Susan Lebbon, The Daily Record Newswire
In February 2013 the Internal Revenue Service released the last of the 2012 forms and instructions for the 990-series forms. The release was delayed due to the late passing of “The American Tax Relief Act.” The 2012 990 changes are relatively minor, however this presents a good opportunity to revisit your Form 990 and make sure key areas of reporting have been properly addressed such as compensation, transactions with related people and entities, excess benefit transactions, tax-exempt bonds and foreign reporting.
A fresh look can improve the quality of your filing and fine-tune your presentation to the outside world. In addition, the IRS has stated that many organizations selected for examination might not have been audited if they had accurately prepared their Forms 990. Because of the new ways the IRS is analyzing return data and selecting cases, it is more important than ever to completely and accurately prepare the form and follow the instructions.
2012 significant changes are as follows:
• The net asset reconciliation in the core form, Part XI, is expanded to include the information formerly on Schedule D for net unrealized gains (losses) on investments, donated services and use of facilities, investment expenses and prior period adjustments. Therefore, the IRS eliminated Schedule D, Part XI, and Reconciliation of Change in Net Assets and renumbered the Schedule D Revenue and Expense reconciliations from “financial statement” to “990 amounts” as Parts XI and XII.
• Part IX, Statement of Functional Expense now requires line 11g, All Other Expenses, to be further itemized on Schedule O when 11g exceeds 10 percent of total expenses.
• The IRS has added a second line to Part VII, Schedule A, column (B) to report average hours per week worked for related organizations. This eliminates the need to detail the hours worked for related organizations on Schedule O and places these hours below the hours worked for the filing organization.
• The reporting of Schedule K-1 (Form 1065) data on the 990 forms has proved to be too complicated so the IRS has dropped the requirement to report assets and income based on Schedules K-1 on Form 990, which was made voluntary after it was introduced in 2010. You are no longer required to report your share of assets and revenue of joint ventures and other partnerships using Schedule K-1; rather, instead you can report according to your books and records. Be careful though. This can result in discrepancies between the total unrelated business revenue reported on Part I, line 7a of Form 990 and that reported on the 990-T. You will need to decide whether to have a variance between the two that could trigger an IRS inquiry or add a book-to-tax adjustment so you can include the unrelated business revenue from the K-1 under revenue on Part VIII of the 990.
• The IRS clarifies that any amount shown as loans receivable to interested persons on line 6 of Part X, Balance Sheet, must be detailed on a Schedule L.
• Clarification of information required to be disclosed in Schedule O for answering “Yes” to use of a management company on Part VI including: describing the services the management company provided to the organization; list any of the organization’s current or former officers, directors, trustees, key employees and highest compensated employees who were compensated by the management company or companies or other person(s) during the calendar year ending with or within the organization’s tax year; and list the amounts of compensation they received from the management company or companies or other person(s).
• Instructions for Part VII, Section A provide examples of how to report benefits under self-insured medical reimbursement programs.
• The IRS clarifies that all income from S corporations must be treated as unrelated business income, and that related S corporations should be included in Schedule R, Part IV along with related C corporations.
• The instructions clarify that payment card and third party network transactions reported on the new Form 1099-K should be reported based on the nature of the payments as there is not one specific line on Form 990 on which to report them.
• The questions regarding financial statements being compiled, reviewed or audited and consolidated or separate have been reworded under Part XII, Financial Statements and Reporting.
• The IRS provides clarification about short period returns, and reminds us that Social Security numbers should never be included on a 990 due to its public disclosure.
• Important changes to definitions in the glossary include: the definition of “Disqualified person” is revised to clarify that if the five-year disqualification period ended within the organization’s tax year, it may treat the person as disqualified for the entire year; the definition of “Grants and other assistance” deletes “Program related investments;” and the definition of “Professional fundraising services” includes preparation of applications for grants or other assistance.
The IRS is pleased with the improvement in transparency and compliance created by the redesigned Form 990. The form has provided the agency with a rich supply of data on exempt organizations that it has been using to develop risk models to assess the likelihood of noncompliance by organizations which enable the IRS to better use its resources. In addition the Form 990 has given the IRS a great deal of information about organizational governance practices. The IRS will be using this data to look at connections between certain governance practices and tax compliance.
Keep in mind, exempt organizations required to file a 990-series form will lose their tax exemption after a third consecutive year of not filing. Although there is no penalty for not filing an annual 990-N, some small organizations take this to mean they can get away with filing once every three years. This is dangerous. Many small organizations have lost their exemption this year because they were just a few days late on that third year. The organizations that lose their tax-exempt status have to reapply for exemption.
Before your next Form 990 due date take some time to review your organization’s 990. Reread the instructions and become more familiar with the reporting. Investigate best practices considering what key areas your organization has regarding compliance and transparency, and how best to report them to try and keep the IRS from looking at your organization.
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Susan Lebbon, CPA, is a senior manager at Mengel, Metzger, Barr & Co. LLP. She can be reached at slebbon@mmb-co.com.
