Exempt Organizations Advisory - IRS Releases Instructions for Revised Form 990

Catherine W. Wilkinson (cwilkinson@steptoe.com)
Suzanne Ross McDowell (smcdowell@steptoe.com)

 On August 19, the IRS released the final instructions for the 2008 Form 990 (for returns filed in 2009).  On April 7, the IRS had released draft instructions for public comment.  Today’s release (“the August Release”) is stamped “draft” because it has not yet completed the process of review by IRS Forms and Publications.  However, the IRS has stated that the final version of the Form 990 instructions, which is not expected to be released until late 2008, will not include significant changes in content from the August Release.  

According to the IRS, significant changes, made in response to public comments, to the April Draft of the instructions, include the following:

1. Revision of the definition of “key employee” for purposes of reporting executive compensation in Part VII and Schedule J, Compensation Information; transactions with interested persons in Schedule L, Transactions With Interested Persons; Part VI, Governance, Management, and Disclosure; and other items to require organization-wide influence or authority or control over 10% of the organization’s activities (up from 5%) and limit to top 20 highest paid employees;
2. List of those countries included in each of nine geographic regions to be used for reporting foreign activities on Schedule F, Statement of Activities Outside the United States;
3. List of reporting requirements for which the filing organization may rely on an express reasonable efforts process to obtain information required from interested persons or third parties, including: Part VI, Governance, Management, and Disclosure, line 1b and line 2; Part VII, Section A, Officers, Directors, Trustees, Key Employees, and Highest Compensated; and Schedule L, Transactions with Interested Persons, Part III, Grants or Assistance Benefiting Interested Persons, and Part IV, Business Transactions Involving Interested Persons;
4. Revision of definition of independent voting member of the governing body for Part VI, Governance, Management, and Disclosure, line 1b;
5. Changes to Schedule H, Hospitals, including clarification of the definitions of “hospital” and “facility”;
6. Exemption of refunding bonds issued after 2002 to refund pre-2003 bonds from reporting in Schedule K, Supplemental Information on Tax-Exempt Bonds, Part III, Private Business Use;
7. Extensive clarification of compensation reporting in Part VII and in Schedule J, Compensation Information, Part II;
8. Narrowing of the scope of business relationship reporting in Part VI, Governance, Management, and Disclosure, line 2 by providing two exceptions from reporting, the “ordinary course of business exception” and the “privileged relationship exception”;
9. Changes to Schedule L, Transactions with Interested Persons, including a simplification of the definition of substantial contributor for Part III and a revision of the threshold for Part IV interested person reporting;
10. Clarification of the definition of “officer” for purposes of reporting executive compensation in Part VII and Schedule J, Compensation Information; transactions with interested persons in Schedule L, Transactions With Interested Persons; Part VI, Governance, Management, and Disclosure to include the “top financial official” and the “top management official”; and
11. Expansion of required narrative reporting in Schedule O.In order to provide many smaller organizations additional time to adapt to the new form, the IRS is providing transition relief by phasing-in the requirement to file the new form over a three-year period. Smaller organizations will be able to file the 2008 Form 990-EZ in lieu of the new 990 if it satisfies both the gross receipts and assets tests as follows:
    

Tax year:                      Gross Receipts:                           Assets:
2008 tax year (filed in 2009)    > $25,000 and < $1 million          < $2.5 million
2009 tax year (filed in 2010)    > $25,000 and < $500,000          < $1.25 million
2010 and later tax years           > $50,000 and < $200,000        < $500,000

The IRS expects to release instructions to the 2008 Form 990-EZ in the next few weeks.

Transition relief also is provided for two new schedules: Schedule H, Hospitals, and Schedule K, Supplemental Information on Tax Exempt Bonds. 

Organizations required to complete either of these schedules for 2008 are only required to complete one part for each schedule: Part V, Facility Information, for Schedule H, and Part I, Bond Issues, for Schedule K. The other parts of these schedules are optional for 2008 but are required beginning with 2009 tax years.

More information regarding the changes to the Form 990 and instructions can be found here.