990’s DO Matter!

1. 990’s DO Matter! All materials here have been developed (and are presented) by: Eve Borenstein Borenstein & McVeigh (BAM!) Law Office LLC Eve Rose Borenstein, LLC [prior permission is required for reprint/use] Funding for this presentation has been generously provided by The Otto Bremer Foundation

2. I-a. What’s “the deal” with the current and Redesigned Form 990? • 990 series of Forms are the “annual return” for all* tax-exempt organizations . . . . In its ‘current’ incarnation (2007 and prior years’), the Form 990 is/was: • “a disaster” [that’s a direct quote from IRS officials]; • of unmanageable structure/design (a result of a decade of Congress’ mandated “add-on’s” and IRS’ attempts to adapt Form to new exam approaches); • truly a public accountability vehicle, not “just” a financial statement; *there is a major exception: 501(c)(3)’s with private foundation status file the Form 990-PF

3. I-a. What’s “the deal” with the current and Redesigned Form 990? • a lengthy read with no table of contents: “one-size-fits-all” approach drives 9 page Form (on top of which c3-filers add the 7 page Schedule A) and tons of lines demand “attach a statement”; and • full of suffocating minutiae, statements are hard to find, and result meets no one’s needs. • Although an abbreviated alternative was (and is) available to filers with smaller “gross receipts” (the 3-page Form 990-EZ), the “-EZ” does not save as much preparation time as one could infer from its shorter number of pages (especially for c3 filers).

4. I-a. What’s “the deal” with the current and Redesigned Form 990? • Form 990 has become THE compliance and accountability tool accessible to both regulators and public. • 990’s (as-filed) ARE read: • Know of the “Guidestar” factor (enormous public use of that website – www.guidestar.org – to peruse Forms – ~14,000 a day!) • As of 1999, Guidestar posts the as-filed-with-the-IRS 990’s (and 990-EZ’s and 990-PF’s), tying each organization to the IRS’ Exempt Organizations “master file”

5. I-a. What’s “the deal” with the current and Redesigned Form 990? • Why are 990’s read? Of interest is: • gossip (chiefly, salaries) • fodder for whistleblowers • info for competitors • Note expectations are now high on part of regulators (big 3 = IRS/Congress, State offices with jurisdiction over those who are “charitably soliciting” and, finally, “court of public opinion”) that self-reporting accomplished on Form will not only be complete, but accurate!

6. I-a. What’s “the deal” with the current and Redesigned Form 990? • Form 990’s data does, for those who know how to read the current Form, provide a “thru the looking glass” view of organization. Upon the Form, filers roadmap: • what they got done during the year (was/remains Part III – Program Service Accomplishments; note acronym is same as ‘public service announcement’) • at what cost (was Part II, now on Redesigned 990’s front page summary & 2nd-to-last-page’s Part IX) • with what monies (was Part I, now on Redesigned 990’s front page summary & 3rd-to-last page’s Part VIII)

7. I-a. What’s “the deal” with the current and Redesigned Form 990? • all of above occurring onwhosewatch (filer’s list the year’s legal/quasi-legal managers), who got paid what (filer’s show their compensation); this Part is referred to as the listing of “TDOKE’s” / TDOKE = Trustee/Director, Officer, Key Employee (was Part V, now on Redesigned 990’s Part VII) • and, for c3-filers, disclosing also “High 5” employees (reaching folks NOT on TDOKE list), as well as contractors, and their pay (was at Schedule A’s Part I, now on Redesigned 990’s Part VII)

8. I-a. What’s “the deal” with the current and Redesigned Form 990? • IMPORTANT!: The Redesigned 990 requires “High 5” employees and contractors be disclosed by ALL filers (no longer just by 501(c)(3)’s!) • year-end financial posture (was Part IV, now on Redesigned 990’s front page summary and last page’s Part X) • Entire rest of Form is “turn yourself in” versus “applaud yourself for compliance” relating to “tax” attributes or compliance mandates (best case, this info is checklist for management; worst case, is fodder for whistle-blowers or red-flag for regulators)

9. I-a. What’s “the deal” with the current and Redesigned Form 990? • Achilles’ heel for IRS has been current Form’s illogical lay-out which defies and/or contradicts primacy of regulators’ key priorities: what gone done, with what monies accessed and disbursed, who’s in charge and how well are they running the show. • Achilles’ heel for exempt organizations in preparing Form has been failure to “own” key arenas, leaving all-too-often to professional preparers the work of: • Fleshing out program service accomplishments • Correctly inputting TDOKE’s and High 5’s, and (for c3’s:) tracking insider-transactions & (for all:) loans

