The New 990:
IRS Proposes a Major Redesign

Looking for summer reading? How about a quick run through of the IRS' proposed new Form 990 Return of Organizations Exempt from Income Tax?

Wait! Don't turn the page! If you don't think your organization's 990 is important, think again.
Sure, your organization doesn't have to pay income tax, but the 990 is still the most important public disclosure document you ever file. While you may be paying tens of thousands of dollars for a bright and shiny new annual report, most funders - government, foundations and savvy individual donors - will quickly pull up your 990 on-line to get the real scoop about your finances, board membership and how much your executive director and key staff earn.
GuideStar, which publicly posts pdf copies of all 990 filings, is now the first stop for anyone looking to learn about a particular nonprofit. Watchdog agencies like Charity Navigator use the 990 data to rate nonprofits against a series of benchmarks for levels of program spending, fundraising efficiency and more. People like me pour through the 990s in what surely must be a symptom of obsessive compulsive disorder, looking for insights as to how the whole sector works and what makes individual agencies dysfunctional. Our recent series of articles highlighting questionable fundraising and compensation policies at the intertwined PSCH and Foundation for Supporters of the Disabled - now under investigation by both the AG's Charities Bureau and the Commission on Quality of Care -- grew entirely out of a casual comparison of a golf outing invitation with the respective 990s for these two organizations.
The IRS' proposed changes to the 990 will make these kinds of inquiries even easier. Currently, the first thing a reader sees on your 990 is a break down of your revenue, a summary of your expenses and a quick look at your bottom line and net assets - basically your financials. In two years, according to the proposed draft, page one of the 990 will immediately tell readers how many board members you have, how many are independent, the number of individuals receiving compensation in excess of $100,000 and the highest level of compensation. While page one will still list the major revenue and expense lines - contributions and grants, program service expenses, management and general expenses, etc. - it will now feature a calculation showing the percentage relationships between these items. What percentage of your expenditures goes to program versus management? What portion of your contributions is eaten up by fundraising expenses? This may not sound like rocket science, but doing these calculations and comparing them against industry-wide benchmarks is what put CharityNavigator on the map - or at least on the web.
"It is focused away from the numbers. It is designed to give a snapshot of what the organization is all about," says Michael McNee who heads up the Nonprofit Industry Services Group for the accounting firm Marks Paneth & Shron. "Who is really using this? It is not really the IRS. It is the general public."
This focus on governance issues - typically issues which are not covered by any section of the tax code - continues throughout the draft form. "There are some new questions that are really quite interesting and are going to generate some interesting reactions," says McNee. Does the organization have a whistle blower policy? Does an officer, director or trustee prepare the financial statements? Does a CPA compile, review or audit your financials? Do you have an audit committee? Does the board keep minutes of its meetings? What internal information to you make available to the general public and how? How did you determine appropriate compensation levels for your officers and key staff? Do you have minutes of the meeting where the decisions were made?
The "yes" or "no" nature of these questions raises some issues of its own, says Kelly Matthews of the Council of Community Services of New York State. "If I check that I don't have an audit committee, does that give me a black mark? I may not even be required to have an audit. Why have an audit committee?"
Nonprofits may also be stunned by the size of the new 990 package which includes a 10 page "core" form and 15 separate schedules. "Many of these schedules cover items which were previously required as separate attachments," says Julie Floch of Eisner LLP, who served for the past three years on an outside advisory task force for the IRS which looked at the 990 among other issues.
"They are really getting at trying to bring consistency in reporting," says McNee, pointing to variations in how organizations report executive compensation and benefits. "The IRS has closed the loop on that by creating a schedule which has you put the different components of compensation into different boxes."
The IRS is seeking comments until September 14th on the new draft Form 990 which is available for review at http://www.irs.gov/charities/index.html.