990 Changes Roil Nonprofits

September 21, 2007
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GRAND RAPIDS — Nonprofits scrambled last week to add their two cents to the hundreds of comments filed with the Internal Revenue Service about the biggest change to their tax forms since the Carter Administration.

“The 990 has not had a major revision since 1979,” said Peggy Bishop, partner at Beene Garter, who heads the Grand Rapids accounting firm’s nonprofit section. “This is a huge, huge thing.”

Aimed at enhancing transparency, promoting compliance and minimizing the burden on federally tax-exempt organizations, the forms are proposed to be implemented for the 2008 tax year. That fast-track schedule is one of the objections voiced from nonprofits and posted on the IRS Web sites. Public comments were due Sept. 14. The proposed revision was introduced in June.

The new Form 990 requests more financial information and includes questions about policies that are not required but are considered best practices, such as guidelines covering conflicts of interest and whistleblowers. It includes a 10-page core document, which demands information about compliance with IRS rules, finances, governance and compensation for current as well as former officers, directors and board members. Plus, the proposal lists 15 supplemental schedules for describing financial activities specific to certain organizations. Bishop said the number of schedules required depends on the type of organization, but universities and hospitals may have to file at least 10 of them.

Small Nonprofits Must File

The Internal Revenue Service has announced that for the first time ever, small nonprofit organizations — those with annual gross receipts of $25,000 or less — must file tax statements starting in 2008 or risk losing federal tax-exempt status.

The new “e-Postcard,” IRS Form 990-N, will be an online-only form. The new requirement was part of the Pension Protection Act of 2006.

“Exceptions to this requirement include organizations that are included in a group return, private foundations required to file Form 990-PF, and section 509(a)(3) supporting organizations required to file Form 990 or Form 990-EZ,” the IRS stated. Also free from the new filing requirement are churches and their auxiliaries, conventions and associations.

Federal tax-exempt status will be cancelled for organizations that fail to comply for three years in a row.

The IRS began mailing letters to these organizations in July. For more information, see

www.irsgov/eo

The current 990, which has seen revisions over the years, requires nonprofits to file a nine-page core document and two schedules, and includes three dozen attachments.

Bishop said she expects that smaller nonprofits will have a tougher time grappling with the proposed form, which is required for federal tax-exempt nonprofits with incomes of $25,000 or more. Many small entities have filed without professional advice in the past, Bishop said, but the proposed form is so demanding, that may become impossible.

“It’s going be a huge burden, definitely, for the smaller ones,” Bishop said. “The larger ones already have it prepared. It’s just going to cost more than it used to.”

Jim Childress, spokesman for Metro Health Hospital, said the hospital supports the idea of making more types of information available to the public.

“We have no problem with that,” Childress said. “The issue is, it is burdensome and asks us to do quite a lot of work in gathering data and putting it in the format they want.”

The 146-member Michigan Health & Hospital Association was among hundreds weighing in at the IRS Web site. The organization points out that the IRS proposes to ask nonprofit hospitals for details about their community benefits, the activities it undertakes for the public good in exchange for tax-exempt status. The form also would demand information on related organizations, billing, collections, joint ventures, loans, the use of tax-exempt bond proceeds and compensation for bond counsel.

The vast majority of Michigan hospitals are nonprofits.

“It is clear that it (Form 990) will no longer be used just for reporting income and expense to the IRS. Instead, it will become an SEC-like disclosure document,” the MHA asserts in its comments.

Lynne Black, vice president of finance for the Grand Rapids Community Foundation, said the proposed changes would require some extra work.

“Most of it is not difficult for me to get because it’s stored in our system in one way or another,” Black said. “I can see where transparency is very good for users of the statements.”

Form 990s are public documents, and some nonprofits post them, as well as audits, on their Web sites. But Black said she is concerned that some of the additional information, such as the percentage of donations spent on fundraising activities, could confuse the public.

“You’ve got to put some explanation behind it all to make it comparable,” Black said. “The concerns I’ve read are, how are users going to be using the information?”

Erin Skene, director of public policy for the Michigan Nonprofit Association, said the group is concerned about the implementation schedule and hopes that the IRS will allow for a second draft to be considered. However, the IRS has stated that if the new form is not implemented for the 2008 tax year, it would be unable to put it into action for three more years.

Skene said MNA also objects to some of the best practice information requested in the current draft, fearing that the public won’t understand it and nonprofits could be confused between what’s required by law and what is simply recommended.

Bishop recommended that nonprofits monitor IRS action on the proposed new form.

“As soon as information is finalized, either check with the internal accounting person or with an external CPA to find out if changes need to be made,” Bishop said. “There probably are going to be changes that need to be made in the way you’re accounting for things.”     

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