10. I-a. What’s “the deal” with the current and Redesigned Form 990? • Properly disclosing fundraising-related in-flows & out-flows (especially on events and sales, where filers must show gross receipts – including bifurcating between “purchase” versus “true gift” revenues – and direct event/sales expenses which are different than overall fundraising expenses) • Understanding IRS’ conventions for financial statement reporting (e.g., donated services or discounted access to services/equipment/facilities are NOT included, distinction between what is a “true” grant versus what is sale of expertise)

11. I-a. What’s “the deal” with the current and Redesigned Form 990? • Documenting basis for compliance with various tax-exemption mandates, such as: • required solicitation disclosures • application (or not) of “unrelated business income tax” (a/k/a “UBIT”) to organization’s non-gift/grant revenues • for c3’s/c4’s, reach of “intermediate sanctions” tax to so-called “excess benefit transactions” • for c3’s, operating within “permissible lobbying limits”

12. I-a. What’s “the deal” with the current and Redesigned Form 990? • And finally, present Form 990 is rather opaque in disclosing arenas of operations Congress and/or IRS has expressed interest in reviewing: • Non-cash (i.e., property) contributions – e.g., artwork or other items held in collections, conservation easements, taxidermied animals! • Fundraising practices and payments (particularly in using agents and professional fundraisers) • Setting executives’ compensation and managing insider transactions

13. I-b. What’s the deal with YOUR Prior-filed 990’s? • Let’s be honest in reviewing the following questions: • who joins exempt organization Boards with the goal of having the group file the best 990 ever? • by whom and when does the information the 990 requires get culled? • what systems are in place during each tax year to document the necessary information that will be reported upon after the year closes? • Whether it’s internal staff OR an external professional who is preparing the Form, the dilemma is the same:

14. I-b. What’s the deal with YOUR Prior-filed 990’s? • different players hold YOUR information . . . • program service accomplishments and overall activities undertaken will be data that program office typically holds • finance department has data on quantified in-flows and out-flows (including compensation) • fundraising staff/committee has info on who gave what and, for special events or activities, what was expended along the way • those staffing the Board have info on Board/ Officers’ service & “conflict of interest” practice

15. I-b. What’s the deal with YOUR Prior-filed 990’s? • and accessing that information is time-consuming and challenging • program activities are often recorded by grant or program, and not necessarily tied to 990 year • finance department and fundraising staff/committee operate in different spheres, both may not be familiar with tax rules or each other’s definitions • key staff face tension in mandating info from Board members (and Officers), may not be privy to all compensation info or transaction details

16. I-b. What’s the deal with YOUR Prior-filed 990’s? • PLUS, pure “tax rules” and 990-reporting needs may not be known/tracked throughout the year, witness that 501(c)(3)’s: • need to capture data on their lobbying to pass laws (same is permitted but not “too much”) • report “insider transactions”, including “excess benefit transactions” • track their transactions with other exempts who are NOT (c)(3), and • explain how they fit nonprivate foundation standards

17. I-b. What’s the deal with YOUR Prior-filed 990’s? • ALL filers (not just c3’s) face at least 3 major (and tons of minor) “tax rules” and 990-reporting needs that need be known/tracked; the major ones are: • solicitation disclosure requirements (these are different for c3’s vs. non-c3’s) • reporting on TDOKE’s being paid by “related organizations” • reporting revenue-generating activities as either “substantially related” (to organization’s accomplishments) OR as taxed under, or excepted from, “unrelated business income tax”

18. I-b. What’s the deal with YOUR Prior-filed 990’s? • Mea culpa should be the key phrase ALL filers employ in looking back at already-filed Forms 990. • Were you to find areas of the 990 that are not properly fleshed out or documented, doing better the next time is the 21st Century NEED.

19. I-c. IRS’ Goals in Modernizing the Form 990 • Change having the “big picture” from the Form be opaque or difficult to grasp by filers/readers: • Layout emphasizes “key” priorities; makes self-evident that Form is more than financial statement • Reporting on activities-operations “of interest” to regulators now occurs via structured statements (via Schedules that only apply to those conducting same), undoing “one-size-fits-all” prior approach • Take advantage of the Form as vehicle for public accountability and transparency . . .

