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Governance Issues Related to the
Form 990

May 12, 2011
                      Douglas Boedeker, CPA, CMA
                          g
                      Dboedeker@tatetryon.com
                      202-419-5106
Course Outline

   Form 990 Background
                 g
   Overall Good Governance Themes
   Compensation Policies – Schedule J
   Form 990, Part VI – The Governance Centerpiece
   Consideration of the other schedules
   Checklist of Required Schedules




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                                                     © Copyright Tate & Tryon 2011
Background on the Federal Form 990

 Publicly available document, easily accessed via www.guidestar.org

 Significant redesign issued in 2008.

 The 990 now consists of a 12 page “core form” supplemented by various
  supporting schedules.

 Major focal points for the redesigned form are transparency regarding
  governance and compensation.

 The IRS believes that a well-governed organization is more likely to be a
  compliant organization.




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                                                                    © Copyright Tate & Tryon 2011
Overall Themes of Good Governance per the 990

 The Organization’s best interest is always top priority.

 Have an engaged, independent Board.

 Understand the regulations regarding tax-exempt organizations.

 Have written policies and p
               p            procedures in p
                                          place whenever p
                                                         possible.

 Transparency fosters compliance.




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                                                                     © Copyright Tate & Tryon 2011
Compensation – Schedule J




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                            © Copyright Tate & Tryon 2011
Compensation – Schedule J

 Part I of Schedule J performs two functions:

  -   Increases Transparency of Executive Perks

  -   Helps the IRS Look for Likely Candidates for Intermediate Sanctions




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                                                                       © Copyright Tate & Tryon 2011
Schedule J – Let’s Talk Intermediate Sanctions

If an “Excess Benefit Transaction” takes place…..

I. Initial 25% excise tax is imposed on the disqualified person receiving the
   benefit. (Tax is levied on the amount of the excess benefit.)

II. A 200% excise tax is then imposed on the disqualified person if the excess
    benefit is not corrected on a timely basis.

III. Organization managers who knowingly participate in the excess benefit
     transaction are subject to a 10% excise tax.




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                                                                   © Copyright Tate & Tryon 2011
Things to watch on Schedule J, Part I

 Line 1a: Be sure the organization can support why these benefits are
  “reasonable”. Follow written policies regarding payment of these perks!

 Line 2: Be sure to have a policy in place so that you can check “Yes” to this
  box.

 Line 3: The more boxes you check in this section, the better.

 Lines 5 & 6: These are potential traps – especially Line 6.

 Line 7: It is easier for the IRS to attack “non-fixed” payments

 Lines 8 & 9: If you can check these “Yes”, that’s a bonus!
                  y


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                                                                     © Copyright Tate & Tryon 2011
Schedule J – Governance Considerations

 Understand your organization’s compensation practices.

 The creation of a board-level Compensation Committee can help inject
  independence into the process.

 Written compensation policies and procedures can save a lot of potential
  angst.

 Remind folks that the potential excise taxes are levied on them!




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                                                                     © Copyright Tate & Tryon 2011
Form 990, Part VI – The Governance Centerpiece




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                                                 © Copyright Tate & Tryon 2011
Form 990, Part VI - Most Talked About Policies

 Section B, Line 12a, b, & c: Conflict of Interest
  -   Is annual disclosure required?
  -   Does the entity monitor and enforce compliance?


 Section B, Line 13: Whistleblower Policy

 Section B, Line 14: Document Retention and Destruction Policy

 Section B, Line 10b: Do you have written policies governing the conduct of
  your chapters?

 Section A, Line 8a & b: Do you keep meeting minutes?




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                                                                   © Copyright Tate & Tryon 2011
Form 990, Part VI – The Annoying Questions

 Section A, Line 2: Family & Business relationships with Board members and
  key employees
  -   You only need to ask them, you can’t force them to respond!
  -   Don’t forget the “in the ordinary course of business” exception.
  -   Consider i
      C      id incorporating questionnaire i t annual conflict of i t
                           ti       ti    i into        l    fli t f interest policy
                                                                            t li
      certification.



