Presented by Kevin T' McGrath, CPA

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Presented byKevin T. McGrath, CPA
The Revised (i.e., "Redesigned") Form 990 Core
Form and Schedules
August 19, 2008
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Acknowledgement

• We would like to acknowledge Eve Borenstein of
  Borenstein McVeigh Law Office, LLC,
  Minneapolis, MN, for her contribution to this
  presentation.

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The "Redesigned" Form 990 Core Form
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Focus of Presentation

• Overall Form (Core and Schedules) Background
  "What, Why, When" -- Explanation from IRS
• Radical Redesign of 2008 Form 990 Core Form
• Preparing for Core Form's Operational Impact

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2008 Form 990 an IRS Perspective

• What IRS did
• Released the form Dec. 2007, no instructions
• Effective for 2008 tax years (2009 filings)
• One year relief for hospitals and bonds
• Why IRS did it
• Current form is out of date and inadequate to
  serve transparency and tax compliance needs
• Does not portray what organization does

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Philosophy of 2008 Form 990

• Compliance, transparency, accountability
• Focus on areas with substantial compliance
  interests and trends build the form to design
  compliance projects
• Build the form to appropriately take advantage of
  its public nature and accountability aspects
• Structure core form for all, complete schedules
  depending upon activities
• Provide opportunities to explain and supplement
  their responses, tell their story

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Key Aspects of the Redesign

• Increased focus on activities, not just numbers
• Summary page - snapshot
• Checklist of schedules - burden, snapshot
• Governance section - board, policies, disclosure
• Compensation and insider transactions
• Foreign activities
• Related organizations, joint ventures, UBI
• Non-cash contributions and fundraising
• Targeted information hospitals, bonds other tax
  filings, endowments, major transactions, FIN 48

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2008 Form 990 Instructions (Pending)

• Will be separate 990 instructions for the core
  and for each schedule, and for the 990-EZ
• Still building the glossary and appendices
• Expect to have special instructions regarding
  disregarded entities, group returns, JVs
• Still developing PSAs by sub-sectors
• Goal 1 help organization answer the Q's
• Template for schedules - purpose of form, who
  must file, accounting method, period covered,
  penalties, public disclosure, special
  instructions
• Release draft, comment period, finalize summer
  2008

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Radical Redesign of Form 990Background -
Practitioner Perspective

• IRS released in June a draft of redesigned Form
  990 for 90-day comment period
• New 990 to be in use beginning in FY 2008
  (returns filed in 2009 for FYs beginning in 2008)
• For calendar year organizations, new form is
  operational now!
• Structure of the Form
• 11-page core form
• 16 separate schedules

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Radical Redesign of Form 990Background -
Practitioner Perspective

• Existing Form of 9 pages PLUS
• Schedule A (501(c)(3)s only)
• Schedule B
• In Redesign (for filing on years begun in 2008),
  becomes Form of 11 pages (Core Form) PLUS
• 16 Schedules

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Collateral Matters

• Redesigned 990 to be phased in over three years
  for smaller entities, who may use Form 990-EZ
  IF
• 2008 Form (years begun in 2008) Gross receipts
  less than 1.0m and total assets less than 2.5m
• 2009 Form (years begun in 2009) Gross receipts
  less than 500K and total assets less than 1.25m
• 2010 Form (years begun in 2010) ... and beyond
  Gross receipts less than 200K and total assets
  less than 500K

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Radical Redesign of Form 990Background -
Practitioner Perspective

• IRSs Stated Goals
• Enhance transparency and provide realistic
  picture to the IRS and public
• Accurately reflect operations so as to facilitate
  IRS assessment of non-compliance
• Minimize the burden on filing organizations

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Radical Redesign of Form 990Core Form Walk
Through .. .

• Program Service Accomplishments (p. 2)
• Dashboard/Snapshot (p. 1) - includes Key Metrics
• Total employees, but not compensation data
• Total Unrelated Business Taxable Income
• Key financial data for prior year and current
  year (contributions, program service revenue,
  investment income, fundraising expenses, total
  compensation, and benefits expense)
• Entity-specific approach, rather than System/
  Consolidated approach

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Radical Redesign of Form 990Core Form Walk
Through .. .