20. I-c.IRS’ Goals in Modernizing the Form 990 • have the Form promote education of and behavior modification within the filing sector, particularly through the new reporting questions on governance practices and management policies • provide key “snapshot” info on front page • use stand-alone Schedules specific to activities (such as insider transactions), rather than numbers • Place the responsibility for appropriate preparation on the filer, rather than outside paid preparers • Serve IRS’ needs as data-mining source overall and to identify potential single-issue audit examinees

21. I-d. IRS’ Reality in Modernizing the Form 990 Redesign process of IRS initiated 2006; draft-for-public-comment released June 2007. ‘Final’ (meaning-post comment period) released late December 2007. This ‘final’ Form is one in use on tax years begun in 2008. The Redesigned 990 takes existing Form’s 9 pages[& Sched. A (for 501(c)(3)’s only) & Sched. B (info on donors)] Replaces samewith – 11 page “Core Form” and 16 Schedules

22. Key Aspects of the Redesign per IRS • Increased focus on activities, not just numbers • Summary page – snapshot • Checklist of schedules – burden, snapshot • Governance section – board, policies, disclosure • Compensation and insider transactions • Foreign activities • Related organizations, joint ventures, UBI • Non-cash contributions and fundraising • Targeted information: hospitals, bonds, other tax filings, endowments, major transactions, FIN 48

23. Philosophy of 2008 Form 990 per IRS • Compliance, transparency, accountability • Focus on areas with substantial compliance interests and trends; build the form to design compliance projects • Build the form to appropriately take advantage of its public nature and accountability aspects • Structure: core form for all, complete schedules depending upon activities • Provide opportunities to explain and supplement their responses, tell their story

24. II-a. Brief Intro to the Redesigned Form 990 • Order of “core form” tracks relative priority of reporting concerns: • Program Service Accomplishments (Part III, entirety of page 2). Here is Form’s first “substantive” page as Parts I & II on 1st page provide “snap shot” info (pulled up from Form’s following substantive parts) and signature blank, respectively. • Parts IV & V are “checklists” of everything to include on Form and file otherwise. Pages 3-5 thus = paperwork “reminders” (had to go somewhere!) • Part VI (page 6) = new Governance Part

25. II-a. Brief Intro to the Redesigned Form 990 • Part VII (pages 7 - 8) = Managers (& their comp) • Parts VIII, IX, X (pages 9 -11) = traditional financial statements: revenues, expenses, balance sheet. (Last on page 11 is Part XI, addressing practices in accessing independent accountants.) • Primacy here is what? • PSA’s • Governance • Managers Financials? last 3 pages

26. II-a. Brief Intro to the Redesigned Form 990 • So, what’s new upon Redesign? • “Snapshot” frontpage • Part VI, “Governance, Management and Disclosure”, representing a HUGE ADDITION overall: • Sub-part on “Governing Body and Management” has 2 “old” questions and 11 new • Sub-part on “Policies” has 6 new questions • Sub-part on “Disclosure” has 2 new questions • Part VII, “Compensation to [TDOKE’s & ‘High 5’s’]” employs new definitions and thresholds for reporting

27. II-a. Brief Intro to the Redesigned Form 990 • Employ of “overflow” schedule – Schedule O – the site at which filers provide narration (sometimes as mandated, other times by their own choice as an “opportunity”) of their individualized circumstances. • In essence, Schedule O exists as the 12th page of the Core Form. • It is an “outpost” where one supplements and/or “owns” (a verb akin to “confess”) its practices and circumstances related to: new/changed/ended program activities; ‘did not comply’ or public relations explanations; myriad of governance “our circumstances”; explanation of late filing; details if return is amended

28. II-a. Brief Intro to the Redesigned Form 990 • New schedule, L: site for disclosing fact of loans (but only those outstanding at yearend) or business transactions with or providing grants/assistance to “interested persons”. • New schedule, R: names filer’s related organizations and reports flow of funds between them and filer • Reporting on fundraising events/activities is now part of new schedule, G. This is also site for new disclosures on use of professional fundraisers. • New schedule, M: reports on receipts of noncash (i.e., property, securities) contributions and practices

29. II-a. Brief Intro to the Redesigned Form 990 • Two things are key “needs to know” in planning for 2008 990: • Need know “related organizations” per Schedule R’s definitions. Schedule completion is only part of the equation, as “need” here relates to reporting comp provided by them to (and in certain cases, transactions with) your TDOKE’s and High 5’s. • Relatively simple definitions are used – control by one group over another (measured at >50%); supporting-supported orgs (under 509(a)(3); or operating as 1 of 3 (or less) general partners

30. II-a. Brief Intro to the Redesigned Form 990 • Since behavior modification is very much a part of the new Part VI, all filers should begin (ideally IN tax year 2008) planning for three key questions: • How and via what process do they review their top management official’s compensation? (i.e., the CEO or Executive Director; those paying other officers/key employees have that same question apply there too) • Two-part question: will they have made a pre-filing disclosure of the 990 to their Board of Directors? AND: how DO they review the Form 990 before it is filed? • What practices, if any, do they employ to monitor and enforce the organization’s conflict of interest policy?

