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Form 990 brings big changes
Historically, the completion of Form 990 merely signaled to me the end of another annual audit process. Once the 990 was reviewed, signed, and submitted to the IRS, the annual audit “ritual” was put to bed for another year. Compiling the information was largely a joint effort by the business office and our external auditors, with a little input from human resources.
The majority of the information the 990 required was available from the financial audit. Human resources provided salary and benefit information on the five highest-paid employees, as required on Schedule A. Our external auditors compiled and inputted the required information. I simply reviewed it, ticked and tied the numbers back to our internal reports, signed it, and mailed it to the IRS.
There were a few questions regarding our major programs and services, but they were brief and remained static from year to year. Because of this, we required very limited involvement-if any-of our clinical leaders. The 990 and Schedule A asked a handful of yes/no questions regarding compliance and operational issues with little explanation required. Our internal staff spent approximately 3 to 4 hours after the completion of the financial audit to finalize the 990. Those days are over!
The new 990, which became effective for the 2008 tax year (filed in 2009 or 4-1/2 months after fiscal year end), requires much more time and effort. Many more people throughout our organization are involved in the preparation, review, and internal approval processes. This is no longer a project that can be completed in the back office and quietly submitted to the IRS.
The revised 990 is an 11-page, 11-part core document with ultimately 16 additional detailed schedules that may need to be completed based on the complexity of the organization's programs/services. The major changes center on compensation of officers, directors, trustees, key employees, and the highest-compensated employees, as well as governance and compliance issues. Disclosure is required of the governance structure, key organizational policies, and disclosure practices. Another area of significant change includes the determination of public charity status and public support, supplemental financial reporting, fund-raising, special events, and gaming (e.g., bingo).
The new 990's Part I is a high-level summary of organizational information, including the mission, the governing body's number of members, and number of employees and volunteers. Brief, high-level financial information also is disclosed in this summary section. A corporate officer must sign the 990 in Part II.
The second page focuses on the organization's major programs and services. The mission statement has to be restated, along with detailed information on any significant programs that have been added, changed, or closed since the previous 990 was filed. The three largest programs (by expenses) must be disclosed in detail, along with the programs' total revenues and expenses.
The next 4 pages include 97 yes/no questions. The answers to the first 44 determine how many of the 16 supplemental questions must be answered. Questions relate to lobbying and political activities, fund-raising, tax-exempt bond issues, loans to officers, related party transactions, and disposition of corporate assets. The next 29 questions focus on IRS filings and tax compliance, and the remaining 24 questions focus on governance, management, disclosure, and key policies. Additional disclosure is required depending on how the questions are answered. Organizations are required to report how they make the 990 available to public inspection (Web sites, upon request, etc.). Organizations also have to describe whether (and, if so, how) they make governing documents, conflict-of-interest policies, and financial statements available to the public.
The next two pages require detailed disclosure of compensation and benefits of key officers, directors, trustees, key employees, highest-compensated employees, and independent contractors. While this information normally is considered confidential, it now must be fully disclosed for public review. Finally, the detailed financial statement information is disclosed.
To accurately and fully complete the 990 and required supplemental schedules, key leaders throughout the organization must be involved. In addition to the financial staff, personnel from clinical leadership, corporate compliance, risk management, human resources, and the executive team play active and integral roles. Finally, the board of directors must review and approve the 990 before it is submitted to the IRS. An advantage of the 990 is that board members are able to see key clinical, compliance, compensation, and financial information in one document.
Amy Mace, CPA, is the CFO of Cummins Behavioral Health Systems, Inc., headquartered in Avon, Indiana. To contact her, e-mail
amace@cumminsbhs.org.
The 990 requires increased governance and oversight
By David E. Jose, Esq.
CFOs have been forced to become aware of the new 990's specific features. The changes are significant in terms of the breadth and depth of information about the organization. However, it is important to understand and appreciate part of the rationale for these changes and their implication from a regulatory oversight perspective, as well as an organizational governance perspective.
The IRS stated that there were specific reasons for the 990 revisions. One is to encourage the entity's transparency to the IRS and other third parties. This transparency has been accentuated through the requirement that Form 990 be made available upon request and found on the Internet and through other sources. A second rationale was for the 990 to serve as an aid for IRS compliance reviews. That suggests an IRS plan to use information from the 990 to formulate more rigorous community benefits standards and then monitor an organization's compliance with those standards. It is also suggestive of the implications that this IRS document can have for “compliance issues” beyond a tax exemption consideration.
It is not a coincidence that the new 990 was developed in the aftermath of the developments attributable to the Sarbanes-Oxley Act, which had a dramatic impact upon issues of transparency, governance, compliance, and disclosure. Simultaneously, high-profile financial “scandals” arose within the nonprofit sector, particularly relating to executive compensation and certain business activities that arguably strayed from organizations' charitable mission.
The IRS developed the new 990 in part to facilitate increased scrutiny, which arose because certain tax-exempt organizations may not have been providing “enough” charitable or other community benefits. Other organizations may have been providing questionable benefits to private individuals or for-profit ventures. Other nonprofits may have been providing significant compensation to senior management.
The increased disclosure under the new 990 allows the IRS to focus on a variety of issues that may or may not reflect on the organization's tax-exempt status. Furthermore, the disclosures also permit state officials and public constituencies to focus on issues such as charity care, community benefit, compensation arrangements, and governance practices. Thus, the 990 can no longer be viewed as simply limited to serving a financial-reporting function. It should be viewed from strategic, management, governance, and legal perspectives, with an awareness of the transparency that it furnishes to a variety of interested parties.
