On April 26, 2007, the Tax Exempt and Government Entities Division of the Internal Revenue Service ("IRS") released informal guidance to supplement revised instructions for IRS Form 990 for 2006 (the "Guidance"). Form 990, the tax return submitted on the 15th day of the 5th month after an organization's accounting period ends1 each year by tax-exempt and non-profit organizations, provides the public with financial information about such organizations, and is often the only source of this information. The IRS released modified instructions for the 2006 form in January, 2007, which require much more extensive disclosure that has been required in the past and reflect changes driven by both the Pension Protection Act of 2006 ("PPA") and the Agency’s recent focus on exposing abusive arrangements that may place an entity’s tax-exempt status in jeopardy. Many organizations have been struggling since January to determine exactly what information they are required to submit. Although the IRS released the new Guidance in the form of a question-and-answer document just weeks before most tax-exempt organizations will file their Form 990s, it can help clarify questions relating to board structure, when to report compensation for directors and officers who have relationships with other organizations, when and how to report compensation for all "disqualified persons," and relationships between directors and other insiders.
The Guidance contains a number of significant clarifications. One comment narrows the definition of "related organizations." Tax-exempt entities are required to report relationships with certain related organizations as delineated by the IRS. Related organizations were defined formerly to include eight categories of such organizations. The Guidance specifies that tax-exempt entities are no longer required to report relationships in which two organizations are partners in a partnership or where one or more persons have substantial influence in both organizations. In addition, Line 75B of Form 990 requires organizations to report the family and business relationships of current officers, directors, trustees and key employees. In its Guidance, the IRS limits the scope of the question to "business relationships between officers, etc." of the filing organization only and exempts organizations from having to report relationships between officers, etc. of related organizations. The same section limits the definition of "business relationships" to "employment relationships, contractual relationships and common ownership of a business in excess of 35%" and clarifies that only direct relationships must be reported. According to the IRS, examples of reportable direct business relationships, according to the IRS, might include "the employment of one director by another in a sole proprietorship or partnership or where one director serves the other as an attorney or accountant in a sole proprietorship or partnership." Although the clarifications are, in part, helpful, they also signify a clear interest on the part of the IRS in scrutinizing these internal relationships.
A consistent theme that emerges in reviewing the Guidance is the Agency’s expectation that tax-exempt organizations will make a "reasonable effort" to obtain information that may be difficult to unearth. For instance, acquiring information about all the business relationships required to be reported in Part V-A Schedule A Part I and Schedule A Parts II-A and II-B may prove logistically problematic. The Agency specifies that the organization need make only a "reasonable effort" to obtain this information. The Guidance further provides an example of such reasonable effort, suggesting that an organization could require its directors and officers to complete an annual disclosure of these relationships. Organizations may want to draft such disclosure forms proactively, and ask, not only about family and business relationships among officers, directors, trustees and key employees of the entity, but also about such relationships with the entity’s highest compensated employees, professionals, and independent contractors. The organizations may want to ask the highest compensated individuals, professionals and independent contractors to complete disclosure forms as well. If, after taking these steps, an entity is unable to obtain all information sought, then the Guidance suggests it will not be penalized by the IRS.
Likewise, the IRS requires "reasonable effort" in reporting compensation and loans to former officers, directors, etc., as required by Part V-B of Form 990. The Guidance does not limit the "look-back period" in reporting compensation and loans to these individuals. Tax-exempt organizations, especially hospitals, may find this requirement daunting, as it forces such organizations to attempt to track all payments to former officers, directors, etc., even if those individuals have not held a position of influence over the organization in decades. For instance, today a hospital may provide a small stipend for medical director services to a physician, who was an ex officio board member many years ago. This compensation would need to be reported on the Form 990. The IRS recognizes that it may be difficult for personnel filling out Form 990 to find records of whether someone receiving compensation was at one time a board member of officer but dictates that a "reasonable effort" should be made to make such determinations. A number of attorneys agree, however, that this requirement will place a tremendous burden on organizations forced to look for evidence of board membership, etc., in some instances from thirty years ago or more, and it may be virtually impossible to obtain such information in those cases.
The remainder of the Guidance provided by the IRS for Form 990 involves a number of "routine clarifications," including correction of errors in the original instructions. One clarification corrects an error in the modified instructions that appeared to require tax-exempt organizations to report loans and advances to disqualified persons. The Agency modified its instructions to require organizations only to report interest on such loans, rather than the loans themselves. Additionally, government contributions or grants to donor-advised funds should be reported on Line 1a, rather than on Line 1d, to avoid double counting, and organizations no longer have to file schedules for Lines 25a, 25b, or 25c.
Due to reporting problems, the IRS is currently looking at a massive rewrite of Form 990. Tax-exempt organizations can expect more revisions and enhancements to be released by the agency in the future. We will provide updated information about changes to the form as well as the increase in audit activity that may result from further clarification by the IRS. Full text of the informal Guidance is available on the IRS website at:
http://www.irs.gov/pub/irs-ege/2006_form_990_qas_final.pdf.
Footnotes
1Most tax-exempt organization submit this form on May 15th each year.
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