The latest 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, 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 its key personnel, 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.
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 reading.
After obtaining an overview of the form and instructions, your committee can determine whether 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 its 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 revised 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.
For more information on filing nonprofit tax returns, see Every Nonprofit's Tax Guide: How to Keep Your Nonprofit's Tax Exempt Status and Avoid IRS Problems, by Attorney Stephen Fishman (Nolo).
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