June 9, 2008
Against a backdrop of continued attention to — and criticism of — nonprofit governance and accountability, the IRS has adopted a substantially revised Form 990 that calls for significantly expanded disclosures. While nonprofits typically delegate matters involving tax returns to tax and accounting experts, because the IRS’s redesigned Form 990 delves extensively into governance matters, nonprofit directors and management should pay attention. Nonprofits should consider their ability to disclose governance and related policies that not only reflect best practices but that also compare favorably to new IRS guidance. Time is of the essence; action in anticipation of the new requirements should be taken in 2008 because the new Form 990 disclosures will apply to 2008 fiscal year activities for the largest nonprofits.
Considerable time and group effort is likely to be required to prepare for, and respond to, the new form. Not only will the form disclose whether directors reviewed it before filing, but nonprofits whose form does not reflect compliance with IRS governance recommendations may face a greater risk of audit. Donors, potential contributors and states attorneys general can be expected to examine Form 990 information, all of which must be publicly available.
Immediate and practical implications of the new form requirements include the following:
General Disclosure Approach
The revised Form 990 requires substantive information about a nonprofit’s board, governance and management policies, and transparency and accountability. Not only must a nonprofit respond to "yes" or "no" governance-related inquiries, but in many instances the nonprofit also must include descriptions. For example, the processes for electing directors and determining compensation, and the manner in which an organization’s conflicts of interest policy is monitored and enforced, must be described.
Governing Body and Management
The IRS has affirmed the importance of an informed and active board. The number of voting board members and the number who are independent must be disclosed. The IRS will review board composition to assess board potential for insider transactions and whether the board represents a broad public interest.
Nonprofits also must describe in the form:
Nonprofit executive compensation is a "focus point" for the IRS. The IRS’s Executive Compensation Compliance Project involved examination of 782 tax exempt organizations, and revealed "significant" errors and omissions in the reporting of executive compensation in filed Form 990s. In addition to errors and omissions in Form 990s, the IRS assessed $21 million in excise taxes attributable to excess benefit transactions. As a result, the IRS included more comprehensive compensation disclosure in the revised Form 990. The new form requires disclosure of the compensation-setting process as well as the number of individuals with compensation (from the nonprofit and related entities) over $100,000, detailed disclosure of compensation paid to certain executives and independent contractors, and information about perquisites, such as first class travel, housing allowances, personal services and tax indemnification payments.
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In summary, the new Form 990 requirements for descriptive and detailed disclosure of governance matters will necessitate input from management, the board, counsel and tax advisors. Nonprofits who want their entity’s Form 990 to reflect governance best practices and IRS guidance should take appropriate action now.
Gibson, Dunn & Crutcher’s attorneys are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
John F. Olson (202-955-8522, firstname.lastname@example.org)
Stephanie Tsacoumis (202-955-8277, email@example.com)
Amy L. Goodman (202-955-8653, firstname.lastname@example.org)
Benjamin H. Rippeon (202-955-8265, email@example.com)
Elizabeth Ising (202-955-8287, firstname.lastname@example.org)
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