The Internal Revenue Service (IRS) released its 2011 Form 990 and instructions on Jan. 21, 2012. Someone looking just at the forms and instructions themselves would see few revisions; however, the IRS has provided a number of clarifications and made some significant changes in the instructions to the form and the schedules.
Some of the more significant clarifications made by the IRS are summarized below:
• Organizations that have not yet filed exemption applications (Forms 1023 or 1024) with the IRS are still required to file the applicable Form 990-series form, as do those with applications pending.
• The website address and principal officer information entered on page one should be current as of the date of filing the return.
• The IRS clarifies that an organization should make reasonable efforts (see the full Glossary definition included in the IRS Form 990 instructions) to obtain information from third parties needed to complete the form.
• Making the Form 990 available upon request does not satisfy the requirement for an organization to provide a complete copy of its Form 990 to all members of its governing body prior to filing the form.
• Figuring out which position checkboxes to mark on Part VII for the governing body, officers and compensated individuals has been very confusing, especially for those not well versed in the definition of the different roles and their subsets. The IRS has clarified that only one position box should be checked for each person listed in the compensation table, unless the individual is both an officer and a director/trustee of the organization. This is not a change, but a clarification to eliminate ambiguity in the instructions and form.
• The IRS clarifies that the value of housing provided by an employer does not have to be reported as compensation to the extent that such value is a working condition fringe. The IRS has also clarified that cell phones provided to employees primarily for business purposes are a working condition fringe and not reportable as compensation.
• If a governing body delegates broad authority to an executive committee or similar committee, this must be explained in Schedule O.
• Examples illustrating when board chair compensation is considered to compensate the board chair as an officer versus an employee of the organization have been added.
• The IRS clarifies that net losses from uncollectible pledges, refunds of contributions and service revenue, or reversal of grant expenses should be reported as “Other changes in net assets or fund balances” on Part XI, line 5, and that these instances need to be explained in Schedule O.
• For contributions made via a text message, the donor’s phone bill meets the section 170(f)(17) recordkeeping requirement of a reliable written record if it shows the name of the donee organization and the date and amount of the contribution made.
• The IRS clarifies that contributions of conservation easements and other qualified conservation contributions that are received by the organization must be reported consistently with how the organization reports revenue from such contributions in its books, records and financial statements.
• Although an organization reports revenue on the 990 under its appropriate accounting method under generally accepted accounting principles, the value of donated services or the use of donated materials, equipment or facilities which are valued and included in financial statement income may not be reported as income on Form 990.
• Schedule N instructions provide new examples of situations that are not considered significant dispositions of net assets.
• “Term endowment” is renamed “Temporarily restricted endowment” in the Glossary contained in the Form 990 instructions and includes not only endowment funds established by donor-restricted gifts for a specified period, but all other temporarily restricted net assets held in a donor-restricted endowment, including certain income from permanent endowments.
Notable changes to the Form 990 and required schedules are outlined below:
Compensation disclosures on Schedule J have been revised so an organization that is part of a related group of organizations will be required to provide a narrative description of any reliance by such organization on a related organization to establish the compensation of any of the reporting organization’s officers, directors, trustees or key employees. Also, additional narrative descriptions of severance/change-of-control payments and compensatory benefits are required to support Part I of Schedule J.
Hospitals should note that Schedule H underwent revision and requires significantly more disclosures. Part V now contains 21 questions requiring substantive disclosures in the form of written narratives relating to a community health needs assessment (optional for tax years beginning in 2011), financial assistance policies, billing and collections policies, and emergency medical care policies. For tax years beginning after March 23, 2012, however, hospital organizations will be required to take into account input from persons who represent the broad interests of the community served by the hospital facility in developing a Needs Assessment. Needs Assessments must be made widely available to the community, and each hospital facility will be required to conduct a Needs Assessment at least once every three years.
In a welcome, but challenging change, the IRS has clarified reporting of pass-through income. Financial information on Form 990, Parts VIII, IX and X now require organizations to report revenues, expenses and assets related to joint ventures and investment partnerships using amounts reported on Schedule K-1, rather than amounts derived from the organization’s books and records. This represents a significant departure from the reporting requirements under previous versions of Form 990, and may cause difficulties in the return preparation process.
Schedule F previously required an organization to list foreign investments only when income or expenses from any foreign source exceeded $10,000, but this has been revised to require the listing of foreign investment holdings when they are valued at more than $100,000 at any time during the tax year.
Schedule K, Tax-Exempt Bonds, now asks whether the organization has established written procedures to ensure timely identification and correction of violations of federal tax requirements.
Changes to Schedule L, Transactions with Interested Persons, provides that a business transaction between the organization and an entity more than 35% owned by current or former officers, directors, trustees or key employees is not reportable in Part IV if the entity is a 501(c)(3) organization, a 501(c) organization of the same subsection as the filing organization or a governmental unit; and eliminates the requirement that a business transaction between the organization and another entity must be reported simply because a current or former officer, director, trustee, or key employee of the organization was a key employee of the other entity.
Schedule R, Related Entities, provides that organizations should report related split-interest trusts in Part IV by type, but do not need to report the trust’s specific name, address, or EIN or complete Part IV, columns (f), (g) or (h) for such trusts.
A paid preparer’s taxpayer identification number (PTIN) must now be entered in the return signature section, which avoids the public disclosure of Social Security numbers; and paid preparers are permitted to sign returns by rubber stamp, mechanical device or computer software program. This change was made as a result of the new requirement that all paid preparers of tax returns must be registered with the IRS.
While not all-inclusive, the above summarizes some of the more significant clarifications and changes to the Form 990 for 2011, and provides a good indication of how the IRS intends to clarify guidance and communicate new rules to those involved in the preparation process. Most changes have been briefly summarized in the core Form 990 instructions, with further detail in the instructions for the individual schedules. See the IRS website at http://www.irs.gov/charities/article/0,,id=233830,00.html.