 Section B, Line 11a & b: Have all members of the governing body received a
  copy of the Form before it was filed? And, how does the organization review
  the 990?




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                                                                                  © Copyright Tate & Tryon 2011
Form 990, Part VI – The Trap Questions

 Section A, Line 1b: The number of “independent” voting Board members

 Section B, Line 15a & b: Was compensation for CEO and other key
  employees set by independent persons?
  -   Really more of a trap for the CEO’s compensation, many organizations answer “No”
      to Line 15b.


 S ti B Li 16 & b D you participate i j i t ventures with t
  Section B, Line 16a b: Do             ti i t in joint     t       ith taxable
                                                                            bl
  entities? If so, do you have written policies to evaluate the allowability of such
  an endeavor?

 Section A, Line 5: Was there a “significant diversion” of assets?

 Part C, Line 18: Be sure to check at least one of the boxes!
       C

        12
                                                                          © Copyright Tate & Tryon 2011
Schedule L – Transactions with Interested Persons




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                                                    © Copyright Tate & Tryon 2011
Schedule L – Things to Consider

 Another “intermediate sanctions” trap!

 Disclosure is the key thing, not everything reported here is necessarily “bad”.
  -   An inadvertent omission can make something look much worse.


 Documentation and monitoring of these items is key.

 Involve the Board whenever possible.




        14
                                                                      © Copyright Tate & Tryon 2011
Grants and Assistance

Schedule F – Outside USA   Schedule I – Inside USA




    15
                                             © Copyright Tate & Tryon 2011
Grants & Assistance

 Key concept is whether the entity maintains records to document:
  1.    The amount of the grants and assistance
  2.    The grantee’s eligibility for the grant or assistance
  3.    The selection criteria used to award the grants or assistance


 In addition, how does the organization monitor the use of grant or assistance
  funds?
  -    Written d
       W itt documentation is always b t
                    t ti i l         best.


 Schedule F is subject to particular scrutiny.

 Concerns are private inurement, tax compliance, and illegal acts.




         16
                                                                        © Copyright Tate & Tryon 2011
Schedule M – Noncash Contributions




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                                     © Copyright Tate & Tryon 2011
Schedule M – A few things to consider

 Line 30 is designed to help detect valuation errors on the part of donors.
  -   Be wary of entering into any such arrangement.


 Line 31, Gift Acceptance Policy, is a good idea. If you don’t have a written gift
  acceptance policy, consider i l
        t        li       id implementing one.
                                         ti

 Line 32a is designed to reveal improper fundraising arrangements. If you say
  yes t this question, you likely should b filli out S h d l G S
      to thi      ti       lik l h ld be filling t Schedule G, Supplemental
                                                                      l     t l
  Information Regarding Fundraising or Gaming Activities.




        18
                                                                       © Copyright Tate & Tryon 2011
Schedule C – Political Campaign and Lobbying Activities




     19
                                                  © Copyright Tate & Tryon 2011
Schedule C – Political Campaign and Lobbying Activities

 Remember, for 501(c)(3)’s, POLITICAL activity is prohibited.

 Lobbying for a 501(c)(3) organization is permitted, but it cannot be a
  significant component of the entity’s activities.

 Schedule C gives you ample space to admit your sins!

 It’s a great idea to have documented policies regarding what governmental
  affairs activity is permissible.




       20
                                                                      © Copyright Tate & Tryon 2011
Form 990, Two other points to watch

 Part IV, Line 36: For 501(c)(3) organizations, “Did the organization make any
  transfers to an exempt non-charitable related organization?”
  -   Be careful about the flow of funds between related entities. Make sure payments
      from a (c)(3) to a non-charity are for services rendered or cost reimbursements.


 Part XII, Line 2c: “Does the organization have a committee that assumes
  responsibility for oversight of the audit, review, or compilation of its financial
  s a e e s and selection of an depe de accountant?”
  statements a d se ec o o a independent accou a
  -   Not a mandatory thing for IRS purposes, but often a great governance tool.




        21
                                                                             © Copyright Tate & Tryon 2011
Form 990 – Checklist of Required Schedules

 Read this on the very first day of
  each quarter.

