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Increased Transparency in the Nonprofit Sector: The Redesigned Form 990

The Internal Revenue Service recently issued the final draft of its fully-redesigned Form 990, the annual return used by nonprofit organizations to report information regarding their activities. The new version of the Form 990 is designed to “enhance transparency, promote tax compliance and minimize the burden on the filing organization. As such, it dramatically differs from its predecessor in the amount of detail that nonprofits are required to report.

Nonprofits will be required to file the redesigned Form 990 beginning with the 2008 tax year (returns filed in 2009). Because the Form not only has changed in content, but also contains a distinct emphasis upon the narrative, nonprofits should become well-acquainted with the form as soon as possible in order to be prepared for their first-time filings. In addition, nonprofits should be aware that their completed Form 990s will be accessible to both the public and governmental regulators.

The redesigned Form consists of an eleven-part “Core,” which is required to be completed by all nonprofits and consists of questions regarding a nonprofit’s mission statement and activities, governance, policies and compensation. The Core is supplemented by a series of schedules, some of which are elaborations to questions contained within the Core, while others are specific to a particular category of nonprofit organization (e.g. schools, hospitals, etc.).

The Form’s goal of increased transparency is made particularly clear in the Core area of governance. In lieu of the prior 990’s yes/no questions, the redesigned Form asks organizations to describe how Board members were elected, to detail both family and business relationships between Board members and the organization, and to discuss if and how the Form 990 was reviewed by the Board prior to its filing. In addition to the governance questions, the redesigned Form also asks nonprofits to list the salaries of key employees – that is, employees who have responsibilities for managing the organization as a whole and who earn more than $150,000 annually¹. The organization is then asked to describe how this compensation is set, as well as to list any other “perks” highly-compensated individuals receive, such as first class travel and housing allowances.

Nonprofit organizations are also asked to describe their policies – whether they have adopted a written conflict of interest policy, a whistle-blower policy and/or a written document retention and destruction policy. In the event that an organization has adopted a conflict of interest policy, it is required to describe the policy, as well as to describe how it “regularly and consistently monitors and enforces compliance with the policy. The organization is also asked to describe how it makes governing documents, conflict of interest policy and financial statements available to the public.

The IRS has also become interested in nonprofit’s business relationships with for profit organizations. The Core asks organizations to disclose whether they invested in, contributed assets to, or participated in any joint ventures with taxable entities during the tax year.

Schedule H

With respect to nonprofit hospitals, the redesigned Form 990 requires the completion of Schedule H, a new schedule which will be gradually phased in. Only Part V of Schedule H will be required for the 2008 tax year; the rest of the Schedule will be required beginning with the 2009 tax year (returns filed in 2010).

For the first time, nonprofit hospitals will be required to detail their provision of “community benefit. Schedule H poses a series of narrative questions that prompt hospitals to explain the various ways by which they assess the needs of the community and provide such benefit.

However, this is not to say that the entire Schedule is in narrative form. What used to be open-ended questions about an organization’s policy and budget for free and discounted care have been replaced by a six multi-part yes/no question on the same subject.

Schedule H also requires hospitals to segregate and report the following expenses: bad debt, Medicare shortfall expenses and community benefit. Organizations need to be particularly aware of this requirement as the advance determination of what expenses are properly categorized as community benefit or bad debt requires additional information gathering for accurate reporting. Hospitals are allowed however, to provide an estimate as to how much of their bad debt is attributable to persons who qualify for financial assistance under their charity care policy and to provide a rationale for what portion of bad debt they believe should constitute community benefit.

As with the redesigned Form 990’s Core, Schedule H asks hospitals to report whether they are engaged in any joint venture with a for-profit entity where the hospital has a 10% or greater aggregate ownership in the venture.

Preparing for Filing the Redesigned Form 990.

Although the draft instructions for the redesigned Form 990 were released on April 7, 2008, the final set of instructions is not expected to be published until late 2008. However, nonprofit organizations should now start to prepare for the filing of the redesigned Form by examining their internal policies for compliance. Policies which should be closely examined include the organizations’ conflict of interest, non-retaliation and document retention policies, as well as the organization’s bylaws. Furthermore, nonprofits should also consider not only how they comply with such policies, but also how they document their policy utilization.

For more information, please contact Heather L. Bednarek at 412.394.2318.

This Thorp Reed & Armstrong, LLP Communiqué is prepared in summary form and is not to be construed as legal advice or opinion on any specific fact or circumstance. We do not assume any responsibility to revise this Communiqué if there are subsequent changes in the law.

May 2008

1 The definition for “key employees” is found in the proposed instructions for the Form 990, published by the IRS on April 7, 2008. It is expected that the final version of the instructions will be published in late 2008.