IRS requires not-for-profits to disclose more info: Organizations gearing up for new rules in 2009

For the first time in decades, the Internal Revenue Service is making a major revision to the way not-for-profits disclose information about their finances, governance and operations.

Coming in the wake of scrutiny from federal lawmakers and regulators alike, the changes to IRS Form 990 that take effect next year require not-for-profit leaders to provide more information on executive compensation and potential conflicts of interest, for example.

And for the first time ever, most organizations will be required to file a version of the informational return, regardless of their size.

“These changes are huge,” said Geralyn Hurd, executive in charge of taxexempt practice for Oakbrook, Ill.-based accounting firm Crowe Chizek and Co. LLP, which has offices in Indianapolis. “There has not been a change like this in 30 years.”

Some experts say the modifications will make taxexempt organizations more accountable to the public. Others worry they will make the process of recruiting volunteer board members more difficult.

The IRS is unapologetic.

“[The reporting form] has failed to keep pace with changes in the law and with the increasing size, diversity and complexity of the exempt sector,” the agency said in a “background paper” on the changes.

Statistics from the National Center for Charitable Statistics show that nearly 8,500 not-for-profits in Indiana filed Form 990s in 2007. But more than 32,500 groups are registered as not-for-profits in the state, according to the IRS. Until this year, notfor-profits with annual revenue of less than $25,000 did not have to report results.

The revised 990 form requires organizations to disclose more information, including any business relationships with board members or their families. Some observers worry the increased reporting may scare away potential board members.

“It’s an awkward conversation” to have with newly recruited directors, said Jim Simpson, president of Financial Technologies and Management LLC, an Indianapolis-based not-for-profit consultant. He said the questions imply that the board member may be serving for personal gain.

At United Way of Central Indiana, CFO Dale DePoy is studying the changes and awaiting detailed instructions from the IRS. UWCI is among the organizations with more than $1 million in annual revenue that must begin using the new form next year.

United Way has nearly 80 individuals on its board, but it likely will qualify for an exemption that allows large boards to just track the business relationships of their executive committees-smaller groups in charge of financial decisions. Still, that’s at least 20 people DePoy must investigate to make sure he knows what businesses they and their relatives own.

United Way already requires board members to fill out a form disclosing potential conflicts of interest. But the updated reporting may mean also asking board members about businesses held by a spouse or extended family.

“How in the world are we going to keep track of that?” DePoy asked.

The new form also requires more notfor-profits to report on compensation for their top employees. Under current rules, public charities exempt from taxes under Section 501(c)3 of the IRS code must disclose how much they pay their top five employees making more than $50,000, plus any officers or “key employees.”

The change calls for all types of notfor-profits to report salaries and benefits for staff who make more than $100,000; it also broadens the definition of key employees.

The increased reporting has led some groups to question whether the IRS has the authority to ask about more than just tax information. While the draft changes were open for public comment, several wrote the agency to recommend doing away with the governance section all together.

The IRS declined, but added language stating that some of the information is “not required by the Internal Revenue Code.”

Even so, several of the governance disclosure items are required of not-for-profits through other federal laws, said Eugene R. Tempel, executive director of Indiana University’s Center on Philanthropy.

And the new reporting requirements mirror areas where the federal government has been cracking down. Plus, the increased disclosure should be good for the public trust, Tempel said.

“There are people who really don’t agree with this and think the IRS has gone too far,” he said. “But if we’re accepting funds that have a tax deduction attached to them, then we have a responsibility to hold ourselves responsible to the public.”

Members of the public have the right to review any not-for-profit’s most recent Form 990 upon request. Some less up-todate forms are posted through independent Web sites, such as www.guidestar.org.

But observers caution against using the form to gather information about an organization without asking not-for-profit leaders for the story behind the numbers.

“The amount of data in there may be overwhelming to your average reader,” said Crowe Chizek’s Hurd. “There’s a whole lot of stuff in there that, if taken out of context, could be very misleading.”

Local reaction to the changes ranges from resistance to nervousness to cheers. So it’s little surprise that advisers-including Crowe-are rolling out seminars and telling organizations to review their internal record-keeping now to make sure they’re up to snuff.

“This is not something that can be procrastinated,” Hurd said. She warned that not-for-profits are setting themselves up for pain if they wait until next year, the first time the new reporting forms must be used, to learn about the revamp.

Smaller not-for-profits get more time to adjust to the new forms. While the largest organizations start using the forms next year, smaller groups will be phased in.

Not-for-profits with revenue of $25,000 to $200,000 will continue to use an easier abbreviated form. And, for the first time ever, not-for-profits with less than $25,000 in annual revenue were required to report to the IRS this year. If they fail to report for three years, they lose their taxexempt status.

Previously, these smallest organizations would get their not-for-profit designation, then disappear from the IRS’ radar. But the IRS and researchers didn’t know why the organizations weren’t reporting.