 This can be an excellent tool to
  provide a heads-up if new
  governance issues have arisen.

 Plus, it can make your 990 prep
  easier if you know what information
  you need to gather!




       22
                                             © Copyright Tate & Tryon 2011
Good Luck!




    23
             © Copyright Tate & Tryon 2011

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Form 990 Update

  • 1. Governance Issues Related to the Form 990 May 12, 2011 Douglas Boedeker, CPA, CMA g Dboedeker@tatetryon.com 202-419-5106
  • 2. Course Outline  Form 990 Background g  Overall Good Governance Themes  Compensation Policies – Schedule J  Form 990, Part VI – The Governance Centerpiece  Consideration of the other schedules  Checklist of Required Schedules 1 © Copyright Tate & Tryon 2011
  • 3. Background on the Federal Form 990  Publicly available document, easily accessed via www.guidestar.org  Significant redesign issued in 2008.  The 990 now consists of a 12 page “core form” supplemented by various supporting schedules.  Major focal points for the redesigned form are transparency regarding governance and compensation.  The IRS believes that a well-governed organization is more likely to be a compliant organization. 2 © Copyright Tate & Tryon 2011
  • 4. Overall Themes of Good Governance per the 990  The Organization’s best interest is always top priority.  Have an engaged, independent Board.  Understand the regulations regarding tax-exempt organizations.  Have written policies and p p procedures in p place whenever p possible.  Transparency fosters compliance. 3 © Copyright Tate & Tryon 2011
  • 5. Compensation – Schedule J 4 © Copyright Tate & Tryon 2011
  • 6. Compensation – Schedule J  Part I of Schedule J performs two functions: - Increases Transparency of Executive Perks - Helps the IRS Look for Likely Candidates for Intermediate Sanctions 5 © Copyright Tate & Tryon 2011
  • 7. Schedule J – Let’s Talk Intermediate Sanctions If an “Excess Benefit Transaction” takes place….. I. Initial 25% excise tax is imposed on the disqualified person receiving the benefit. (Tax is levied on the amount of the excess benefit.) II. A 200% excise tax is then imposed on the disqualified person if the excess benefit is not corrected on a timely basis. III. Organization managers who knowingly participate in the excess benefit transaction are subject to a 10% excise tax. 6 © Copyright Tate & Tryon 2011
  • 8. Things to watch on Schedule J, Part I  Line 1a: Be sure the organization can support why these benefits are “reasonable”. Follow written policies regarding payment of these perks!  Line 2: Be sure to have a policy in place so that you can check “Yes” to this box.  Line 3: The more boxes you check in this section, the better.  Lines 5 & 6: These are potential traps – especially Line 6.  Line 7: It is easier for the IRS to attack “non-fixed” payments  Lines 8 & 9: If you can check these “Yes”, that’s a bonus! y 7 © Copyright Tate & Tryon 2011
  • 9. Schedule J – Governance Considerations  Understand your organization’s compensation practices.  The creation of a board-level Compensation Committee can help inject independence into the process.  Written compensation policies and procedures can save a lot of potential angst.  Remind folks that the potential excise taxes are levied on them! 8 © Copyright Tate & Tryon 2011
  • 10. Form 990, Part VI – The Governance Centerpiece 9 © Copyright Tate & Tryon 2011
  • 11. Form 990, Part VI - Most Talked About Policies  Section B, Line 12a, b, & c: Conflict of Interest - Is annual disclosure required? - Does the entity monitor and enforce compliance?  Section B, Line 13: Whistleblower Policy  Section B, Line 14: Document Retention and Destruction Policy  Section B, Line 10b: Do you have written policies governing the conduct of your chapters?  Section A, Line 8a & b: Do you keep meeting minutes? 10 © Copyright Tate & Tryon 2011
  • 12. Form 990, Part VI – The Annoying Questions  Section A, Line 2: Family & Business relationships with Board members and key employees - You only need to ask them, you can’t force them to respond! - Don’t forget the “in the ordinary course of business” exception. - Consider i C id incorporating questionnaire i t annual conflict of i t ti ti i into l fli t f interest policy t li certification.  Section B, Line 11a & b: Have all members of the governing body received a copy of the Form before it was filed? And, how does the organization review the 990? 11 © Copyright Tate & Tryon 2011
