Arkansas NonProfits and 501(c)3 Federal Form 990 Update

Form 990 Requires Diligence and
Thoroughness

 

The IRS has issued final regulations related to
the recently redesigned Form 990 (Return of Organization Exempt From Income
Tax
), which is required for most tax-exempt entities. Not surprisingly, the
final regulations generally follow guidelines established by proposed
regulations in 2008. The sweeping changes approved by the final regulations take
effect on September 7, 2011, and generally apply to tax years beginning on or
after January 1, 2008.

 

New Form IRS 990 Digs Deep

The new Form 990 is designed to increase transparency
of tax-exempt organizations. It requires extensive reporting about governance
and management policies, as well as the organization’s
relationship with board members, officers and key employees.

Currently, the entire Form 990 must be filed for an
organization with gross receipts of $200,000 or more and total assets of
$500,000 or more. An organization that fails to file Form 990 for three
consecutive years will lose its tax-exempt status.

The information an organization must obtain from
board members, officers and key employees includes answers to these
questions:

  • Did any of their family members engage in
    business transactions with the organization?
  • Did they (or their families) own more than
    35 percent
    of entities and engage in business transactions with the
    organization?
  • Did they do business, other than as a member
    of the general public, with another board member, officer, or key employee? Or
    did they do business or with an entity of which another board member, officer,
    or key employee is a director, officer or more-than-35 percent
    owner?
  • Did they have a family relationship with any
    other director, officer or key employee of the organization?
  • Are they a director, officer, or greater than
    10 percent owner of an entity of which another of the organization’s
    directors, officers, or key employees is a director, officer or more-than-10
    percent
    owner?

 

 

 

Here are some of the key areas addressed by the new final
regulations (TD 9549), and how they compare with the earlier proposed
regulations:

 

Advance ruling process –
Previously, an organization seeking to be recognized by the IRS as a publicly
supported charity had to complete a two-step process. First, the organization
was required to declare that it expected to remain publicly-supported on a
consistent basis. Second, after five years had passed, the organization had to
file Form 8734 (Support Schedule for Advance Ruling Period) showing
that it had satisfied this test.

The proposed regulations treated an organization as a
publicly supported organization in its first five years if it could show on its
application that it reasonably expected to receive the required public support
during this period. Now the new final regulations follow suit. This effectively
eliminates the advance ruling requirement.

Public support test – This test requires an
organization to receive more than one-third of its support each tax year from
qualified gifts, grants, contributions or membership fees, or gross receipts
from activities that are not an unrelated trade or business.

The proposed regulations changed the period for determining
public support from the four years prior to the tax year being tested to the
five years ending with the tax year being tested.

Under the final regulations, an organization that fails the
public support test for two consecutive tax years will be treated as a private
foundation for limited tax purposes. The organization will be treated as a
private foundation for all tax purposes beginning on the first day of the third
consecutive tax year.

Accounting methods – One of the goals of
redesigned Form 990 is to provide consistent tax and financial reporting.
Accordingly, if an organization computes its public support and reports the
information on Schedule A (Public Charity and Public Support), the
proposed regulations required it to use the same accounting method to report the
information on Form 990. The final regulations continue this treatment.

Reliance – As with the proposed
regulations, the new final regulations allow donors to rely on an organization’s
determination letter that it is a public charity unless the donor was
responsible for, or aware of, any action resulting in the loss of the status.

The final regulations also restore language that was
inadvertently deleted from the proposed regulations giving limited grantor and
donor reliance based on a written statement from the organization.

 

Compliance with the new final regulations is essential for
tax-exempt groups. Filing Form 990 can be a complicated process and it requires
diligence and thoroughness. Your tax adviser can provide assistance and more
information about how the regulations affect your
organization.

 

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