United Way Executive Financial Education Series

1. United Way Executive Financial Education Series Current Developments with the IRS and EO Division, Form 990 Basics from a User Viewpoint

2. IRS EO Division Updates • Excerpts from Lois Lerner’s Address at Georgetown University Law School • Results of Form 990 Governance Initiative Testing • “Significant Diversion of Assets”

3. IRS EO Division Updates • Statistically significant correlation found with • Mission Statements • Comparability Data when used Always • Systems/Procedures safeguarding assets • Form 990 review by the entire board

4. IRS EO Division Updates • Some correlation was found that concentrated control resulted in less likelihood of compliance. • No statistically significant correlation was found for • Written conflicts of interest policies

5. IRS EO Division Updates • No statistically significant correlation was found for (Cont) • Organizations who never or occasionally used comparability data for compensation. • Family or business relationships between board members. • As a result of these findings, a strategic planning group has been tasked to generate a full statistical study.

6. IRS EO Division Updates • “Significant Diversion of Assets” • Form 990 question formerly read “Material Diversion of Assets” • Diversion of assets is an unapproved use or conversion of assets for purposes other than exempt function • Significant is the lesser of 5% of that year’s gross receipts OR 5% of year end total assets OR $250,000.

7. IRS EO Division Updates • 285 organizations reported significant diversions of assets in 2009 • Roughly $170 million was identified. Many cases did not include an explanation in Schedule O. Most were theft/embezzlement, some were Ponzi schemes. • 82 cases resulted in civil or criminal charges (non-IRS) • 47 individuals were incarcerated or served probation.

8. IRS EO Division Updates • 9 cases resulted in full restitution • 11 cases resulted in partial restitution • For 265 cases, there was no recovery or correction. • Charitable use assets are subject to both federal protection and state protection under charitable trust laws.

9. IRS EO Division Updates • Examination program is being created to investigate common indicators of serious cases and common indicators where self-correction was achieved. • Specifically, what policies and practices were in place prior to the event and what actions were taken by the organization in response to the event.

10. IRS EO Division Updates • “The goal will be to pursue excess benefit transaction actions against the persons committing them.” • In excess benefit transaction enforcement, the organization itself is not the target, but the individuals receiving the benefit and the managers of the organization if they are complicit in the transaction.

11. IRS EO Division Updates • 2012 EO Division Workplan • Auto-Revocation of Non-Filers: • Creating a back log in the determinations section for re-instatement requests. Delays with new applications. • List of Select Check is the new single point access allowing searches of Pub. 78 , the auto-revocation list and 990-N filing verifications.

12. IRS EO Division Updates • Patient Protection and Affordable Care Act of 2012 implementation • IRS is required to review the community benefit activities of hospitals at least every three years. Intended to generate additional guidance, education and potential Form 990 modifications. • Section 501(c)(29) Qualified Nonprofit Health Insurance Issuers – developing guidance and preliminary rulings for these new entities.

13. IRS EO Division Updates • Patient Protection and Affordable Care Act of 2012 implementation (Cont) • Accountable Care Organizations (ACOs): Notice 2011-20 outlined how existing guidance applies to 501(c)(3) organizations, including tax-exempt hospitals, that participate in Medicare Shared Savings Programs through ACOs. • MSSPs are three year programs in which ACOs accept responsibility for overall quality, cost and care of Medicare fee-for-service beneficiaries.

14. IRS EO Division Updates • Patient Protection and Affordable Care Act of 2012 implementation (Cont) • Monitor Form 990 reporting requirements in relation to Schedule H for tax-exempt hospitals, 501(c)(29) Qualified Nonprofit Health Insurance Issuers and Form 990-T refund claims for the Small Employer Health Care Tax Credit.

15. IRS EO Division Updates • General Form 990 Compliance Issues • 501(c)(4), (5) and (6) self declared organizations • Not required to seek determination by the IRS • Comprehensive questionnaire to assess Form 990 compliance • Political Activity: Election Year • Monitored through information from outside sources (whistleblowers) as well as risk modeling from Form 990 data. Data evaluated by a committee of civil servants to target examinations.