• New Part requires comprehensive disclosures of
  governance policies and practices
• New Part operates as Checklist of when triggers
  hit for attaching specific Schedules
• Have there been loans or other transactions with
  insiders?
• Are there related organizations?
• Hospitals have required schedule for detailed
  disclosure of charity care and community benefit
• Exceeding certain thresholds of pay provided to
  current and former officers, board members, and
  key employees

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Radical Redesign of Form 990Core Form Walk
Through .. .

• Compensation Part (alters present form greatly)
• This Part is dropped back to page seven
• Discloses W-2/1099 pay and "other compensation"
  from this and related organizations for
• Officers, directors, trustees, and key employees
• Five highest paid employees over 100,000
• Former officers, key employees, and high fives,
  over 100,000, and
• Former directors or trustees over 10,000.

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Radical Redesign of Form 990

• Augmenting Core Form's disclosures are much more
  detailed compensation and benefits reporting (via
  Schedule J) for all formers and for any person
  with total pay over 150,000 who is reported on
  the Core Form, as well as for anyone paid by an
  unrelated organization for services they provide
  to the filing entity
• Core Form uses a table for reporting five highest
  paid independent contractors receiving more than
  100,000 from the filer (no longer two lists of
  independent contractors)
• Note the continuing need for consistent
  definitions of officer and key employee for
  this purpose

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Radical Redesign of Form 990Core Form Walk
Through .. .

• Part VI Governance, Management, and Disclosures
  (Sections A, B, and C information about policies
  not recorded by the Internal Revenue Code)
• Section A. Governing Body and Management
• For each Yes response to Lines 2-7 below, and
  for a No response to lines 8 or 9b below,
  describe the circumstance, process, or changes in
  Schedule O. See instructions.
• 1a Enter the number of voting members of the
  governing body . . . . . . 1a
• b Enter the number of voting members that are
  independent . . . . . . 1b
• NOTE answers here (1a and 1b) are also
  prominently inputted upon the Dashboard/Summary
  Page

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Radical Redesign of Form 990Core Form Walk
Through .. .

• Governance Part (new)
• Number of voting and independent directors
• Any family or business relationship among
  officers, directors, trustees, and key employees
• Delegation of management control to a management
  company or other person
• Any significant change to governing documents
• Any material diversion of entity's assets
• Contemporaneous documentation of all board and
  committee meetings

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Radical Redesign of Form 990Core Form Walk
Through .. .

• Governance (continued)
• Written conflict of interest policy with annual
  interest disclosure by officers, directors,
  trustees, and key employees? Explain in Schedule
  O regular monitoring and enforcement of
  compliance with policy.
• Written whistleblower policy?
• Written document retention, destruction policy?
• Policies governing consistency of affiliate
  activities?
• Was 990 provided to board before it was filed?
  Explain in Schedule O the process used to review
  990.
• Explain in Schedule O how governing documents,
  conflicts policy, 990/990-T, and financial
  statements made available to public.

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Radical Redesign of Form 990Core Form Walk
Through .. .

• Governance
• Did compensation process for CEO include review
  and approval by independent persons,
  comparability data, and substantiation?
• Use Schedule O to describe compensation review
  and approval process for other officers and key
  employees.
• Written policies regarding participation in joint
  ventures, including safeguards for exempt status.
• Note number of narrative explanations - does
  ability to explain make it less likely that these
  policies will become de facto legal standards?

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Radical Redesign of Form 990Core Form Walk
Through .. .

• Conflicts/Self-Dealing
• Trigger questions require reporting on Schedule L
  to disclose details involving current and former
  officers, directors, trustees, and key employees
  and, as applicable, disclose
• Name of interested person
• Relationship between interested person and the
  entity
• Description of disclosable transaction
• Whether transaction involves sharing or the
  entitys revenues
• Amount of the transaction

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Radical Redesign of Form 990Core Form Walk
Through .. .

• Conflicts/Self-Dealing
• Simplified compared to June 2007 draft
• Will there be a five-year or other look-back
  period for determining former for this purpose?
• Will there be a 5,000 or other materiality
  threshold for business relationship?
• Will entity be required only to make a reasonable
  effort to obtain the information - e.g., a
  completed and signed questionnaire (as is now the
  case with 75c)?

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Radical Redesign of Form 990Core Form Walk
Through .. .

• Other Noteworthy Changes
• Income side of Income and Expense statement
• Dues now reported as Program Service Revenue
• No exclusion codes for lack of UBIT-application
• Gaming and fundraising in-flow scheduling pushed
  to Schedule G

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Radical Redesign of Form 990Core Form Walk
Through .. .

