IRS Unveils Final Version of New Informational Tax Form for Charities

The Internal Revenue Service is giving small charities and nonprofit hospitals a reprieve from

having to complete the newly redesigned Form 990 informational tax form in the next tax year.

The form, relatively unchanged for more than 25 years, is getting a significant makeover for the 2008 tax year — a move that is designed to make it easier for the public to understand the financial operations of charities and help the tax agency find organizations and people who violate the laws that govern tax-exempt groups.

But the IRS — after receiving more than 700 letters from nonprofit leaders, accountants, and state regulators about the new form — said last month that it had decided some groups would not have enough time to adjust to the new reporting guidelines.

As a result, many small organizations will have the option of filing the shorter Form 990-EZ while they adjust to the changes.

In addition, nonprofit hospitals and organizations that must fill out a schedule detailing tax-exempt bonds will get an extra year to comply with some of the changes.

“This phase-in process will allow organizations to become familiar with the new Form 990,” said Lois G. Lerner, the IRS’s director of exempt organizations.

Extra Time

The altered schedule has been well received by many observers, who had expressed concerns that many groups would not be able to adjust to the new changes on the IRS’s original timetable. That schedule required all organizations with more than $25,000 in annual revenues to begin filing the form for the 2008 tax year.

But the IRS has also received criticism in recent weeks for softening the draft it released in June.

In addition to giving some groups extra time to comply with the changes, the IRS has also removed some lines from the form that would have displayed figures that compared compensation of top officers with total expenses, and fund-raising expenses with total contributions.

Sen. Charles E. Grassley of Iowa, the senior Republican on the Senate Finance Committee, said he was disappointed that the IRS isn’t doing more to make sure nonprofit groups accurately report the amount of money going to their charitable purpose. He noted that he had “just submitted testimony at a House hearing on veterans charities that spend more money on salaries and fund-raising than helping veterans. The IRS easily could have done more to help donors readily understand where their money goes. I plan to revisit that issue.”

IRS officials, however, say they believe the changes provide for more disclosure without providing arbitrary measures of the financial health of tax-exempt groups.

That sentiment was echoed by Jack Siegel, a Chicago lawyer and author who has been closely following the IRS’s effort to overhaul the Form 990. “Everybody will have their gripes, but on the whole, the IRS did a marvelous job of integrating the sector’s comments into [the] final product,” Mr. Siegel said in a recent essay about the final version of the form. “To some extent, the devil will be in the instructions. That is where terms used on the form will be defined.”

The IRS expects to release instructions for the new form early this year.

Big Changes

Those instructions will help charities better understand how to fill out the new form, which is significantly different from the current document. The main part of the redesigned Form 990 consists of an 11-page document — what the IRS calls the “core form” — that all nonprofit organizations would complete.

The form is accompanied by 16 supporting schedules, one or more of which charities would be required to fill out, depending on their activities. The IRS said most charities probably would have to fill out only three of the schedules.

By comparison, the current Form 990 has a nine-page main section, two schedules, and 36 possible attachments.

Because small charities do not have the accounting and legal resources employed by larger organizations, the IRS is now giving some groups the option of filing the shorter Form 990-EZ.

Groups with annual revenue of $25,000 to $1-million and those with assets of less than $2.5-million may choose to file the Form 990-EZ for the 2008 tax year.

For the 2009 year, the threshold covers groups with revenue between $25,000 and $500,000 and with assets of less than $1.25-million.

In the 2010 tax year and beyond, groups with between $50,000 and $200,000 in revenue and with assets of less than $500,000 can opt for the Form 990-EZ. At the same time, beginning with the 2010 tax year, the IRS will raise the threshold to $50,000 for organizations that must file the Form 990. As of 2010, groups with less than $50,000 will no longer be required to file the full Form 990 and can instead file the new Form 990-N.

Currently, all nonprofit groups with more than $25,000 in revenue must file the full form.

Rules for Hospitals

Concerns about the complexity of the Schedule H for hospitals has led the IRS to change its timetable for phasing in new disclosure requirements for nonprofit hospitals. Hospitals will now be required to fill out only portions of the form for the 2008 tax year. Hospitals will have until the 2009 tax year to complete the full form.

“We believe the transition relief we are providing is appropriate and meaningful, and will ease the concerns raised by commenters,” Ms. Lerner said.

Hospitals will, however, be required to submit much more information about their financial operations and the benefits they provide to their communities. Nonprofit hospitals have been facing increased scrutiny from Mr. Grassley and from some state regulators who believe hospitals need to provide more details about why they deserve tax-exempt status.

The new Form 990 will offer the public much clearer answers to those questions, said Carol Keehan, chief executive of the Catholic Health Association in Washington.

“The new Schedule H will provide a standardized way for hospitals to describe, both qualitatively and quantitatively, the ways in which they benefit their communities,” Ms. Keehan says.

Details of the changes are available through the IRS’s Web site.