By: Susan Keller and Lisa Dembeck
David Frankenberger (DF), Marketing Coordinator, had the opportunity to sit down with two leaders in our Tax Department, Susan Keller (SK) and Lisa Dembeck (LD) – in part one of a two-part series – to gain a little more insight on the evolution of the Form 990 and how a not-for-profit organization can utilize it to tell their story honestly and effectively.
DF: Tell me a little about the Form 990 revision thought process.
SK: Historically, the Form 990 has always been a mechanism for not-for-profit organizations to provide the IRS with information about their organization. In the past, the majority of the information was financial. The “old” Form 990 asked a few questions and had some narrative information, but for the most part, the information on the Form was financial in nature. The goal of the IRS was to not make the Form 990 too complicated, considering the vast majority of not-for-profit organizations are small. However, over time, the concern grew that the larger organizations had become more complicated and there was not enough information on the 990 to understand them. Therefore, the IRS recognized that the Form 990 must be amended to reflect the ever-changing not-for-profit landscape.
DF: When was the Form 990 revamped and what were the key revisions?
LD: In 2008, the Form 990 was revamped to be more comprehensive and transparent. The Form 990 now covers governance, ensures proper compliance and provides adequate space in the Form for background information about your not-for-profit organization, such as fundraising and lobbying efforts and other policies that you have in place.
SK: The “new” Form 990, was a major change in the thought process within the IRS. While the revised Form-focused more on ensuring larger organizations provide enough information for the reader to be able to understand the organization, some smaller organizations would still struggle to complete the Form. In an attempt to make the transition smoother, the IRS raised the filing thresholds for the Form 990EZ so that more smaller organizations could take advantage of filing a shorter Form while many small to modest size organizations still have to complete the full Form 990. Another change with the Form 990 was that there was no longer an ability to simply say “see attached” in the Form and attach any number of statements about your organization to the back of the Form 990. The attachment of statements in no particular order made it difficult for a reader of the Form to be able to compare Forms for similar organizations. All information requested to file a complete and accurate return is now part of the return. But, if you have “more story to tell” and run out of room in the allotted space, there’s an overflow area – appropriately named Schedule O – that holds any additional information and references the particular portion of the Form the information applies to.
LD: Another revision to the Form 990 in 2008 included the mandatory electronic filing of all Form 990s, now known as e-filing. Since the IRS now receives all of the data electronically, they are able to compile of the information gathered from each Form 990 and slice-and-dice the information to different matrixes based on characteristics like type, mission, operational size, geography, number and wages of employees – and more. For both the IRS and other readers of the Form, like grant-making organizations, this standardization makes it much easier to compare various characteristics of one organization against another. Allowing the IRS to build various matrixes of how a “normal” organization with X, Y and Z characteristics looks allows them to use the matrixes to find outliers.
DF: So what’s being done with this data?
SK: As you can imagine, the IRS has been compiling data for nearly ten years. To be honest, considering all the other issues within the IRS, we’ve not heard much from them about the new processes they have put in place except for that they are analyzing the data. I suppose, like the census, it takes quite a few years of gathering information to properly analyze and report the findings and trends. Information is now starting to seep out related to how the IRS is utilizing the data, and we are hoping to get more and more.
DF: Are you seeing a change in the number of IRS audits since these revisions took place?
SK: I would say not really, especially considering the strain on IRS resources. And that’s part of why the IRS revamped the Form 990 and created these matrixes. The IRS found that the vast majority of audits when completed, resulted in very few findings. The IRS might have made several small comments to an organization in the end, but very few organizations had any type of issue that led to a finding and even less that led to any monies being paid or possible revocation of exemption. So the audit process as it was, created too much of a drain on already limited resources for no results. Hopefully, these matrixes will be a better use of resources by identifying those organizations that are outliers and perhaps then more likely to have some type of finding.
DF: Typically, how does a not-for-profit organization get flagged for an IRS audit?