• Other Noteworthy Changes
• Expense side of Income and Expense statement
• Expense statement retains present form's separate
  listing of compensation to disqualified persons
  other than current officers, directors, and key
  employees

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Radical Redesign of Form 990Core Form
Observations .. .

• Primacy of Program Service Accomplishments
  Enunciation
• Moves up to page two of core form
• Now includes separate description of significant
  changes and of most important accomplishment for
  the year
• Electronic filers will have little room to tell
  their story, because new Schedule O has
  two-electronic-page limit per item

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Radical Redesign of Form 990Core Form
Observations .. .

• Description of a discovered excess benefit
  transaction (old 89b) now flows over to Schedule
  L, where one reports name of disqualified person,
  description of transaction, whether corrected,
  and 4958 excise tax paid

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Radical Redesign of Form 990Core Form
Observations .. .

• Reportable (a/k/a Taxable) Compensation tracks to
  clear measures
• Officers and other employees --- amounts reported
  in Box 5 of Form W-2
• Directors and individual trustees --- amounts
  reported in Box 7 of Form 1099-MISC.
• Institutional trustees --- fees for services paid
  pursuant to a contractual agreement or statutory
  entitlement note also that amounts paid to
  institutional trustees are reported on the Core
  Form but gt150,000 threshold trigger to Schedule
  J does not apply

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Radical Redesign of Form 990Core Form
Observations/Preparing for Operational Impact

• Reportable compensation is picked up in Part
  VIIs Columns D and E, picking up amounts from
  filer and related organizations, respectively

Part VII Compensation of Officers, Directors,
Trustees, Key Employees, Highest Compensated
Employees, and Independent Contractors
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Radical Redesign of Form 990Core Form
Observations/Preparing for Operational Impact

• Non-reportable renumerative benefits (again, from
  BOTH filter and related organizations, if any)
  are reported in Column F. Here ONLY an estimate
  is required.

(F) Estimated amount of other compensation from
the organization and related organization
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Radical Redesign of Form 990Core Form
Observations/Preparing for Operational Impact
While all CURRENT Officers, Directors, Trustees,
and Key Employees hit Part VII,

• for FORMERs, this Part applies thresholds based
  upon columns DE amounts
• for O/KEs, list if gt100k
• for T/Ds paid IN THAT CAPACITY, list of gt10k

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Radical Redesign of Form 990Core Form
Observations/Preparing for Operational Impact

• Part VII Compensation of Officers, Directors,
  Trustees, Key Employees, Highest Compensated
  Employees, and Independent Contractors

List the organization's five current highest
compensated employees (other than an officer,
director, trustee or key employee) who received
reportable compensation (Box 5 of Form W-2 and/or
Box 7 Form 1099-MISC) of more than 150,000 from
the organization and any related organizations
High 5s have their own threshold - ALL org.s
(not just 501(c)(3)'s) now have to report)!
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Preparing for Operational Impact

• Review governance policies and procedures
• Assure yes to policies on conflicts of
  interest, whistleblower, document
  retention/destruction, consistency of affiliate
  activities, and safeguarding exempt status while
  participating in joint ventures
• Apply new independence standard in assessing
  number of independent directors
• Contemporaneous minutes for all committee
  meetings
• Determine any failure to monitor and enforce
  compliance with conflicts policy

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Preparing for Operational Impact

• Review governance policies and procedures
  (contd)
• Is compensation review and approval process
  structured to qualify for rebuttable presumption
  - for all officers and key employees?
• Plan to provide 990 to Board before filing date
  consider 990 review process and how it will be
  explained
• Consider what information is made public and be
  ready to explain

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Preparing for Operational Impact

• Continue to collect data on business and family
  relationships among current officers, directors,
  trustees, and key employees (current 75b)
• Expand collection of data on business
  relationships between entity and current/former
  officers, directors, trustees, and key employees
• Relationships only as they existed at any time
  during year for which 990 is filed?
• How far back on formers?
• Any de minimis amounts, such as 5,000?

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Preparing for Operational Impact

• Need to prepare now for new Form 990
• Coordinate with other reporting obligations and
  best practices
• Note that 990 applies operationally on first day
  of fiscal year beginning in 2008 - for calendar
  year filers, current operations will be disclosed
  on new 990
• How will entity describe its program service
  accomplishments in space provided? Schedule Os
  best foot forward?
• When will we know of any space limitations for
  electronic filers?

