IRS Form 990 has undergone the most extensive revisions in recent history-and tax-exempt hospitals should take note to avoid potential scrutiny.
At a Glance
The revised Form 990: Return of Organization Exempt from Income Tax includes new questions about compensation, driven by concerns about excessive executive compensation among tax-exempt organizations. Tax-exempt hospitals should review Form 990's revised reporting requirements and ensure that their forms are filled out accurately and completely in order to avoid potential penalties and scrutiny.
Not many administrators of not-for-profit hospitals would be excited to receive notification from the IRS that the agency has questions about their organization's tax exemption. Making sure your organization has correctly completed the IRS Form 990: Return of Organization Exempt from Income Tax is one way to avoid such questions.
The 2005 IRS Form 990 has undergone the most extensive changes in recent memory, with revisions running throughout the form and in the instructions to the form. The revised Form 990 includes new questions about compensation, driven by concerns about excessive executive compensation among tax-exempt organizations. The changes are noteworthy not only because of the potential for triggering IRS scrutiny, but also because many not-for-profit healthcare organizations use the Form 990 as a communication tool to highlight the ways they fulfill their missions.
How can tax-exempt hospitals make sure they are playing by the rules when it comes to completing the Form 990? The IRS has posted answers to frequently asked questions about the revisions on its web site, particularly lines 75b and 75c,a and has indicated that it will evaluate whether changes in the Form 990 instructions for 2006 should be made to clarify line 75c.a Hospitals should become familiar with the revised reporting requirements to ensure that their Form 990 submissions are accurate and complete.
Penalties for Noncompliance
Failure to file Form 990 on a timely basis, failing to furnish on the return any required information, or furnishing incorrect information may subject the organization and responsible individuals to penalties. In addition, failure to complete certain areas on Form 990 may trigger an IRS compliance check, which may, depending on the circumstances, evolve into a much more detailed examination.
In a telephone forum sponsored by the IRS on May 17, 2006 ("EO Officials Give Pointers on Executive Compensation," 2006 TNT 96-5 [Tax Analysts, May 18, 2006]), representatives of the IRS discussed the agency's compliance project aimed at executive compensation of public charities and private foundations. They said the IRS will initiate a compliance check if the organization filing the Form 990:
- Fails to answer a question on Schedule A, Part III, Statements About Activities, which in part asks about transactions between the organization and insiders, or answers a question "yes" without explanation
- Lists receivables from officers, directors, trustees, or key employees on Line 50, Part IV, Balance Sheets, of Form 990 without attaching a schedule with an explanation (including interest rates, original loan amounts, repayments, and collateral)
- Does not answer, or answers "yes" without an explanation, question 89b on Form 990, which asks Section 501(c)(3) and Section 501(c)(4) organizations whether they engaged in any excess benefit transaction under Section 4958, or became aware of an excess benefit transaction from a prior year
- Leaves blank Column B in Parts V-A and V-B of Form 990, which asks for the job title and average hours per week devoted to the position for current and former officers, directors, trustees, and key employees
Changes in the Rulebook
The most recent revisions to Form 990 fall into categories such as compensation and benefits information, definition of family and business relationships, compensation from related orga-nizations, reasonable effort, conflict of interest, compensation for independent contractors, foreign activities, supporting organizations, and qualified conservation contributions.
Compensation and benefits information. Previously, Form 990 rules under Part V required disclosure of compensation and benefits to officers, directors, trustees, and key employees. Line 75 of Part V of the 2004 Form 990 also required the organization to report compensation and benefits paid to any of its officers, directors, trustees, or key employees by related organizations in situations where the officer, director, trustee, or key employee received total compensation of more than $100,000 in the aggregate from the exempt organization filing the Form 990 and all related entities, and received at least $10,000 from any related entity. The instructions to the 2004 Form 990 defined "related organization" as any entity (whether tax-exempt or taxable) that the filing organization directly or indirectly owned or controlled, or that directly or indirectly owns or controls the filing organization.
Part I, "Compensation of the Five Highest Paid Employees Other Than Officers, Directors, and Trustees," of the 2004 Schedule A required disclosure of compensation and benefit information of the five most highly paid employees, other than individuals reported on Form 990, who receive annual compensation over $50,000, and the total number of such employees paid over $50,000. Part II, "Compensation of the Five Highest Paid Independent Contractors for Professional Services," required disclosure of the same information with respect to the five most highly paid independent contractors whether individuals or firms) for professional services who receive annual compensation over $50,000, and the total number of such independent contractors receiving over $50,000 for professional services.
