Nonprofit, tax-exempt 501(c)(3) organizations that are required to file the annual informational tax return called the Form 990 will, starting in 2009, find themselves facing a new version of the form (as they report on their year 2008 activities). By learning about the new Form 990 now, your 501(c)(3) nonprofit can start gathering the necessary information to successfully and easily file the return.

The Importance of IRS Form 990

The new Form 990, just like the previous version, is an informational return that most nonprofit tax-exempt organizations have to file annually with the IRS, five months after the close of their fiscal year. Completing and filing the Form 990 is an important aspect of a tax-exempt organization's life cycle, because it serves two functions, for two important audiences.

• Informs the IRS. The Form 990 provides the IRS with information about your nonprofit's activities and financial status in order to demonstrate that your nonprofit still meets the qualifications for tax-exemption.
• Informs the public. The Form 990 informs the public about crucial aspects of your nonprofit. Most of the pages and tables are available for public inspection, including those describing executive compensation and program expenditures. Potential donors and grantors can, and many routinely do, look at an organization's Form 990 before making decisions about charitable giving. The media and nonprofit-watchdog groups may also check out 990s.

Does Our Nonprofit Have to File the New Form 990?

Most tax-exempt organizations and nonexempt charitable trusts have to file some type of Form 990 informational return. However, there are three general exceptions:

Some religious institutions. Some religious institutions, such as churches, aren't required to file Form 990. (Check the exemption letter that your organization received from the IRS to find out for sure.)

Annual receipts less than $25,000. Organizations with annual gross receipts of less than $25,000 aren't generally required to file Form 990. However, they do have to file a new electronic postcard form called the Form 990-N, available from the IRS at www.irs.gov  (choose "More Forms and Publications" and scroll down until you see "Form 990-N").

Group returns. Organizations that are included in a group return usually don't have to file Form 990.

Transition Period to New Form 990

To phase in the new form, the IRS has established a two-year period during which smaller organizations can file either the new Form 990 or the short form Form 990-EZ (which has not been substantially modified). 

• For tax year 2008, most organizations with gross receipts of less than $1,000,000 and total assets less than $2,500,000 may choose to file either the new Form 990 or the Form 990-EZ.
• For tax year 2009, most organizations with gross receipts of less than $500,000 and total assets less than $1,250,000 may choose to file either the new Form 990 or the Form 990-EZ.
• Beginning in tax year 2010, most organizations with gross receipts of less than $200,000 and total assets less than $500,000 may choose to file either the new Form 990 or the Form 990-EZ.

Overview of Changes in the Form 990

The new Form 990 looks significantly different than the old one, and it collects many different pieces of data. The new form emphasizes transparency and the relationship between tax compliance and good corporate governance.

You can find the new Form 990 and instructions on the IRS's website at www.irs.gov -- click "More Forms and Publications" tab on the IRS home page.

The core form. The new format contains a core form of 11 parts, which all filing organizations must complete. The core form requests financial data as well as information on your organization's programs, plus it contains a formal checklist (in Part IV) that will help you figure out which schedules to fill out and attach to your return.

The summary sheet. Another significant change in format is the addition of a summary sheet, which serves as the first page of the new Form 990. The summary sheet pulls together all the information from the core form and the schedules, providing a quick snapshot of the organization. One of the sections in this new summary sheet allows the organization to highlight either its mission or its significant activities -- this can be important for fundraising purposes. 

New Reporting on Corporate Governance

Form 990 includes an entirely new section on corporate governance (in Part VI), which probes how a nonprofit manages critical issues such as the independence of its board and the resolution of conflicts of interest among key players in the organization. Although the IRS has very little authority to investigate corporate matters (these are generally left to state agencies), this section allows it to explore the relationship between good corporate governance and compliance with the tax code.

Within the new corporate governance section, your organization will have to answer questions about:

• its governing body (in most states, usually called the board of directors )
• management policies, and 
• disclosure of tax and corporate documents to government agencies as well as to the public.

For example, some of the questions include:

• whether your organization creates contemporaneous documents (such as meeting minutes) that record the actions of your board of directors or other governing body
• whether your organization has adopted policies to deal with things like: conflicts of interest among key personnel in your nonprofit, treatment of whistleblowers, retention or destruction of documents, compensation for officers, directors, and key employees, and joint ventures between your nonprofit and a taxable entity such as a for-profit corporation or LLC
• how your organization reviewed the Form 990 itself before submitting it to the IRS
• how many people on the board of directors (or other governing body) qualify as independent voters, and
• whether any of your organization's directors, officers, or key employees had a business relationship with another such person.

New Reporting on Compensation

Your organization will need to fill out a new table and section with information on compensation for its officers, directors, key employees, highest compensated employees, and independent contractors. All filing organizations -- not just charities -- must now complete this section. Because the definitions of the persons covered in this section have changed, be sure to read the instructions carefully.

New Revised Schedule A for 501(c)(3) Organizations

Schedule A, which most 501(c)(3) organizations will be required to file, now focuses exclusively on proving that your organization is getting public support and deserves public charity status. (Other issues addressed in the old Form 990 Schedule A have been moved to either the core form or to additional schedules in the new 990.)

What Can Your Nonprofit Do to Prepare for Filing the New Form 990?

Being well-prepared will make it easy to submit the new Form 990. The first steps you should take include:

• Forming a committee. Form a committee or assign someone in your organization to investigate how the new Form 990 will impact your organization.
• Reviewing a copy of the form and instructions. Although the instructions are lengthy and quite detailed, they are well worth the reading.

After obtaining an overview of the form and instructions, your committee can determine if your nonprofit needs more advanced preparation for the particular questions within the 990. Among other areas to explore, your committee should definitely take a hard look at your nonprofit's governance procedures by following these next steps:

Review the corporate governance section. Hold a board meeting to review key policies already in place at your nonprofit and discuss whether adopting new policies will be helpful. For example, having a conflict of interest policy is considered good corporate governance, but whether your nonprofit needs to adopt policies regarding joint ventures, executive compensation, or whistleblowers depends on your nonprofit's particular activities. In a situation where your nonprofit is run entirely by volunteers and performs all of its functions without partnering with a for-profit business, your board probably wouldn't need these extra policies.

Prepare questionnaires. Prepare questionnaires for your officers, directors, and key employees. The directors' questionnaire should draw out information about their voting independence. Another important questionnaire topic concerns the family and business relationships among your organization's officers, board, and key employees.

Even if you feel like you know the answers, distributing these questionnaires serves a protective function: According to the instructions to the new Form 990, circulating such questionnaires annually constitutes "reasonable efforts" to obtain this information.

Review your nonprofit's meeting records.  Do this to ensure that your board is keeping accurate and contemporaneous records or "minutes" of its key decisions.

Review your nonprofit's procedures for filing Form 990. Your organization will have to disclose how it approves the Form 990 before sending it to the IRS. Make sure you have procedures in place providing adequate oversight by your board or other governing body.

To ensure that your nonprofit is keeping proper records of its board meetings and decisions and maintaining other corporate documents, get Nonprofit Meetings, Minutes & Records: How to Run Your Nonprofit Corporation So You Don't Run Into Trouble , by Anthony Mancuso (Nolo).