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Questions??
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The Redesigned Form 990 Schedules
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Focus of Presentation

• Reprise Background What, Why, When
  --Explanation from IRS
• 2008 Form 990 NEW Schedules (other than
  Hospitals)
• Schedule H (Hospitals)
• Preparing for Schedules Operational Impact

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Radical Redesign of Form 990Schedule
Observations Practitioners Perspective

• Schedule A So-called Public Support Tests
• Each test (170(b)(1)(A)(vi) and 509(a)(2)) now
  inputted on separate pages (separate grids, each
  specific to regulations)
• Cash basis NOT mandated
• Calculated results compared (with prior years
  result) to thresholds
• Two years sequential flunk noted as
  disqualifying allows movement fluidly between
  tests without permission (check the box serves)

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Radical Redesign of Form 990Schedule
Observations Practitioners Perspective

• Schedule A 509(a)(3) Supplement
• Does organization have a written determination
  from IRS as to Type I, II, or III supporting
  status?
• Since 8/17/06, has organization accepted gifts
  from a person who controls board of supported
  organization, from a family member of such a
  person, or from a 35-controlled entity of such a
  person?
• Detailed information on organizations supported
  by this organization

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Radical Redesign of Form 990Schedule
Observations Practitioners Perspective

• Schedule H Hospitals
• Definitions of hospital and facility
• Entity v. group v. hospital as the reporting unit
• Cost of charity care and community benefit
• What counts, how do you count it
• Treatment of joint venture activities
• Bad debt
• Medicare shortfalls
• Costs funded by others - e.g., restricted grants,
  transfers within an affiliated group

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Radical Redesign of Form 990Schedule
Observations Practitioners Perspective

• Schedule H Hospitals
• Most of form delayed one year reporting on
  facilities required for 2008
• Hospital defined by state licensure/certification
  for now - all reporting on entity-by-entity basis
• More detailed questions on and data acquired
  about charity care and community benefit -
  charity care policy, eligibility criteria, annual
  report

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Radical Redesign of Form 990Schedule Observations

• Schedule H Hospitals
• Provide detailed figures on specified categories
  of community benefit
• For each, report number of programs, persons
  served, total expense, offsetting revenue, and
  percentage of net expense to total expense
• Separate section on community building activities
  (same financial data as per charity care and
  community benefit)

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Radical Redesign of Form 990Schedule Observations

• Schedule H Hospitals
• New section for disclosing bad debt, Medicare
  shortfall, and collection practices - note
  narrative explanations required
• Draft table on billing data by patient category
  eliminated
• Describe management companies and joint ventures
  owned jointly with officers, directors, trustees,
  key employees, and physicians, and disclose
  ownership percentages - aggregate ownership
  threshold of 10 (raised from 5 in draft)
• New section requiring details about charity
  care policies, procedures, etc.

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Radical Redesign of Form 990Schedule Observations

• Part VII 1a Complete this table for all persons
  required to be listed.
• Section A

4 For any individual listed in Section A, is the
sum of reportable compensation and other
compensation from the organization and related
organizations greater than 150,000? If Yes,
complete Schedule J for such individuals . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
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Radical Redesign of Form 990Schedule Observations

• Schedule J Compensation
• Report detailed compensation data for subset of
  core form section A persons
• Base compensation on W-2/1099
• Bonus and incentive compensation on W-2/1099
• Other pay on W-2/1099
• Nontaxable benefits (no longer including de
  minimis fringe benefits and nontaxable expense
  reimbursements)
• Deferred compensation, including earnings on
  prior amounts and/or increases in actuarial value
• Total, including nontaxable benefits (including
  working condition and other nontaxable fringe
  benefits)
• Amounts also reported on prior 990

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Radical Redesign of Form 990Schedule Observations

• Schedule J Compensation
• Expanded check-box reporting - any instance of
  First-class or charter travel
• Travel for companions
• Tax indemnification and gross-up payments
• Discretionary spending accounts
• -- Housing allowance or personal residence
• Payment for business use of personal residence,
  health or social club dues, or initiation fees
• Personal services (e.g., chef, chauffeur, and/or
  maid)
• Observations regarding expanded check-box
  reporting

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Radical Redesign of Form 990Schedule Observations

• Schedule J Compensation
• Other questions leading to narrative
  explanations
• Failure to follow reimbursement policies
• Providing severance pay, change in control
  payments, SERP, or equity-based arrangement
• Compensation contingent on revenues (physician
  pay?) Compensation contingent on net earnings
  (circuit-breakers?) Any other non-fixed payments?
• Any amounts reported on core form paid or accrued
  under a contract subject to initial contract
  exception under intermediate sanctions rules?

