain in Schedule O how main organization ensures consistency.

21. Copy of 990 provided before filing?Governing Body and Management # 10 Answer “yes” if each voting member of Governing Body member was provided either paper or electronic copy before filing. Describe in schedule O the process by which officers, board members or management reviewed the 990, whether before or after 990 was filed. Note who conducted review, when conducted and the extent of such review.

22. Mailing AddressGoverning Body and Management #11 • IRS needs mailing address to contact officers, directors and key employees • Official mailing address of organization may be used.

23. PoliciesQuestions 12 -16 • Not required by law • Adopt by year-end to answer “yes” • Must be written policies

24. Conflict of Interest PolicyPolicies # 12 • Arises when a person in a position of authority, such as an officer, director, or manager, may benefit financially from a decision he or she could make in such capacity, including indirect benefits such as to family members or businesses with which the person is closely associated • Policy defines conflicts, identifies classes of people covered, facilitates disclosure, specifies follow-up procedures • Are directors, officer and key employees required to annually disclose interests that could give rise to conflicts? • Monitor and enforce compliance…if yes, describe how in Sch. O

25. Whistleblower and Document Retention and Destruction - Policies # 13 and #14 • Written Whistleblower Policy-Sarbanes Oxley-protects rights of whistleblowers who report wrongdoing to federal investigators. • Written document retention and destruction policy-Sarbanes Oxley makes it a crime to knowingly destroy, conceal, falsify records to impede federal investigation. • Answer yes if in place as of the last day of tax year.

26. Compensation PolicyPolicies # 15 Review and approval by independent persons., i.e., a governing body or compensation committee Use of data as to comparable compensation for similarly qualified persons in functionally comparable positions at similarly situated organizations Contemporaneous documentation and recordkeeping with respect to deliberations and decisions regarding the compensation arrangement. Used for CEO, ED or top management official ? Used for other officers or key employees in organization? Describe process in Schedule O.

27. Joint Venture PolicyPolicies # 16 • Did organization participate in a joint venture with a taxable entity during year? • Did Org. adopt written policy to negotiate certain safeguards to ensure exempt purpose is protected and taken necessary steps to do so? Safeguards include: Controls over the venture sufficient to insure that it furthers the exempt purpose; requirements that venture gives priority to exempt purpose over maximizing profits; and that activities would not jeopardize the organization’s exemption.

28. Form 990 Filings in StatesDisclosure #17 Some states require or permit the filing of Form 990 to fulfill State exempt organization or charitable solicitation reporting requirements. Pennsylvania & New Jersey requires filing

29. Public Availability of Forms 1023/1024, 990 & 990-T - Disclosure # 18 Must make Form 1023 or 1024 available except for those filed before 7/15/87 990 must be available for a period for 3 years, starting with filing date 501 (C) (3) must make 990-T available for 3 year period. Explain in Schedule O if organization does not make these documents available.

30. Public Availability of Other DocumentsDisclosure # 19 • Explain in Sch. O how governing documents, COI policy, and financial statements are made available? • Use website. • Copies can be provided if not available electronically. • Inspection at organization’s office also okay.

31. Possession of books and records Disclosure # 20 Provide name of person, business address and telephone number. If records are kept at personal residence, use organization address. No requirement to provide address or telephone number of a personal residence.

32. Next Steps Take time now to become more familiar with the full set of forms Review all existing policies and begin a process to develop additional policies to be adopted before year end Conduct a “dry run” completion of the new form to see how you look Take advantage of the opportunity to tell your story!

34. Schedules of disclosure • Schedule A • Public charity status and public support • Schedule D • Uncertain tax positions • Art : Valuation of collection • Endowment funds • Schedule E • Schools • Schedule G • Transparency related to fundraising activities

35. Schedules of disclosure • Schedule I • Grants and other assistance to organizations, governments and individuals in the US • Schedule M • Non-cash contributions

36. Schedules of disclosure • Schedule J • Transparency of highly compensated individuals • Schedule L • Transaction with interested persons • Schedule R • Transparency of transactions with related organizations • Hidden activities with potential UBIT issues

37. Source: Research Institute of America (RIA)

38. Source: Research Institute of America (RIA)

39. Source: Research Institute of America (RIA)

40. Source: Research Institute of America (RIA)

41. Source: Research Institute of America (RIA)

42. Source: Research Institute of America (RIA)

43. Unrelated Business Income Tax • Why does the IRS Care? • Competition with for-profit organizations • Is it truly not-for-profit?

44. Where is it reported? • Form 990T • Part IV of form 990 • New Schedule D • First page of 990

45. Sources of Income that are not subject to tax • Donations • Related Function Income • Interest • Dividends • Sale of Investments • Rents of Real Property

46. Definition of unrelated business taxable income Trade or business Regularly carried on Not related to charitable function

47. Examples Tennis academy operated by school when not in session. Pet grooming offered by Society for Prevention of Cruelty to Animals.

48. Exemptions Voluntary Labor/Thrift Shop Income from sale of merchandise of which 85% was donated to organization Convenience of organization members, which includes members, patients, visitors, officers, employees/Laundromat at college

49. Taxable Income, Including Debt Financed Income Rental of debt financed real property Income generated by investments purchased on margin Investment in partnerships passes through in kind

50. Reminder The IRS and Donors not only look to what funds are being used for, they also look to where funds are coming from