16. IRS EO Division Updates • Political Activity: Election Year • IRS position for 501(c)(3) Charitable Organizations is an absolute prohibition from “participating or intervening in any political campaign on behalf of, or in opposition to, any candidate for public office.”

17. IRS EO Division Updates • Form 990-T filings • Reviewing organizations who report unrelated business activities but do not file Form 990-T OR who file 990-T on a consistent basis but show no tax liability.

18. IRS Priority Guidance Plan 2012-2013 • Regulations under §501(r) for community health needs assessments • Final regulations on additional requirements for charitable hospitals • Final regulations regarding requirements for supporting organizations under the 2006 PPA • Additional guidance on supporting organizations

19. IRS Priority Guidance Plan 2012-2013 • Regulations on the new excise tax on donor advised funds and fund management related to the 2006 PPA • Regulations under §6033 for group returns and non-regulatory exceptions from filing • Final regulations related to church tax inquiries and examinations

20. Form 990 Overview • Page One Summary Data • Organizations Website • Contains most of the information necessary for financial ratio analysis • Identifies independent voting board members • Numbers of W2s and 1099s issued • For general analysis, pages 9, 10 and 11 are practically obsolete

21. Form 990 Overview • Page Two: Program Accomplishments • Here is the effectiveness data missing from the ratings systems. • Descriptions should be thorough and identify, quantitatively where possible, the scope and effectiveness of your operations. • How many people were served or impacted • What is the geographic area supported by the program

22. Form 990 Overview • Page Three and Four: Supplemental Schedules • The schedules represent transactions of interest for the IRS • Schedule C – Lobbying Activities • Schedule D – Financial Statement Details and Reconciliation • Schedule F – Foreign Activities • Schedule I – Grants and Assistance to Organizations and Individuals

23. Form 990 Overview • Page Three and Four: Supplemental Schedules • Schedule G – Fundraising and Gaming Activities • Schedule J – Compensation • Schedule L – Transactions with Interested Persons • Schedule M – Non-Cash Contributions • Schedule R – Related Organizations and Unrelated Partnerships

24. Form 990 Overview • Page Five: Other Compliance Filings • Payroll and information reporting • Unrelated Business Income • Foreign Financial Accounts • Quid Pro Quo Contribution Disclosure (see schedule G) • Sales of Donated Property (Car Auctions)

25. Form 990 Overview • Pages Six-Eight: Policies and Governance • Independent Board of Directors • Relationships between board members • Changes to governing documents • Significant diversion of organizational assets • Members or stakeholders with ability to influence the board of directors • Record keeping in regards to board or committee deliberation and action

26. Form 990 Overview • Pages Six-Eight: Policies and Governance • Policies governing chapters, branches and affiliates • Form 990 review policy • Conflict of interest policy and process used to monitor it • Whistleblower policy • Document retention policy

27. Form 990 Overview • Pages Six-Eight: Policies and Governance • Compensation policy • Process used in determining and approving compensation, independent approval • Documents supporting compensation decisions • Availability of public disclosure documents Form 990 and Form 1023 (1024 for non-charitable) • Optional availability of governing documents and audited financials

28. Form 990 Overview • Pages Six-Eight: Policies and Governance • Lists of officers, directors, key employees, highest compensated employees and independent contractors • Former members who no longer served during the reporting period, but still received compensation are disclosed • Current member include any person serving within the reporting period

29. Form 990 Overview • Pages Six-Eight: Policies and Governance • Key employees meet three tests • Compensation > $150,000 • Responsibility or control over 10% or more of the organization’s assets or expenditures • One of the top 20 non-officers who meet the criteria • Independent Contractors identified as professional or other services. Specifically not utilities and Insurance Providers are suspect (vendor not independent contractor)

30. Form 990 Overview • Page 9 – Statement of Revenue • Key issue is monitoring Unrelated Business Income relative to contributions and program revenues • Page 10 – Statement of Functional Expenses • Key issue is reasonableness in allocation • Page 11 – Balance Sheet • Page 12 – Audited Financials and Audit Committee

31. QUESTIONS?