The IRS believes that strong corporate governance leads to increased compliance for tax-exempt organizations. In 2008, the IRS released a redesigned Form 990, Return of Organization Exempt From Income Tax, which requires more comprehensive and in-depth information regarding the organization’s governance, structure, policies and disclosure practices. These changes were formalized in final regulations issued Sept. 8 (T.D. 9549). The IRS also recently informally offered guidance on when board officers are considered independent.
The new Form 990 requirements generated a significant amount of discussion and debate among the IRS, tax-exempt organizations and members of the client-serving community. Accounting authorities such as the AICPA have increased their involvement in these discussions to try to address the concerns of taxpayers and their preparers.
For example, the redesigned Form 990 instructions ask whether a tax-exempt organization has conflict-of-interest, document- retention and whistleblower policies that had been adopted by the board of directors by the end of the tax year.
However, since the boards of many organizations have delegated policy drafting and adoption authority to board committees such as a governance committee, the AICPA recommended to the IRS that the instructions be modified to provide that organizations may answer yes to the policy questions if the policies have been adopted by the board or by a committee that has been authorized by the board to act on such policy matters. The IRS subsequently indicated in answers to frequently asked questions that it will allow organizations to answer yes when policies are adopted at the board-delegated committee level (see tinyurl.com/43uonmd).
In addition, the redesigned Form 990 asks how many board members of the organization are independent. The instructions were not clear regarding board officers that are not employees and whether payments for reasonable compensation to such persons impair independence. The AICPA suggested adding more examples to the instructions to clarify if and when board officers would not be considered independent while receiving reasonable compensation for board service.
In a recent meeting with the AICPA Exempt Organizations Tax Technical Resource Panel, the IRS said that, if the board member is not the organization’s top management or financial official, an officer under state law, or an officer under the organization’s organizing documents or board resolutions, the receipt of compensation itself does not impair independence, if the amount of compensation is reasonable. The IRS said that it will consider adding clarification to the instructions and requested that the AICPA provide specific wording for examples.
In summary, tax-exempt organizations should understand the requirements of the continually evolving Form 990 and its instructions to gather the information that is required to be reported by the IRS. Organizations should be alert for any future changes and improvements made to Form 990 and its instructions and educate the appropriate personnel within the organizations.
By Jeanne M. Schuster, Esq., CPA, and Christine Lee, both of Ernst & Young LLP, Boston.
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