Balancing the Mission Checkbook

In just a few days the comment period will end for the IRS proposed changes to Form 990. Since these proposed changes will impact every nonprofit organization that is required to file a 990 (nonprofits with revenues over $25,000) it will be worthwhile to pay attention to the comments and the IRS’ process for considering and responding to the input received. IRS hopes to have the changes finalized and a new 990 form in place for the 2008 tax year and they have a mountain of comments to digest if they want to stay on schedule. Many commentators, in fact, are urging the IRS to delay the implementation date of all or parts of the new form to allow time for more review and discussion of the impact of this major change. Comments are available for review on the IRS web site. Many state and national organizations have convened their members and constituents to analyze the draft and submit thorough comments, including Independent Sector and the National Council of Nonprofit Associations. Read these comment letters to get a sense of the analysis and feedback to the IRS.

Form 990 has not had a major overhaul in many years. The need for a change is widely accepted, and summarized well in the IRS background paper on the redesign: “The current 990 has not kept pace with changes in the sector and the law. Because of its history of ad hoc revisions, the current form neither adequately describes the filing organization nor provides a basis for comparing an organization with its peers.” The proposed redesigned Form 990 consists of a 10 page core form for all filers, and 15 separate schedules that will be required only of those nonprofits for which the information applies. This format will hopefully be much easier to read and keep related information together instead of scattered on different pages and schedules. It is very different, though, and will require learning a new structure and format.

The core form begins with a summary page with the organization’s mission and activities and several key points about activities, governance, and key financial information. While comments are generally positive about the summary page, there are concerns throughout the proposed form about questions that reach into what might be called best practices. Management and governance practices are developed to respond to an individual organization’s structure, community, financial situation, and activities and any simple yes and no questions can easily be misinterpreted without sufficient context. The comments reflect this concern over and over again, on questions about compensation, conflicts of interest, and audit committees.

The 15 proposed schedules range from supplemental financial information that will be required for most filers to schedules for tax-exempt bonds or foreign activities that would apply to a small percentage. There are several proposed schedules that will require new reporting for many organizations such as non-cash contributions and gaming and fundraising events. Some of these will necessitate additional recordkeeping and could be onerous. Hospitals have commented en masse requesting a delay of the implementation for a new schedule regarding community benefits and charity care.

I suggest you pay attention to this change as it goes through review and any further drafts or discussion. A clearer, more easily understood Form 990 will be good in the end, but will require much effort along the way.