  • 13. Form 990, Part VI – The Trap Questions  Section A, Line 1b: The number of “independent” voting Board members  Section B, Line 15a & b: Was compensation for CEO and other key employees set by independent persons? - Really more of a trap for the CEO’s compensation, many organizations answer “No” to Line 15b.  S ti B Li 16 & b D you participate i j i t ventures with t Section B, Line 16a b: Do ti i t in joint t ith taxable bl entities? If so, do you have written policies to evaluate the allowability of such an endeavor?  Section A, Line 5: Was there a “significant diversion” of assets?  Part C, Line 18: Be sure to check at least one of the boxes! C 12 © Copyright Tate & Tryon 2011
  • 14. Schedule L – Transactions with Interested Persons 13 © Copyright Tate & Tryon 2011
  • 15. Schedule L – Things to Consider  Another “intermediate sanctions” trap!  Disclosure is the key thing, not everything reported here is necessarily “bad”. - An inadvertent omission can make something look much worse.  Documentation and monitoring of these items is key.  Involve the Board whenever possible. 14 © Copyright Tate & Tryon 2011
  • 16. Grants and Assistance Schedule F – Outside USA Schedule I – Inside USA 15 © Copyright Tate & Tryon 2011
  • 17. Grants & Assistance  Key concept is whether the entity maintains records to document: 1. The amount of the grants and assistance 2. The grantee’s eligibility for the grant or assistance 3. The selection criteria used to award the grants or assistance  In addition, how does the organization monitor the use of grant or assistance funds? - Written d W itt documentation is always b t t ti i l best.  Schedule F is subject to particular scrutiny.  Concerns are private inurement, tax compliance, and illegal acts. 16 © Copyright Tate & Tryon 2011
  • 18. Schedule M – Noncash Contributions 17 © Copyright Tate & Tryon 2011
  • 19. Schedule M – A few things to consider  Line 30 is designed to help detect valuation errors on the part of donors. - Be wary of entering into any such arrangement.  Line 31, Gift Acceptance Policy, is a good idea. If you don’t have a written gift acceptance policy, consider i l t li id implementing one. ti  Line 32a is designed to reveal improper fundraising arrangements. If you say yes t this question, you likely should b filli out S h d l G S to thi ti lik l h ld be filling t Schedule G, Supplemental l t l Information Regarding Fundraising or Gaming Activities. 18 © Copyright Tate & Tryon 2011
  • 20. Schedule C – Political Campaign and Lobbying Activities 19 © Copyright Tate & Tryon 2011
  • 21. Schedule C – Political Campaign and Lobbying Activities  Remember, for 501(c)(3)’s, POLITICAL activity is prohibited.  Lobbying for a 501(c)(3) organization is permitted, but it cannot be a significant component of the entity’s activities.  Schedule C gives you ample space to admit your sins!  It’s a great idea to have documented policies regarding what governmental affairs activity is permissible. 20 © Copyright Tate & Tryon 2011
  • 22. Form 990, Two other points to watch  Part IV, Line 36: For 501(c)(3) organizations, “Did the organization make any transfers to an exempt non-charitable related organization?” - Be careful about the flow of funds between related entities. Make sure payments from a (c)(3) to a non-charity are for services rendered or cost reimbursements.  Part XII, Line 2c: “Does the organization have a committee that assumes responsibility for oversight of the audit, review, or compilation of its financial s a e e s and selection of an depe de accountant?” statements a d se ec o o a independent accou a - Not a mandatory thing for IRS purposes, but often a great governance tool. 21 © Copyright Tate & Tryon 2011
  • 23. Form 990 – Checklist of Required Schedules  Read this on the very first day of each quarter.  This can be an excellent tool to provide a heads-up if new governance issues have arisen.  Plus, it can make your 990 prep easier if you know what information you need to gather! 22 © Copyright Tate & Tryon 2011
  • 24. Good Luck! 23 © Copyright Tate & Tryon 2011