Nonprofit Governance under the Microscope — The New IRS Form 990

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: 

• Policies and procedures should be reviewed now in light of IRS "best practices" guidance and in anticipation of upcoming Form 990 disclosure. Organizations that do not follow IRS guidance are likely to receive additional scrutiny. Organizations that have not implemented, or do not enforce, policies to be disclosed in the new Form 990 (including a code of ethics and conflicts of interest and whistleblower policies) may wish to take action now so that related disclosure can be included in the new form. 

• The new Form 990 is a "group project" and will take longer to prepare. No longer can the Form 990 be completed entirely by an auditor or chief financial officer. Operational, management, board and legal input will be necessary. Required descriptive responses may be complex and time-consuming. Additionally, the organization’s process for reviewing the Form 990 and whether the form was provided to the board must be disclosed. 

• Accounting processes and recordkeeping practices may need adjustment to capture new Form 990 information. For example, the new Form 990 calls for detailed fundraising and donation schedules that will require specific records. Other new disclosures include: the number of volunteers (which can be estimated if there is a reasonable basis for the estimate), and number of employees and independent contractors who received compensation or payment for services exceeding $100,000. Changes in program services during the year also must be summarized. 

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:

• significant changes to organizational documents and bylaws;
• member authority to elect board members and approve board decisions;
• whether board and committee meetings are contemporaneously documented; and
• adoption of written procedures and policies that address consistency of activities and operations among chapters or affiliates and the "parent" entity.

Executive Compensation 

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.