• October 31, 2014

IRS Releases Instructions for New Charity Tax Form

The Internal Revenue Service released on Tuesday final instructions for the redesigned Form 990, completing the first major overhaul in a generation of the informational return that most charities must file with the federal government.

The IRS modified some language in the instructions, including tinkering with the definition of a “key employee” to limit the number of executives whose compensation must be reported, but charity watchdogs said they were happy to see the final instructions issued without many significant changes. Some had feared the IRS would make major changes in response to complaints from nonprofit officials that new reporting requirements on the form were burdensome.

“The IRS exempt-organizations shop has shown a lot of will to not listen to all the whiners out there,” said Dean Zerbe, a tax lawyer in Washington and a former top aide to Sen. Charles E. Grassley, the Iowa Republican who has been leading investigations of charity abuses in recent years. “The barking dog hasn’t been listed to, and rightly so.”

Janne G. Gallagher, vice president and general counsel of the Council on Foundations, said the IRS did a good job with the final instructions in reducing some of the reporting that would be required, such as reducing the number of instances in which a charity must report transactions with family members of substantial contributors to the charity.

“This could potentially eat up a huge amount of time and resources reporting on transactions with which there is absolutely nothing wrong,” she said.

“On balance,” she said, “this is a major piece of work for the service, and they’ve made a tremendous effort to be responsive to the comments they received.”

Key Employees

:The redesigned Form 990 consists of an 11-page form that all nonprofit organizations would complete, and 16 supporting schedules, one or more of which charities would be required to fill out, depending on their activities. The Form 990 was last significantly revised in 1979.

The IRS unveiled the final version of the new form in December 2007, and it released draft instructions for filling out the form in April. The agency said it received 120 comments about the draft instructions.

“We made a number of changes to these instructions but the changes were in a lot of ways cleaning up language, or additions that illustrate key points,” said Ron Schultz, senior technical advisor for the IRS’s tax-exempt division. “There’s not in my view a huge difference in content between the April and August instructions.”

The form expands the amount of information charities must provide about compensation provided to key employees. The draft regulations required charities to list any employee who made $150,000 or more and controlled at least 5 percent of the charity’s activities. But a few charities complained during the comment period that such a list would take in “department heads” and might run to 100 people or more, Mr. Schulz said.

“There was a lot of pushback on that,” he said.

In the final instructions, the IRS increased the disclosure threshold to individuals who control 10 percent of the charity’s activities. The final instructions also require charities to list no more than 20 of their highest-paid employees.

Michael W. Peregrine, a lawyer in Chicago who works with the boards of charities, says the new 990 will require far greater disclosure from charities about potential conflicts of interest among board members, significant donors, and recipients of services from the charities. Steven T. Miller, commissioner of the IRS office for tax-exempt and government entities, has pushed for those and other disclosures from charities.

“These instructions are an exclamation point to the broad IRS discourse on the importantance of corporate governance that has been Steve Miller’s mantra for the last 24 months,” Mr. Peregrine says.

He said the disclosure requirements have “lots of merit,” and are not too intrusive. In many cases, two board members who do business with one another might only need to disclose that they have a business relationship without providing further detail.

“We need to work with our board members so that they get it, and so that they understand that this is not a tremendous invasion of privacy,” he says.

But Nancy Anthony, executive director of the Oklahoma City Community Foundation, said that in a relatively small city like Oklahoma City, board members often have business dealings with one another and may not be inclined to disclose them publicly. “I am not sure that we could get that disclosure, or, if so, if we could retain those board members,” Ms. Anthony said.

Jack B. Siegel, a Chicago lawyer who advises charities and has closely followed the redesign of the 990, says he doesn’t believe such disclosure requirements will have a chilling effect on board service. “People have motivations for wanting to serve on boards, and they’re going to serve unless things get horrendous,” he says. “Having to fill out another piece of paper isn’t going to drive people off boards.”

Mr. Siegel praised the draft instructions in April and he said on Tuesday “the second batch is even better. From what I can tell, they’ve made a lot of the changes that people suggested.”

Publicity Tool

Diana Aviv, president of Independent Sector, a coalition in Washington of roughly 600 charities and foundations, said she was pleased to see the IRS acknowledge that the Form 990 has become more than just a tax document. Today, the forms are available online at Guidestar.org and are widely used by journalists, significant donors, and charity-watchdog organizations. The new form will allow charities to give a narrative description of their accomplishments just after the summary page.

“Right now, we don’t have another universal vehicle through which others can learn about an organization,” Ms. Aviv said. “This is it.”

Ms. Aviv said she was also pleased that the 990 will be phased in over time for smaller organizations, which are most likely to struggle with the new reporting requirements. For example, organizations with assets of less than $1.25-million and revenue of less than $500,000 will be allowed to use the simpler 990-EZ for 2008 and 2009.

Mr. Schulz of the IRS conceded the new form and the instructions were “not perfect” but he said the new 990 should achieve the goal of providing more useful information about charities.

“For us, it’s been all about compliance and transparency,” he said. “Our third principle was to keep the burden on charities down a much as we could. We really tried to do all three. At the end of the day, we think, with the help of the sector, we got there.”

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In addition to the instructions, the IRS today released three background papers on the new form.

The first of these documents, Background Paper – -Summary of Form 990 Redesign Process, explains the redesign, from the release of the form’s discussion draft in June 2007 to today’s release of the new form’s instructions.

The second document, Background Paper -– Form 990, Moving from the Old to the New, summarizes the sections and schedules of the new form, highlights which portions are new or significantly revised from the 2007 form, and compares the 2007 and the 2008 forms and instructions.

A third document, Background Paper -– Changes to April Draft Instructions, outlines significant changes since the IRS released a draft of the instructions in April and lists topics that require the IRS to conduct further studies.

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