The IRS completely redesigned Form 990, the Return of Organization Exempt from Income Tax, to be filed for calendar year 2008 and subsequent periods.  This Form is filed by most tax-exempt organizations and is open to public inspection.  One stated purpose of the makeover was to increase transparency and disclosure of exempt organization operations, thereby improving governance and highlighting conflicts of interest and insider dealings.  One major change in the Form is that it requires extensive reporting concerning the organization’s governance and management policies, the independence of its board, and board members’ and key employees’ family and business relationships with each other and with the reporting organization.

Organizations that report on a calendar year basis will already have filed their first year of the new form and at this point should review their information-gathering procedures to identify any needed improvements.  Organizations that have a June 30 year-end either will already have filed with the new form for the period ending June 30, 2009 or will be in an extension period for filing.  Organizations that have not yet filed the new form should be reviewing their disclosure questionnaires to make sure they are collecting all needed information.

Questions about board members’ and key employees’ family and business relationships with each other have been on the Form 990 in one guise or another in recent years.  Section 501(c)(3) organizations have also had to answer generally worded questions about board members’ relationships with the reporting organization.  However, on the new Form 990, the questions have become more specifically defined and the detail required to answer them has increased.  In addition, for the first time, Form 990 asks about the number of independent board members – with a very specific definition of “independent.”  The information needed to determine independence overlaps with, but is not identical to, the information needed to answer the questions about family and business relationships.

What this means is that the reporting organization must seek more personal information than ever before from its board members and other individuals connected with the organization in order to accurately complete the Form 990.  Moreover, the current focus of the IRS and the public on tax-exempt organization abuses, and the publicity surrounding the issuance of the new Form 990, will cast a spotlight on organizations’ responses to this form.

The information exempt organizations must now obtain from their board members, officers, and key employees includes:

·        Whether they or any of their family members engaged in any business transactions with the organization;

·        Whether entities of which they or their families owned more than 35 percent engaged in any business transactions with the organization;

·        Whether they do business, other than as a member of the general public, with another board member, officer, or key employee, or with an entity of which another board member, officer, or key employee is a director, officer, or more than 35 percent owner;

·        Whether they have a family relationship with any other director, officer, or key employee of the organization; and

·        Whether they are 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 greater than 10 percent owner.

A complete list of the required information would run several pages.  Also, in some cases, questions must be asked of former board members and officers who are compensated by the organization.

The IRS dictates in the Form 990 instructions and materials posted on the IRS web site that the reporting organization must make a reasonable effort to obtain the information needed to answer these questions.  The instructions specify that distributing a questionnaire asking about these matters is sufficient; in other words, the organization need not require documentation, search records, or hire private detectives.  Although many organizations already have conflict of interest policies in place, not all organizations currently circulate annual disclosure questionnaires.  Of those who do, very few will have existing questionnaires that ask the specific questions needed to elicit the required information.  Also, many organizations do not circulate the questionnaire to all the groups (board members, officers, and key employees) that must complete it.

Consequently, many organizations are instituting new procedures to meet this requirement.  New questionnaires will need to be prepared and circulated, along with an explanation of why this information is being requested.  Persons about whom information will be disclosed on the Form 990 when completed may appreciate knowing, before the Form 990 is filed, what will be disclosed about them.  Finally, because some reporting individuals may be unaware of existing, reportable, indirect relationships, the organization should be diligent in review of questionnaires to catch anything that is an indirect business relationship that would otherwise go unreported.

The new Form 990 undoubtedly requires additional effort and intrusive questions to ensure compliance with reporting requirements.  On the plus side, much of the information that is gathered can be useful in avoiding the appearance of a conflict of interest in the organization’s decision-making.  Respondents should know that the new Form 990 requirements are moving their organization toward best governance practices.