• September 3, 2014

IRS Unveils New Nonprofit Tax Form

The Internal Revenue Service on Thursday released a new version of its Form 990 informational tax return, the primary tax document that charities file each year with the government.

The version released is a draft that charities, lawmakers, and other people will get to debate over the next few months.

Charities with $25,000 or more in annual revenue are now required to file the form.

The tax agency said the new form would be easier for most charities to fill out while providing the IRS with additional and improved data to improve its enforcement of tax laws.

The document has new questions for nonprofit organizations on such issues as employment taxes, executive compensation, overseas operations, justifications for tax-exempt status (such as details about free care provided by nonprofit hospitals), and joint ventures between hospitals and businesses.

The most controversial part of the proposed form may be a section that asks specific questions about whether organizations follow certain management and governance policies and practices. For example, charities are asked if they have policies on conflicts of interest, whistleblowers, and how long to keep documents and when to get rid of them.

The IRS hopes the questions will promote greater accountability among charities. Officials of the tax agency said they do not plan to impose penalties on organizations that lack such policies, but warn that charities without them run a greater risk of being audited.

“In our view and experience,” the IRS said, “a well-managed organization is likely to be a tax compliant organization.”

The proposal to revise the form marks the first significant overhaul of the document since 1979.

“The present form is not particularly useful to anyone,” said Lois G. Lerner, director of the Exempt Organizations Division of the IRS. “It’s illogical, it’s inconsistent, difficult to fill out, and it’s difficult to understand. So that is why we thought it was time to take a full comprehensive look at the form to bring it into the 21st century and really reflect the kind of exempt organizations that are out there today.”

The main part of the redesigned Form 990 consists of a 10-page document — what the IRS calls the “core form” — that all nonprofit organizations would complete.

The first page, a summary of the rest of the form, would provide a snapshot of a charity’s key financial, compensation, governance, and operational information — including revenue, expenses, liabilities, and net assets — so that a person reading the form could “quickly see the size and key financial measures of the organization,” the IRS said.

The summary page also would spotlight certain figures, such as a charity’s fund-raising expenses as a percentage of the organization’s total contributions or total expenses.

The main part of the form is accompanied by 15 supporting forms called schedules, one or more of which charities would be required to fill out, depending on their type and activities. The IRS said most organizations would only have to fill out a few of the schedules.

The current Form 990 for 2006 has a nine-page main part, two schedules, and 36 possible attachments.

Among the key changes the IRS has proposed:

Some organizations would be required to complete a new Schedule J, “Supplemental Compensation Information,” that the IRS said would seek new information “to break down the reporting of an individual’s executive compensation into multiple components, including regular wages and salary, incentive compensation, deferred compensation, fringe benefits, and expense allowances or reimbursements.” The IRS said it estimates that fewer than 5 percent of nonprofit organizations that filled out the main form would also have to submit Schedule J. Among those that would have to submit the schedule: organizations that provided someone compensation of more than $150,000. Charities would also have to provide information about their obligations for employment taxes, excise taxes, and unrelated business income taxes (which organizations must pay on commercial operations not related to their tax-exempt purposes). In recent years, the IRS has identified thousands of charities that withheld taxes for Social Security and Medicare from their employees’ pay but did not send the money to the government and the tax agency hopes the new form would help it spot problems with such payments. Nonprofit organizations would have to describe their “most significant program service accomplishment” for the year. A new Schedule G, “Supplemental Information Regarding Fundraising Activities,” would ask organizations if they raised money through mail, e-mail, and other solicitations and to provide details about any relationships with people or groups that help them raise money. Charities that raised money through special events and gambling would have to provide additional details about their fund-raising activities. A new Schedule D, “Supplemental Financial Statements,” would ask detailed questions about organizations that have conservation easements, maintain donor-advised funds, or maintain collections of “art, historical treasures, and similar assets.” The schedule has a section that would require organizations with endowments to provide detailed information about them over five years. A proposed Schedule K, “Supplemental Information on Tax-Exempt Bonds,” would seek to gather new information about the use and investment of proceeds and organizations’ relationships with outside advisers.

Other schedules would focus on gathering additional information from hospitals; groups with related organizations; charities that receive noncash contributions, and groups that conduct activities outside the United States.

The form released today drew praise from Sen. Max Baucus, Democrat of Montana who is chairman of the Senate Finance Committee.

“This new form will help the public and the IRS assess whether tax-exempt organizations are staying true to the reasons they were granted exempt status in the first place,” Mr. Baucus said in a statement.

Sen. Charles E. Grassley of Iowa, the senior Republican on the Senate Finance Committee, was generally pleased with the proposed form “The IRS’s revisions are on the right track,” he said.

During the next three months — through September 14 — nonprofit organizations and people interested in the form will have the chance to weigh in on the draft document and recommend changes to it before the IRS eventually makes the form final.

The IRS plans to require charities to start using the form for the 2008 tax year, which organizations would file in 2009.

The proposed document is available on the IRS Web site.

Organizations may send comments about the proposal to the IRS at Form990Revision@irs.gov.

The IRS encouraged charities to send comments sooner rather than later so that it can gradually consider them during the next 90 days rather than receive the comments all at once on September 14.

The IRS also asked for comment on whether it should raise the revenue threshold for groups that file the Form 990 to $50,000 from the current $25,000.

(Read The Chronicle’s article discussing what nonprofit leaders, government officials, and watchdog groups hope the new form will achieve.)

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