Tax News

CCH (cch.taxgroup.com) reports:

  Revised instructions to be used by tax-exempt organizations in completing the redesigned Form 990, Return of Organization Exempt From Income Tax, have been released by the IRS. The IRS released the redesigned Form 990 in December 2007, to be used for reporting tax year 2008 information in 2009. The redesigned form consists of a core form to be completed by all organizations and 16 schedules to be completed depending on the organization's type and activities. Transition rules, however, are in place so small organizations have time to adjust to the new form.

  For the 2008 tax year, most organizations with gross receipts less than $1.0 million and total assets less than $2.5 million may chose to use Form 990-EZ, Short Form Return of Organization Exempt From Income Tax (not redesigned for 2008), or the updated Form 990. For the 2009 tax year, entities can chose between Form 990-EZ or Form 990 if gross receipts are less than $500,000 and total assets less than $1.25 million. The filing thresholds will be set permanently at $200,000 gross receipts and $500,000 total assets beginning with the 2010 tax year. Organizations that generally have gross receipts of less than $25,000 will file Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ, for tax years 2007-2009. The gross receipts threshold is raised to $50,000 for tax years 2010 and later.

  The IRS released an initial draft of the instructions on April 7, 2008. With the latest release, the IRS has provided a description of changes from the April draft instructions. Many changes are intended to provide greater clarity regarding the specific information sought. The revised instructions provide additional examples, reduce the reporting burden, and establish or revise definitions and standards in certain areas. For example, the instructions define key employee for reporting compensation on Part VII of the core form and Schedule J (Compensation Information), Transactions With Interested Persons on Schedule L, and governance, management and disclosure on the core form. There are also significant changes to the instructions for many of the schedules, including Schedule H, Hospitals; Schedule J, Schedule K, Tax-Exempt Bonds; and Schedule L.

  The revised Form 990 instructions have a sequencing list that is particularly useful in determining the order to use in completing the various portions of the form (Parts I-XI) and any of the sixteen schedules that might be required (General Instruction C). Terms that are bolded in the instructions appear in alphabetical order in the Glossary. A compensation table is provided to aid in determining where and how to report various types of compensation paid to officers, directors, trustees, key employees and highest compensated employees (Specific Instructions for Part VII). Appendix E provides guidance relative to group returns and Appendix F explains how to report activities conducted indirectly through joint ventures and disregarded entities. Public inspection guidance is available in Appendix D. A properly completed Form 990 requires an organization to complete Parts I through XI of the Form 990, and any schedules for which a "Yes" response is indicated in Part IV of Form 990.

  Although the latest instructions are identified as a draft, the IRS indicated there will be no significant changes in content when the final version of the instructions is released later in 2008, although the wording and format may change. The Service stated that it was releasing the instructions now so that organizations and practitioners can review the content and prepare for the 2009 filing season (for 2008 tax returns).

  Practitioners commended the IRS for a huge effort and for releasing the instructions before 2009. At the same time, they noted the burdens placed on exempt organizations to meet the new reporting requirements.

  "The IRS has worked tirelessly to satisfy all stakeholders who often have very conflicting interests and opinions," Jane Searing, a shareholder with Clark Nuber in Bellevue, Washington told CCH. "It is really helpful that they are releasing the final instructions before the third quarter ends for calendar year organizations. This helps organizations and their service providers complete the work necessary to implement systems for collecting the information required on the new form. Although we have not had time to fully digest this latest version, we are hopeful this set of instructions will help clear up some of the outstanding questions and concerns over the version issued in April."

  "The revised form presents a huge burden for public charities," Nancy Ortmeyer Kuhn of Caplin & Drysdale in Washington, D.C. told CCH. "The expanded Form 990 requires a lot more information from charities that file the form. Many [organizations] will have to redo their accounting systems and they're still working on it. It's a huge job to capture the information they have to report. The community is hoping the IRS will understand this concern." Kuhn said it would be appropriate for the IRS to provide transition relief for reporting under the new system. One way to do this would be not to impose penalties when the IRS examines the first returns, Kuhn said.

  Reactions also varied as practitioners honed in on different schedules. "People were really unhappy with the [draft instructions'] definition of "key employee" [for Schedule J]," Suzy McDowell of Steptoe & Johnson LLP told CCH. The old definition looked for control of a discrete segment or five percent of the organization, McDowell stated. The revised definition "now requires organization-wide control or influence, or control of at least 10 percent of the organization." This is an improvement, McDowell said, although "exempt organizations won't be completely happy." McDowell said that another part of the instructions for Schedule J provided "extensive clarification" for the definitions of "reportable (wage) compensation" and "other compensation," a change that will be helpful.

  "The complexity is very evident and appears on the very first page of the instructions," Kuhn told CCH. There are three categories of transactions with "interested persons" that must be reported on Schedule L (Transactions With Interested Persons), Kuhn said, and each category uses a different definition of interested persons, she indicated. The American Bar Association commented that "this is complexity that doesn't need to be there," Kuhn said. "So [the lack of change] was disappointing."

  The instructions indicate when an organization can rely on "reasonable efforts" to obtain certain information from interested persons and third parties, such as family and business relationships, compensation paid by related organizations, and the involvement of an interested person in particular transactions. "This is good," Kuhn told CCH. "It shows there is an understanding that some information may not be available." McDowell agreed. "That's a big change that will give exempt organizations some relief."

  The IRS has identified approximately 1.3 million public charities and other non-charitable exempt organizations. For tax year 2004, the most recent year available, the IRS reported that it had received 364,000 Forms 990 and 142,000 Forms 990-EZ, a total of 506,000 returns. The IRS intends to release "draft" instructions in the next few weeks for the Form 990-EZ, the short form currently used by smaller tax-exempt organizations with gross receipts under $1 million and total assets of less than $2.5 million. The new Form 990-EZ will be phased in for smaller organizations over a three-year period.

  By Brant Goldwyn and Mary Krackenberger, CCH News Staff

IR-2008-98,
2008FED ¶46,548

IRS Completed 2008 Form 990 Instructions and Background Documents

IRS Background Paper --Summary of Form 990 Redesign Process

IRS TE/GE Division Exempt Organizations 2008 Form 990 Background Paper --Form 990, Moving from the Old to the New

IRS Background Paper --Changes to April Draft Instructions

Redesigned Forms 990 Instructions (August 2008)

Other References:

 
Code Sec. 6033

  CCH Reference - 2008FED ¶35,425.33

 
Code Sec. 6104

  CCH Reference - 2008FED ¶36,911.10

  Tax Research Consultant

  CCH Reference - TRC EXEMPT: 12,252.15

  CCH Reference - TRC EXEMPT: 12,258.05