The Internal Revenue Service is taking a closer look at how nonprofit organizations are run. It will soon be asking for more disclosure about non-cash donations, decisions on executive pay, partnerships with for-profit organizations, and whether officers, directors and trustees annually disclose potential conflicts of interest.
Those concerns show up in the overhaul of IRS Form 990, the nonprofit version of a tax return. It’s the first major overhaul since 1979 and long overdue. Nonprofits have changed considerably in 29 years.
The new form should provide more complete information to the Internal Revenue Service, potential donors and even reporters. It also will create administrative headaches for the nonprofit managers who will have to collect and report information in a new way. The new form goes into effect next year (for 2008 returns).
Sondra Reis, associate director of the Minnesota Council of Nonprofits, said the U.S. Senate Finance Committee has had ongoing concerns about where the nonprofit sector gets its income and how it gets reported.
The committee’s focus was not so much on the integrity of nonprofit reporting, Reis said, but on the tax deductions that individuals claim for non-cash donations. For example, in the recent past, the committee raised questions about the value of cars given to charities.
The IRS was curious about donated cars, too, and in 2004 changed the rules. Individuals now get deductions based the car’s value when sold at auction rather than a fair market value estimate (such as the Blue Book value).
Reis said the 990 rewrite is an extension of those same concerns. For instance, the new 990 has Schedule M, (PDF) a new form that requires nonprofits to list non-cash donations. It asks for a breakdown in two-dozen categories, such as cars, art, food, books, clothing, boats, securities, real estate, collectibles, drugs, taxidermy, archeological artifacts, scientific specimens and more.
Organizations have to list the number of contributions in each category, the revenue, and how they determined the value.
More questions on governance
Rich Cowles, executive director of the Charities Review Council, said the new 990 would highlight information that people need in making charitable giving decisions. “On balance, we think it is an improvement in transparency,” he said.
Reis and Cowles both pointed to the improved format. The front page now gives an organizational snapshot, helping the casual reader. The cover page states the organization’s mission and significant activities, the number of employees, volunteers and board members, and revenue and expense information.
The new form also focuses more on nonprofit governance.
The new 990 asks nonprofits not only the number of board members, but also the number of “independent board members.” The IRS is looking for business and family relationships that could create conflicts of interest.
For instance, the draft instructions (PDF) say board members are not independent if they have a family member who receives compensation from the organization or related organization. It goes on to define “family relationship” as a “spouse, ancestors, brothers and sisters (whether whole or half blood), children (whether natural or adopted), grandchildren, and spouses of brothers, sisters, children, and grandchildren.”
The IRS wants to know if nonprofits have written policies covering such things as whistleblowers, document retention and gifts. And it not only wants to know if nonprofits have a conflict of interest policy, but also if officers, directors, trustees and key employees are “required to disclose annually interests that could give rise to conflicts.”
The new form asks how nonprofit boards set compensation for executive directors and other top managers. Were independent persons involved in the review and did they use comparability data? (And using a qualifier only a bureaucrat could love, the 990 asks if the process included “contemporaneous substantiation of the deliberation and decision.”)
The old 990 required nonprofits to report compensation for the five highest-paid staff earning more than $50,000 a year. Reis said the IRS hadn’t made an inflation adjustment for years. The new 990 requires reporting for those making more than $100,000.
The new form even has a yes-or-no box asking whether the nonprofit’s board saw the 990 before it was filed and further asks leaders to describe the process, if any, the organization used to review it.
New scrutiny for hospitals
The IRS is taking a harder look at hospitals, too. According to the IRS website, (PDF) the old 990 “has failed to keep pace with the increasing size, diversity, and complexity of the nonprofit hospital sector.” The old form “does not provide for the reporting of community benefit activities or request important information regarding how nonprofit hospitals serve the public consistent with the privileges and benefits of tax exemption.”
The solution? The new Schedule H (PDF) (which is getting phased in.) It requires hospitals to document such things as charity care (both in total dollars and a percent of total expenses.) It asks if hospitals have a written debt collection policy, and, if so, whether that policy has provisions on collecting debt from patients known to qualify for charity care or financial assistance.
Reis said some nonprofits are doing a practice run, filling out the new forms with last year’s information just to figure out where they might have data gaps. And she suggested that nonprofits consider approving policies now getting IRS scrutiny, such as the gift and whistleblower policies, if they don’t have them already.
“You don’t want to be surprised after Jan. 1 that you are answering ‘no’ to questions that you wish you could have answered ‘yes’ to,” Reis said.
Donors and others who want to check a nonprofit’s public financial information have a few sources: the Minnesota attorney general’s charities database, the Charities Review Council of Minnesota and a national database called GuideStar.