31. II-b. 21st Century Challenges that MUST be overseen for 990 reporting! • Appropriate reporting of one’s “program service accomplishments” (Part III of the Form; now also referred to as “program service achievements”) • This Part of Form has always called for quantitative measures to be reported (except with research or arenas where same are not susceptible of measure). • 2007 and prior years’ Form lists 4 largest programs; Redesign lists 3 largest programs. Size measure “to make the list” uses dollars/materials expended (in other words, program expenditures per Form 990, thus not included are donated services/access).

32. II-b. 21st Century Challenges that MUST be overseen for 990 reporting! • Part III now requires filers to note programs/operations that were not discussed on filer’s exemption application or reported (with respect to new activities) on a PRIOR Form 990; and also to disclose abandoned programs. • “New” methods of conducting programs was subtly asked for on 2007 Form for first time. New inquiries at questions 2 and 3 serve as an ‘update’ of exemption application, on an ongoing basis. • Having 990 ask for this info now abrogates determination letter’s mandate to “inform Cincinnati” of such changes in operations.

33. II-b. 21st Century Challenges that MUST be overseen for 990 reporting! • Part III’s “program service accomplishments” (Redesign inputs the “largest 3” programs at Lines 4a-4c) are the most important narrative disclosure all filers must make! • 1st visible self-disclosure AFTER the new summary page, quantifies WHAT the organization did in line with its exempt status programs 1, 2, and 3 (assuming it conducts multiple programs). • Filers are directed to Schedule O to summarize the programs not making the “largest 3” (i.e., 4 + on). • Filers may use Schedule O to note program(s) missing from “largest 3” due to 990’s measure of hard-dollars/materials, missing volunteered time, etc.

34. Sample return’snarratives

35. Figure out WHO this is . . . Entry here is from filer’s 2005 Form 990, Part III and demonstrates that YES, folks sometimes do use small font and get their descriptions solely on this Page/Part . . .

36. small org examples: Education: Conducted six snowmobile safety classes (12 hours of instructions over 3 evenings) in five municipalities spread out over the county. Total number completing class to certification, 36. Youth sports: Ran 3 youth hockey teams over course of 12 week season, 15 10 year olds, 18 11 year olds, 20 12 years olds rostered each team. Total ice-time in practices and games per team: 300. Each team had coach and assistant coach present for all practices and games. In addition, open skate for teams sponsored with trainer present weekly throughout the season – 3 hours per week.

37. more small org examples: Community Building: Undertook the sponsorship of weekly socials (36 during year) at organization’s facility, open to the public; printed and distributed 200 newsletters quarterly to most households in town; via newsletters successfully solicited 18 volunteers to chaperone school age children at town’s annual picnic. Community Service: 10 members each provided 26 hours of visits to township’s senior center and assisted living community room; 6 members staffed community information booth at area arts festival and at seasonal highway rest stop for total of 780 hours.

38. II-b. 21st Century Challenges that MUST be overseen for 990 reporting! • While in prior 990 years (2007 Form 990 and prior), 501(c)(3) organizations alone were subject to this “need”, ALL exempts as of the 2008 Redesign year’s Form need be prepared to detail a wider array of “insider transactions”, the definition of which tracks smell test parameters that go well beyond some (most?) conflict of interest policies. This need “picks up” – • Loans with TDOKE’s, as well as (for c3 and c4 entities) loans with “disqualified persons” – a definition which tracks status back over five years • Business transactions with TDOKE’s and those connected to them

39. II-b. 21st Century Challenges that MUST be overseen for 990 reporting! • Grants or assistance being provided to TDOKE’s, substantial contributors AND grant selection committee members, as well as parties connected to them • And finally, (c)(3) and (c)(4) entities must be prepared to “turn in” – by name – disqualified parties [i.e., those who have been in a position of “substantial influence” over the organization in the prior 60 months (or whom are related to such parties)] were they to have received an excess benefit in transacting with the organization in the filing year, or have been discovered to have received an excess benefit in the course of a prior year.

