Thursday, July 7, 2011

FAQs Explain Form 990 Questions On Exempt Organizations' Governance Policies

Form 990, Part VI—Governance, Management, and Disclosure, Frequently Asked Questions and Tips

IRS has recently released on its website updated Frequently Asked Questions (FAQs) and Tips on Part VI of Form 990, “Return of Organization Exempt from Income Tax.” In the FAQs, IRS clarifies and explains a number of the questions in Part VI, which seeks information about an organization's governance, management, and disclosure policies.

Background. Form 990 is the annual return that most tax-exempt organizations must use to report information about their operations. It consists of a 12-page core form that must be completed by each Form 990 filer. The form also has 16 schedules designed to require reporting of information from those organizations that conduct particular activities, for example, political campaign and lobbying activities, schools, and hospitals. Form 990 includes a front page summary providing a snapshot of key financial and operating information, a governance section, and compensation and related organization reporting. IRS uses Form 990 as its primary tax compliance tool for tax-exempt organizations while most states rely on it for charitable and other regulatory oversight, and to satisfy state income tax filing requirements for organizations claiming a state income tax exemption.

Under Code Sec. 6033(a), most tax-exempt organizations, other than churches, must file with IRS an annual Form 990, Form 990-EZ (Short Form Return or Organization Exempt From Income Tax), or Form 990-PF (Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation), or submit a Form 990-N (Electronic Notification (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ). Beginning in 2010, most organizations with gross receipts less than $200,000 and assets less than $500,000 may file either Form 990 or Form 990-EZ. Under the discretionary exemption in Code Sec. 6033(a)(3)(B), IRS provides that exempt organizations whose annual gross receipts aren't normally in excess of a specified amount file the simplified Form 990-N. For tax years beginning on or after Jan. 1, 2010, IRS allows an exempt organization (other than a private foundation or Code Sec. 509(a)(3) supporting organization) whose annual gross receipts aren't normally in excess of $50,000 to electronically file the simpler Form 990-N.

New guidance. In the FAQs, IRS clarifies and explains a number of issues arising in Part VI of Form 990, including the following:

... All organizations required to file Form 990 are required to answer the questions in Part VI. (FAQ 1)

... The instructions to the Part VI questions generally state the specific time or period to be used in answering a particular question. However, if an organization adopted a certain policy after the specified time period but before it filed its return, it may describe this in Schedule O. For questions that don't specify a relevant time period, the organization may take into account practices undertaken after the close of the tax year. (FAQ 3)

... If a committee of the organization's board rather than the board itself adopted a certain policy, and was authorized to do so, then the organization may answer affirmatively any questions regarding whether the policy was in fact adopted by the end of the tax year. (FAQ 4)

... In determining the number of independent voting members of the governing body, an organization is to apply the three-part definition of “independent” contained in the instructions to this question. (FAQ 7)

... In answering Questions 1 and 2 of Part VI, Form 990 (regarding independent directors and businesses and family relationships among Board members, officers, and key employees), an organization is expected to engage in a “reasonable effort” to obtain the necessary information, such as an annual questionnaire. (FAQ 8)

... IRS has no plans to provide model or sample policies that organizations could adopt in order to affirmatively answer questions in Part VI. IRS emphasized that whether an organization adopts such policies is a decision to be made by each individual organization, considering its own particular facts and circumstances. (FAQ 9)

... In general, the filing organization isn't required to provide governance information regarding its related organizations, such as a for-profit subsidiary or brother-sister exempt organization. However, different rules apply in the case of a group return. (FAQ 10)

... If the filing organization is controlled by an organization that has a conflict of interest policy, whistleblower policy, and document retention and destruction policy, this is an insufficient basis for the filing organization to state that it has these policies itself. An organization should only answer these questions affirmatively if it has adopted these policies. (FAQ 11)

References: For tax-exempt organization's annual return Form 990, see FTC 2d/FIN ¶S-2801; United States Tax Reporter ¶60,334; TaxDesk ¶688,001; TG ¶60703.

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