Proposed disclosure rules will shed more light on nonprofits’ financials

Published in the July 20, 2007 edition of Columbus Business First

The Internal Revenue Service in June began seeking comments on the first substantial expansion since 1979 of Form 990 Return of Organizations Exempt from Income Tax. 

This mandatory annual form is an extensive, publicly available report that includes information ranging from standard financial data to information on compensation, contracts, investments, employees, donors, and board members. 

Lack of popular appreciation of the easy availability Form 990 filings on the Internet, as well as concerns with the form’s vague definitions and incompleteness have prompted an explosion of disclosures required by nonprofit overseers and donors.  Their goal:  to provide the transparency, accessibility, and completeness the current Form 990 lacks. 

This perceived need for multiple disclosures may change.  The proposed revisions to the Form 990 move this tax report much further into the realm of governance and best practice.  Disclosures are expanded to include key financial ratios, and the proposed form incorporates multiple checklists for policies and procedures. 

Nonprofits are encouraged to review the proposals and submit comments to the IRS no later than September 14, 2007 particularly addressing the IRS’ goal of increased transparency of information and usefulness as a compliance tool.  Information on this proposal can be found at the Web site irs.gov/charities/.

Here’s a fast look at what is in store for nonprofits with the new Form 990:

●Governance and Management

Perhaps the most significant change is the introduction of flags for best practices and a firm connection between mission and how the nonprofit’s money is spent. 

On the first page of the proposed form, organizations must report fundraising expenses as a percentage of contributions and grants. 

They also must report compensation to officers, directors, and key employees as a percentage of program-related expenses.  And they will be asked to disclose how actively they employ their wealth by reporting total expenditures as a share of total net assets. 

The proposed form devotes its entire third section to governance.  It asks for the number of independent board members and for descriptions of major changes to its governing documents.  It asks for verification that the organization produces minutes of its meetings and that it has written policies on conflicts of interest, whistleblowers, and document destruction. 

Moreover, the organization must now document whether its board reviewed the Form 990 before it was filed as well as how and whether it makes available to the public its IRS filings, financial statements, audit reports, and major policy and governance documents. 

Nonprofit hospitals receive special scrutiny of their charitable missions.  They must fill out a unique schedule of all the ways they provide community benefit, including charity care, unreimbursed Medicaid, subsidized health services, research, and local charitable contributions. 

●Tax Compliance

In recent years, the IRS has identified numerous nonprofits, including some in Columbus, that withheld taxes for Social Security and Medicare from their employees’ paychecks but failed to forward that money to the government. 

The form now asks the organization to confirm it has filed withholding forms and taxes, vendor 1099 forms, and unrelated business income tax returns and issued donor deductibility letters. 

●Investment Management

The proposed form probes more deeply into investments that are not in the form of publicly-traded securities and it asks the organization to identify the investments and fixed assets that are program related.

In a major step, it asks organizations for specifics on endowment revenue and expense over the past five years. 

For example, contributions are separated from investment earnings as sources of revenue.  Grants and other disbursements and expenditures for facilities, programs, and administration are all separately reported as spending from the endowment. 

The form also asks the organization to confirm whether it has policies regarding participation or investment in joint ventures or affiliated entities. 

●Financial Disclosure and Compensation

Details of income and expense are substantially expanded.  Revenue reporting expands to 35 lines from 21, and expense reporting expands to 35 lines from 27.  More significantly, reporting on compensation of officers, directors, and contractors is moved to the second page of the form and combined into one table. 

Reported compensation combines compensation from all related organizations.  For officers, key employees, and directors who receive combined compensation greater than $150,000 the organization must report on seven modes of payment, including expense accounts, severance agreements, and nontaxable benefits. 

Furthermore, the organization must indicate if compensation decisions had included review by independent directors, review of comparability data, and documentation of the deliberations and final decisions. 

Finally, the form requires the organization to answer five questions regarding business relationships with related people or organizations during the past five years with detailed disclosures.

If approved, this new Form 990 report will hit virtually all the hot buttons of best practices in nonprofit management and governance. 

Because the form is mandatory and readily available at guidestar.org, this new report could become the primary document to evaluate financial strength, ethical conduct, effective governance, and, most importantly, the quality of the linkage of money to mission. 

Allen J. Proctor was chief financial officer of Harvard University and is the author of “Linking Mission to Money, Finance for Nonprofit Board Members.”  www.proctorconsulting.org

Copyright 2007. Reprinted with permission, Business First of Columbus Inc.