These changes also reinforce a changing role for the board of directors of a tax-exempt organization. Part of that new role will demand closer attention to a board's fiduciary duties owed to the organization's operations as well as its mission. Several features in the new form directly touch upon governance policies and procedures. The 990 includes open-ended inquiries regarding:
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Conflict-of-interest policies
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Whistle-blower protections
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Document retention and destruction policies
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Compensation policies
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Joint ventures
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Expense payment policies
These are significant operational components that require board consideration as well as ongoing oversight.
Perhaps more specifically, a board is faced with the probability that it will be directly reviewing this expanded form. This results in a need to address a depth of operations that many nonprofit boards have not previously faced. The form's inquiries are intended to force a board to consider how well it is fulfilling its governance responsibilities. Part of the predicament is that the board may be uncertain about what the “correct” practice may be. Nonetheless, board members are put on notice that they have a responsibility to inquire about, and potentially implement and oversee, such operational issues.
The new 990 has coincided with an increasing reference to “best practices” for different governance features. This will be true when faced with responding to certain questions on the form such as, “Does the organization have a written conflict-of-interest policy?” That is an example of many questions that “innocently” ask only for a yes or no answer. However, the push for best practices in the governance arena will make it increasingly difficult for an organization to answer “no” to such questions, or to have an outdated policy gathering dust.
For healthcare organizations, the concept of “community benefits” has been somewhat uncertain and fluid during the past 40 years. However, this is receiving increased scrutiny, and the new 990 deliberately was formatted to help the IRS determine whether the nonprofit organization is satisfying a more rigorous community benefit standard. Also, in the past the IRS had no way of analyzing or comparing organizations and the purported benefits that they were providing. The new 990 is intended to elicit information that will allow for a better comparison and greater scrutiny. This has implications for tax-exempt organizations seeking to remain compliant in the eyes of the IRS. Not to be ignored are the implications for the organization seeking to remain compliant under the growing oversight of bond-financing authorities, state regulatory agencies, and other public constituencies. While the new 990 underscores the increased risk and scrutiny faced by tax-exempt nonprofit organizations, it also provides an opportunity for a board to establish improved strategic, management, and governance direction for the organization.
David E. Jose, Esq., is a Partner with Krieg DeVault, LLP's Indianapolis office. He concentrates his practice in healthcare, corporate, administrative, and regulatory law. To contact him, e-mail djose@kdlegal.com.
Chill, CFO: It's EZ
A fictional tale about a CEO who didn't take Form 990 seriously
By Ann Borders
“The redesign of Form 990 is based on three guiding principles: enhancing transparency, promoting tax compliance, andminimizing the burden on the filing organization.” -IRS
As behavioral healthcare administrators cope with the Great Recession, it's imperative that we streamline, simplify, and eliminate bureaucratic time wasters.
Case in point: The CFO stops by to discuss the new IRS Form 990. Her eye twitches. There's a noise like 50-ton boulders engaging in lethal battle. “Just my teeth grinding,” she explains. And are those tears?
That does it. I send the CFO off to Lapland (Indiana) for a vacation, and I visit the IRS Web site. The 990 instructions are beside a picture of seven hands clasped in loving friendship. Really. (That's to get you in the right mood, I suppose.)
The instructions are 75-pages long but, hey, that's shorter than most of our managed care contracts. And there's an EZ version! (Helpful hint: Whenever you see “EZ,” go for it, same with any restaurant that has an “EATS” sign. You can't lose.) It says to use the EZ if your assets are <$2.5 million. Hmm, does that “<” mean greater than or less than? Small detail. I'll say it's greater than.
Gee, this really is EZ. They give plenty of examples: “The above is an example of a one-step allocation that shows how to report the allocation in Part IX. Without this optional reporting method, the total expenses of the first cost center would be allocated to the other functions, and might include an allocation of part of these expenses to another cost center. The expenses of the second cost center would then be allocated to other functions and, perhaps, to other cost centers, and so on.” Got it!
There's more. You have to report tons of information on highly compensated officers, directors, and employees. Highly compensated? Here? I write “NA.” Next comes a chart that shows how much time it should take to fulfill the 990's requirements-more than 500 hours! Talk about governmental inefficiency; I spent 90 minutes, tops.
Update: The CFO is back from Lapland. The board named her CEO after my unfortunate visit from the gentlemen in blue suits. (As soon as I heard them call me “ma'am,” I knew I was in for it.) My attorney visits me occasionally. He tried all the best defenses: the “gloves-are-too-small” defense, the “she-was-just-trying-to-help” defense and, of course, the Twinkie defense. (Actually, this is my second bust. The first came when I tried to slip granddaughter Alice a Twinkie. I was waterboarded that time.)
I kind of like it here, though. I find that barred rooms are more relaxing than boardrooms-and I have lots of time to devote to my new online enterprise: Corporate Compliance Made EZ. Business is booming!
Rest assured, Ann Borders took Form 990 very seriously. Borders is President/CEO of Cummins Behavioral Health Systems, Inc., in Avon, Indiana. To read her blog, visit https://behavioral.net/annbordersblog.
Behavioral Healthcare 2009 March;29(3):46-49