SK: It’s hard to tell. Your odds of being audited fall into one of three main categories. First, plain old unfortunate luck. We could speculate that the IRS makes their decision based on the information gathered from the Form 990, or because the organization has never been audited before. Granted, some not-for-profits who have been around for a hundred years have never been audited. The second reason could be the result of some sort of negative press. Maybe something has come up through the regular news that casts a bad light on the not-for-profit. Often times, the IRS will leap on it. They may not leap on it with a full audit, but alternatively, with a letter and questionnaire. In many cases, these challenges can be resolved with a simple call to the IRS. Thirdly, and perhaps most common, is when the not-for-profit organization gets referred from some other division. This happens largely from corporate or individual audits where there are some types of questionable activities on that end. Maybe there’s a not-for-profit organization the corporation or individual is involved with in some fashion – like donating to or working for – and the auditor on that audit refers the not-for-profit for audit. When that happens, there’s no getting out it quickly!
DF: What advice can you give a not-for-profit organization to hopefully lessen their chances of being flagged for an IRS audit?
LD: First, and probably the easiest, is make sure your not-for-profit organization has a written conflict of interest policy. The IRS likes to see that. In fact, the IRS asks organizations directly if this policy is in place in the governance section of the Form 990. Second, and probably the most telling, is making sure you are fully aware of and reporting any diversion of assets. You have to ask yourself: is their fraud in my organization? Do I have the proper fraud prevention systems in place? If a diversion or fraud is discovered, whatever you do, don’t hide it. Nothing is more devastating than claiming no diversion or fraud on your Form 990, and then media outlets pick up on a lead that your not-for-profit organization has been accused of fraudulent activity. You don’t want to appear as if you’re hiding something and if you are honest and forthcoming with any fraud, you control the organization’s narrative. Also, since the Tax Cuts and Jobs Act went into law, I’ve been hearing a lot of questions about how to record officer and board member compensations. With the new limitations on compensation, is there an amount that the IRS would flag as too high? While we can’t say there’s an exact number, we can stress the importance of benchmarking your not-for-profit organization. You want to benchmark based on organization type, geography, and size of both assets and operating budget. This will ensure that compensations are on par with peer organizations not out of the ordinary.
SK: I would also say board diversity. The board should represent the diversity of the community the not-for-profit serves. Bringing people with different fields of expertise to the table is key to a healthy board. And while important to have mission-focused members also make sure you have financial folks also, so that the board understands the financial information.
DF: What words of wisdom can you share about getting the most out of Form 990?
SK: The bottom line: you have to complete the form. There’s no getting out of it. So don’t dial it in. Treat the Form 990 as a way to get positive propaganda out about your not-for-profit organization. Use it as an opportunity to work on your mission statement. Make sure it focuses on what you do and why you do it – and get to the point. The narrative should reflect your organization both honestly and positively.
LD: Most not-for-profit informational websites auto-populate information from the Form 990 into their profile about your not-for-profit organization. When space is limited and you’ve spent time talking about your headquarters, history and the year you were founded, the reader still doesn’t know what your not-for-profit organization does. That doesn’t tell people anything. Be concise. There are still plenty of places on the Form 990 – like schedule O – to put everything else.
DF: A lot has happened this year regarding financial reporting. How will this affect the not-for-profit industry?
SK: Both Lisa and I will be attending the National Nonprofit Conference in Washington, D.C. later this summer. It should be an interesting conference, and we hope to come away with a better understanding of a few things. For instance, the IRS is in the process of restructuring. We’d like to know what’s going on. Since the event will be in D.C., we’ll have access to IRS representatives as well as industry experts from across the nation under one roof to talk about the trends they are seeing. Their insights into what they are seeing happen across the industry will be invaluable. From a tax perspective, we would like to know how some of the revenue recognition changes will impact the Form 990 – and will the IRS have the resources to implement those changes.
LD: We’ll also learn about the tax updates surrounding court cases and private letter rulings. This will give us a lot of nuances as to what the IRS and U.S. Department of Treasury are thinking about and how they plan to ensure the rules are followed.
SK: Since many of the rules have not changed since 1969, it will be interesting to see if the thought process around these rules has or has not changed. You get threads of the changing perspectives through the issued guidance that’s out there.
DF: Thank you, Susan and Lisa, for sharing your thoughts and advice. I’d love to sit down with the both of you next month and recap your experience at the National Nonprofit Conference. Hopefully, you’ll have some of your questions answered and you can share with us the inside scoop.