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Radical Redesign of Form 990Schedule Observations

• Schedule K Tax-Exempt Bonds
• Most of form delayed one year
• Detailed questions on bond proceeds
• Series of questions on potential private use -
  management contracts, research agreements, and
  safe harbors
• Third-party compensation table eliminated
• New table on arbitrage reporting and compliance
  concerns

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Radical Redesign of Form 990Schedule Observations

• Schedule L Transactions with Interested Persons
• Describe details of each loan (outstanding at
  year end) to or from current/former officer,
  director, trustee, key employee, high 5
  employee, or other disqualified person
• Describe excess benefit transactions name of
  DQP involved, transaction, and whether corrected
• Describe grants or assistance benefiting
  interested persons
• Describe business transactions with interested
  persons - triggered by response to core form line
  28

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Radical Redesign of Form 990Schedule Observations

• Schedule O Supplemental Information
• Use O to comply with narrative requirements where
  directed
• Use O to provide other general explanations
• Note space limitations for electronic filers -
  two pages per required attachment, and two pages
  for anything else

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Radical Redesign of Form 990Schedule Observations

• Schedule R Related Organizations
• Identify each disregarded entity
• Identify each related exempt entity
• Identify (and provide EIN) each related entity
  taxed as a partnership or as a corporation
• Describe details of each transaction with a
  related entity (next slide)

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Radical Redesign of Form 990Schedule Observations

• Receipt of interest, annuities, royalties, or
  rent
• Gift, grant, or capital contribution
• Loan or loan guarantee
• Sale, purchase, or exchange of assets
• Lease of facility, equipment, or other assets
• Performance of services
• Sharing facilities, equipment, mailing lists,
  other assets, or paid employees
• Reimbursement paid for expenses
• Other transfer of cash or property

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Radical Redesign of Form 990Schedule Observations

• Other Schedules
• B Contributors
• C Political and Lobbying Activities
• D Supplemental Financial Statements
• E Schools
• F Foreign Activity
• G Fundraising or Gaming Activities
• I Grants and Other Assistance
• M Non-cash Contributions
• N Liquidation, Termination, Dissolution or
  Significant Disposition of Assets

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Collateral Matters

• Instructions (Drafts due out 8/15/08)
• Transitional Relief -- Schedule H Hospitals
• One-year delay for all but facilities disclosure
• Transitional Relief -- Schedule K Tax-Exempt
  Bonds
• One-year delay for all but description of
  outstanding bonds

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Preparing for Operational Impact

• Need to prepare now for new Form 990
• Coordinate with other reporting obligations and
  best practices
• Note that 990 applies operationally on first day
  of fiscal year beginning in 2008 - for calendar
  year filers, current operations will be disclosed
  on new 990
• How will entity plan for Schedule H? Schedule O?

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Preparing for Operational Impact

• Preparing for Schedule H
• Start mock-up now of Schedule H narratives to
  determine where additional adjustments to
  practices and procedures may be needed
• Make sure charity care, community benefit, bad
  debt, Medicare shortfall, and other data are
  captured on entity-by-entity basis
• Determine now which activities will be included
  in community-benefit and community-building, and
  begin capturing data

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Preparing for Operational Impact

• Preparing for Schedules J (Compensation) and L
  (Transactions with Interested Persons)
• Track value of nonqualified benefits for
  individuals with compensation over 150K and all
  formers included on core form
• Determine amount of nonqualified deferred
  compensation reported on prior 990s
• Determine which Schedule J boxes will be checked,
  and get ready to explain - which practices should
  end now?
• Compile and be ready to explain all pay
  arrangements involving revenues or net earnings,
  or that are equity-based
• Determine all amounts paid accrued under contract
  subject to initial contract exception

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Preparing for Operational Impact

• Preparing for Schedules J
• (Compensation) and L Transactions with
  Interested
• Persons) (contd
• Determine status of each loan between entity and
  any interested person - in default? Approved by
  board or committee? In written agreement?
• Consider clearing out all current loans and
  prohibiting further loans
• Determine all related entities, and all
  transactions with them - track data in the form
  needed for Schedule R
• Determine how Schedule O will be needed, and
  whether space will permit all that entity wishes
  to explain

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Questions??