A New Form Takes Shape

Proposed informational return would contain specific questions on governance and hired fund-raising companies

The Internal Revenue Service has released a new version of its Form 990 informational tax return,

the primary tax document that charities file each year with the government. The version released is a draft that charities, lawmakers, and other people will get to debate over the next few months.

Charities with $25,000 or more in annual revenue are now required to file the form. The tax agency said the new form would be easier for most charities to fill out while providing the IRS with additional and improved data to enhance its enforcement of tax laws.

The document has new questions for nonprofit organizations on such issues as endowments, donated goods, employment taxes, executive compensation, overseas operations, justifications for tax-exempt status (including details about free care provided by nonprofit hospitals), and joint ventures with businesses.

Governance Questions

The most controversial part of the proposed form may be a section that asks specific questions about whether organizations follow certain management and governance policies and practices.

For example, charities are asked if they have policies on whistleblowers and on how long to keep documents and when to get rid of them.

Charity experts have also raised questions about the form’s first page: a summary of the rest of the form that is designed to provide a snapshot of a charity’s key financial, compensation, governance, and operational information.

On this opening page, the IRS asks charities to provide their fund-raising expenses as a percentage of total contributions; their compensation of top officials as a percentage of total contributions; their total expenses as a percentage of net assets; and the percentage of gross receipts that charities received after professional fund raisers were paid.

The summary page would also require nonprofit organizations to enter the “highest compensation amount” they paid each year to top current or former officials and the number of people who received more than $100,000 in annual salaries from charities.

The IRS said these and other questions on the form’s first page would allow a user of the form to “quickly see the size and key financial measures of the organization,” including its revenue, expenses, liabilities, and net assets, and compare one nonprofit organization to others.

Concern About Abuses

Lois G. Lerner, director of the Exempt Organizations Division of the IRS, said in releasing the form that the IRS believes most tax-exempt organizations obey tax laws, but “we do know that over the last several years there have been some organizations that have pushed the envelope in certain areas. And some of these questions go to those areas.”

Bruce R. Hopkins, a Kansas City lawyer and the author of books on nonprofit tax law, said in an e-mail message that the redesigned form “overall is an excellent (and fascinating) product, although in some places the IRS is unduly aggressive and overreaching.”

Mr. Hopkins added: “Lawyers and accountants are going to have a field day with this thing. As usual, that means that just about everyone else (save the watchdog agencies and other panderers) will be unhappy but will cope.”

The main part of the redesigned Form 990 consists of a 10-page document — what the IRS calls the “core form” — that all nonprofit organizations would complete. The first page summarizes the other nine.

This section is accompanied by 15 supporting forms called schedules, one or more of which charities would be required to fill out, depending on their type and activities. The IRS said most charities probably would have to fill out only three of the schedules.

The current Form 990 for 2006 has a nine-page main part, two schedules, and 36 possible attachments.

Among the key changes the IRS is considering for the Form 990:

• Some organizations, mostly large ones, would be required to complete a new Schedule J, “Supplemental Compensation Information,” that the IRS said would seek “to break down the reporting of an individual’s executive compensation into multiple components, including regular wages and salary, incentive compensation, deferred compensation, fringe benefits, and expense allowances or reimbursements.”

• The IRS said it estimates that fewer than 5 percent of nonprofit organizations that filled out the main form would also have to submit Schedule J. Among those that would have to submit the schedule: organizations that provided someone compensation of more than $150,000.

• Charities would also have to provide information about their obligations for employment taxes, excise taxes, and unrelated business income taxes (which organizations must pay on commercial operations not related to their tax-exempt purposes). In recent years, the IRS has identified thousands of charities that withheld taxes for Social Security and Medicare from their employees’ pay but did not send the money to the government, and the tax agency hopes the new form will help it spot problems with such payments.
• Nonprofit groups would have to describe their “most significant program service accomplishment” for the year.
• A new Schedule G, “Supplemental Information Regarding Fundraising Activities,” would ask organizations if they raised money through mail, e-mail, and other solicitations and to provide details about any relationships with people or groups that help them raise money.

  Groups that raised money through special events and gambling would have to provide additional details about their fund-raising activities.

• A new Schedule D, “Supplemental Financial Statements,” would ask detailed questions about organizations that have conservation easements, maintain donor-advised funds, or have collections of “art, historical treasures, and similar assets.”

  The schedule has a section that would require organizations with endowments to provide detailed information about them over five years.

H. Art Taylor, president of the BBB Wise Giving Alliance, a charity watchdog organization, said the proposed form and schedules are generally more straightforward than the current form, seeking more yes-or-no answers and specific figures than open-ended responses.

“The IRS is asking the questions more tightly and looking for specific types of answers that can allow for comparison” of organizations, Mr. Taylor said. “This way the forms can be more easily filed electronically with the IRS. Right now, there is so much unstructured information on the form that it is hard to digitize it.”

Mr. Taylor added: “The flip side is that it may be more difficult for organizations to truly explain themselves.”

Jack B. Siegel, a Chicago lawyer, said in comments he sent to the IRS that charities would need the chance to explain themselves in responding to questions on the new summary page that seek such figures as organizations’ fund-raising expenses as percentages of total contributions.

On this question, “the underlying assumption is that a lower percentage is better than a higher one,” Mr. Siegel said. “Thoughtful people are trying to move the public and media away from reliance on simplistic and often misleading metrics like this one.” He said the IRS should eliminate the question, allow charities to calculate the figure for a three-to-five-year period, or “provide adequate space to permit the organization to explain” its calculation.

Mr. Hopkins, the Kansas City lawyer, said “this Form 990 is designed to influence and modify exempt organizations’ behavior,” with the best “and most chilling” example being the IRS’s proposed questions on governance.

“The law does not require that an organization have a whistleblower or document-retention policy to be exempt,” Mr. Hopkins said. But, he said, “the IRS is now pushing these policies, just as it has been forcing organizations to adopt conflict-of-interest policies. It will not be long before agents in the field will be taking the position that all of these policies are required for tax exemption.”

Seeking to Curb Abuses

The IRS hopes the questions on governance will promote greater accountability among charities. Officials of the tax agency said they do not plan to impose penalties on organizations that lack such policies, but warn that charities without them run a greater risk of being audited.

“In our view and experience,” the IRS said, “a well-managed organization is likely to be a tax-compliant organization.”

The proposed form drew praise from Sen. Max Baucus, Democrat of Montana, who chairs the Senate Finance Committee. “This new form will help the public and the IRS assess whether tax-exempt organizations are staying true to the reasons they were granted exempt status in the first place,” Mr. Baucus said in a statement.

During the next three months — through September 14 — the public will have the chance to weigh in on the draft document and recommend changes to it before the IRS eventually makes the form final. The IRS plans to require charities to start using the form for the 2008 tax year, which organizations would file in 2009.

The proposed document is available online.

Organizations may send comments about the proposal to the IRS at Form990Revision@irs.gov.