Aaron Hershberger

The IRS’s redesign of Form 990 addresses the demand for increased transparency and accountability from tax-exempt organizations. The service uses Form 990 as a tool to increase compliance and encourage tax-exempt organizations to “voluntarily” adopt good governance practices.

To increase board member involvement in the organization’s Form 990 filing process, the IRS added a question asking, “Was a copy of the form provided to the organization’s governing body before it was filed?” In addition, the form requires organizations to describe their internal Form 990 review process, including who conducted the review, timing of the review and extent of the review. If the organization does not have a review policy, now may be the time to put one in place.

What does this mean to a board member of a tax-exempt organization? To provide a valuable and meaningful review of Form 990, you need to be knowledgeable about your organization and have a basic understanding of the form.

Start by answering the following questions. What is our mission? What are we doing to accomplish our mission? How is the organization structured? How is our organization governed? Who is the audience for our Form 990? You will be better prepared to review the form for completeness and accuracy if you have a good understanding of your organization’s mission, structure and constituents.

Once you have a strong understanding of your organization, you are ready to start your form review. Form 990 consists of an 11-page core form (Parts I–XI) and 16 schedules lettered A through O and R. All organizations required to file Form 990 complete the core form. Several schedules are required based on the activities of the organization. The simplest way to review the form is front to back, start on Page 1 and work your way through the form. As you review the form, look for things that stand out, ensure disclosures are provided where required and make sure disclosures are clear and understandable to someone not knowledgeable about the organization.

Form 990, Part I provides a snapshot of summary information collected throughout the form, including the organization’s mission or most significant program, as well as key financial, compensation, governance and operational information. Review Part I for reasonableness, paying careful attention to the mission or most significant program service description. Does the description adequately describe the organization’s exempt purpose?

Form 990, Part III reports new, discontinued or altered program services and requires narrative and financial reporting of the exempt purpose achievements for each of the organization’s three largest program services by expenses. Did the organization make significant changes to its activities or programs during the year? If so, ensure the changes are adequately disclosed. Be sure the organization is presented favorably as it describes its three largest program services. This is an opportunity for the organization to educate the reader about its good deeds.

Form 990, Part IV contains a list of questions to determine which additional schedules must be completed by the organization. Questions answered affirmatively in this section will prompt the organizations to provide additional detail on one of the 16 schedules. Three questions should be of particular interest to you. Question 5 asks if the organization engaged in any political campaign activities on behalf of, or in opposition to, a candidate for political office. You should be aware of your organization’s political activities. Question 25 asks if the organization engaged in an excess benefit transaction with a disqualified person during the year. If your organization has engaged in an excess benefit transaction, you should understand the details of the transaction and ensure the proper steps were taken to correct the transaction. Question 28 asks if an officer, director, trustee or key employee has a business relationship with the organization. You should have an understanding of these transactions to protect against conflicts of interest. Review answers to each question based on your understanding of the organization and activities and actions taken by the board during the year.

Form 990, Part VI is one of the most important parts of the redesigned Form 990. Part VI requires reporting the organization’s board composition and independence, governance, management structure, policies (conflict of interest, whistleblower and document retention policies) and whether the organization promotes transparency and accountability by making certain governance information publicly available. Part VI is divided into three sections:  Section A covers governance and management issues, Section B covers policies and Section C covers disclosures.

Form 990, Part VII requires all organizations to report compensation of officers, directors, trustees, key employees and the five highest compensated individuals. Part VII also requires the disclosure of compensation of the five highest paid independent contractors receiving more than $100,000. You should review this information to understand the compensation paid to leaders of the organization and also to understand whom the organization is paying for various services.

Form 990, Parts VIII, IX and X include the statement of revenue, statement of functional expenses and the organization's balance sheet. The information should present the same information provided by management in financial updates to the board. You should question any discrepancies between amounts reported on Form 990 and amounts previously presented to you.

The redesigned Form 990 also contains 16 schedules (A through O and R) designed to report information from organizations that conduct particular activities. Form 990, Part IV (Checklist of Required Schedules) determines the organization’s filing obligation for a particular schedule.

The following additional schedules should be of particular interest in your Form 990 review:

• Schedule C requires reporting of political activities and lobbying activities. Review this section to ensure your understanding of the types and extent of your organization’s political and lobbying activities.

• Schedule J requires detailed reporting of compensation information for certain individuals listed in Part VI of the core form whose compensation exceeds certain thresholds. Schedule J requires disclosure of benefits provided, including first-class travel, charter travel, travel for companions, tax indemnification and gross-up payments, discretionary spending accounts, housing allowances and residences for personal use, payments for business use of personal residence, health or social club dues or fees and maid or certain other personal services. In addition, Schedule J requests information about policies and substantiation practices relating to compensation arrangements and the processes and data used to establish compensation. Review this section to confirm your awareness and knowledge of compensation and benefits provided to key individuals within your organization. Compensation continues to be a focus area for the IRS and the public.

• Schedule L requires reporting of certain financial transactions or arrangements between the organization and “interested persons.” In general, interested persons are current and former officers, directors, trustees, key employees and the five highest paid employees. Interested persons also include businesses owned by and family members of current and former officers, directors, trustees, key employees and the five highest paid employees. The schedule requires reporting of excess benefit transactions, loans, grants and assistance and business transactions between the organization and interested persons. In general, this information is not readily available to the organization, and the organization must make a reasonable effort to obtain the information. Use of questionnaires with properly written questions and a glossary of terms provided to and certified by interested persons will meet the reasonable efforts test. Review this section to have an understanding of each of the transactions and arrangements presented, as well as why the transaction or arrangement is necessary for the organization. In addition, review the process used to gather the information reported to ensure the organization has met the reasonable efforts test.