40. II-b. 21st Century Challenges that MUST be overseen for 990 reporting! • Re fundraising, “smart” systems need be in place to: • Accept and record non-cash contributions (non-cash = property; for example, publicly-traded stock or items such as presenter’s “ugly candlesticks” to be ‘sold’ at silent auction) • Maintain complete information on donors’ identity (note this is the one arena of 990 input NOT open for public inspection) • Properly set and note “exchange” portion on special events/sales

41. II-b. 21st Century Challenges that MUST be overseen for 990 reporting! • 2008 Form 990 requires ALL filers know their “related organizations” and disclose their name/t.i.n./activities (and some further info). “Related organizations” are measured via Schedule R’sdefinition which pick up “parents”, “subsidiaries”, “brother”/“sister”, or those who are “supported” to “supporting” (or vice versa) under 509(a)(3). Also counted are partnerships where the filer is a general amongst 3 or fewer general partners. • Definition of control used for finding parent-subsidiary-brother/sister is >50% stock/Board. • Redesign also focuses on UNRELATED joint ventures – organizations taxable as partnerships

42. II-b. 21st Century Challenges that MUST be overseen for 990 reporting! • Grantmaking organizations need be prepared for the following questions on their 2008 990: • what systems are in place for recordkeeping on all grantees? • what systems are used to test grantees eligibility? • How are grantees monitored with respect to their compliance with terms of their grants?

43. III-a. The Core’s BIG Three – III, VI, VII;Here, III Program Service Accomplishments (Part III, page 2) continues to, as with 2007 and prior years’ Forms, report ‘outputs’ and ‘achievements’. However, as of the Redesign, Part III now starts out first requiring input of the organization’s mission (no longer 3 inch line to input “primary exempt purpose”), and as already noted, also asks if activities are new, changed, or have been terminated:

44. III-a. The Core’s BIG Three – III, VI, VII:Here, III • Requirement to disclose filer’s mission at Line 1: • Instructions say that if Board has not adopted a mission statement, state “none”! • Incorporated c3’s likely have Articles of Incorporation setting out purposes in which it is said the entity is “organized and operated exclusively for one or more of the following purposes -- charitable, educational, scientific, religious, literary, preventing cruelty to animals, promoting national or international amateur sports competition”, and perhaps an even more limiting statement (e.g., “to this end, the corporation shall undertake efforts to combat domestic violence”). That purpose clause equates to “mission” and should be inputted (rather than “none”).

45. III-a. The Core’s BIG Three – III, VI, VII;Here, III Not in 2008 Same as in prior years NEW in 2008 (likely 2009)

46. III-a. The Core’s BIG Three – III, VI, VII;Here, III • As noted earlier, this Part narrates the filing year’s achievements (via Line 4) and “updates” filer’s exemption application (via Lines 2 and 3). • As in prior years, c3’s and c4’s must also reflect, for each program inputted on Lines 4a-4c, the total amount of expenditures incurred (per 990’s measures, which again do not include volunteered services or discounts in accessing use of equipment or facilities). • In addition, as of the Redesign, c3’s and c4’s must input program service dollars brought in by each program and as of the 2nd year of the Redesign (i.e., on the 2009 Form) will have to identify each program by program “codes”.

47. III-a. The Core’s BIG Three – III, VI, VII • Having dispensed with the FIRST of the BIG THREE, let’s take a look at the other TWO: • Governance, Management, and Disclosure (Part VI, page 6) • Compensation of TDOKE’s and Highest Compensated Employees, Independent Contractors (Part VII, pages 7 & 8)

48. III-a. The Core’s BIG Three – III, VI, VII;Here, VI • Part VI is a completely NEW Part that asks for multiple comprehensive disclosures of governance policies and practices • This Part has been widely touted by the Commissioner of the Tax-exempt/Governmental Entities Operating Division of the IRS, Steve Miller, as the “crown jewel” in their efforts to promote “good governance”. WHY is “good governance” in the IRS’ vocabulary? The IRS (and most sector-observers!) believe appropriate policies and procedures are instrumental for healthy organizations AND to improve tax compliance!

49. III-a. The Core’s BIG Three – III, VI, VII;Here, VI • Specifics about this Part? • It starts out saying that policies inquired about “are not required” by law . . . • Note that Part VI’s answers are “paired” with the Schedule O – this Part mandates disclosures there (e.g., “wrong” yes/no responses & for all at Line 10) . . . but that language does NOT mean that answering this Part is optional!

50. III-a. The Core’s BIG Three – III, VI, VII;Here, VI • Section A is all about the Board. • Its first question requires input of the NUMBER OF VOTING MEMBERS OF THE BOARD (AT LAST DAY OF TAX YEAR) – this on Line 1a. • Next entry (1b) requires input of NUMBER OF THOSE VOTING MEMBERS WHO ARE “INDEPENDENT” (AGAIN, AT LAST DAY OF TAX YEAR). Note that this info is rebroadcast on the Redesigned 990’s Summary Page (Part I, Lines 5/6)! • So, what makes a Director “independent”?