Under the new rules, Part V has been expanded into Parts V-A and V-B. Part V-A, current officers, directors, trustees, and key employees, requires disclosure of the information provided on Part V of the 2004 Form 990. In addition, line 75a of Part V-A asks for the total number of officers, directors, and trustees permitted to vote on organization business at board meetings. Further, line 75b asks whether current officers, directors, trustees, or key employees listed in Part V-A of Form 990, or highest-compensated employees listed in Schedule A, Part I, or highest-compensated professional and other independent contractors listed in Schedule A, Part II-A or II-B (see below), are related to each other through family or business relationships. Line 75c asks whether such individuals receive compensation from any other organizations (tax-exempt or taxable) related to the filing entity. If one or more relationships exist, a statement must be attached that lists, for each such individual, a description of the relationship between the filing entity and the other organization, the name and employer ID numbers of each related organization that provided the compensation, and the amount provided by each.
An FAQ from the IRS website (2005 Form 990 FAQ #V-1) states that the names of all board members (officers and nonofficers) must be listed. In addition, all corporate officers, trustees, and key employees must be named. The address provided for each person should be the address at which the person prefers to be contacted. The organization's address may be used if the organization will promptly send any letters or other communications to the person contacted. The address provided will become public information.
Definition of family and business relationships. Another FAQ (2005 Form 990 FAQ #75-1) cross-references the instructions for line 51, "Other Notes and Loans Receivable," for the definition of family and business relationships for purposes of Line 75b. "Family relationships" include an individual's spouse, ancestors, children, grandchildren, great-grandchildren, siblings (whether by whole or half blood), and the spouses of children, grandchildren, great-grandchildren, and siblings. "Business relationships" are employment and contractual relationships, and common ownership of a business where any officers, directors, or trustees, individually or together, possess more than a 35 percent ownership interest in common. Ownership means voting power in a corporation, profits interest in a partnership, or beneficial interest in a trust. The organization must report relationships among all members of all the groups listed, not just relationships among members of each group (2005 Form 990 FAQ #V-2).
Compensation from related organizations. With respect to the question on Line 75c about compensation from related organizations, the compensation thresholds have been lowered. The 2005 Form 990 requires such reporting if any officer, director, trustee, key or highest-compensated employee, or highest-compensated professional or nonprofessional independent contractor (as defined above) receives aggregate compensation of at least $50,000 from the reporting organization and related organizations.
"Related organization" is now defined as organizations (whether tax-exempt or taxable) with a "close connection." The instructions state that "the close connection that creates related entities ... is broader than direct or indirect ownership or control" and may include:
- Common control of one or more of the organizations
- Direct or indirect control of one organization by another through common governance
- Direct or indirect ownership of one organization by another
- Control of one organization by another through authority to approve budgets or expenditures
- Coordination of operations as to facilities, programs, employees, or other activities
- Common persons exercising substantial influence over all the organizations
The instructions say that common control occurs when the filing organization and one or more other organizations have a majority of their governing boards or officers appointed or elected by the same organization(s), or a majority of their governing boards or officers consist of the same individuals. Common control also occurs when the filing organization and one or more commonly controlled organizations have a majority ownership in a corporation, partnership, or trust. Ownership means holding (directly or indirectly) 50 percent or more of the voting power in a corporation, profits interest in a partnership, or beneficial interest in a trust.
All Section 509(a)(3) supporting organizations, whether Type 1, Type 2, or Type 3, are considered related entities with respect to the organization(s) they support. Also, the related-party compensation reporting requirements apply to both supported and supporting organizations.
The instructions further provide that "related organizations" could include any of the following situations:
- The filing organization controls the organization or the organization controls the filing organization through common officers, directors, or trustees, or through authority to approve budgets or expenditures.
- The filing organization and the other organization(s) were created at approximately the same time and by the same persons.
- The filing organization and the other organization(s) operate in a coordinated manner with respect to facilities, programs, employees, or other activities.
- Persons who exercise substantial influence over the filing organization also exercise substantial influence over the other organization(s).
Reasonable effort. One FAQ (2005 Form 990 FAQ #75-2) addresses the question of how much effort an organization must undertake to obtain the information requested in Lines 75b and 75c. The IRS states that the organization must make a reasonable effort to obtain the information and provide accurate information on its return. An example of a reasonable effort would be to distribute a questionnaire annually to each officer, director, trustee, and key employee listed in Part V-A; each highest compensated employee listed in Schedule A, Part I; and each highest compensated professional and other independent contractor listed in Schedule A, Parts II-A and II-B. The questionnaire should require the name and title, date, and signature of each person reporting the information. The questionnaire also should contain the family and business relationship definitions set out in the instructions for line 51 (discussed above).
Conflict of interest. Line 75d of Part V-A asks whether the organization has a written conflict of interest policy.
Compensation and benefits to former officers, directors, trustees, and key employees. The new Part V-B, "Former Officers, Directors, Trustees, and Key Employees," of Form 990 requires disclosure of compensation and benefits, as well as any loans and advances, to former officers, directors, trustees, and key employees. Information about individuals formerly associated with a related organization need not be reported (2005 Form 990 FAQ #V-3). All loans and advances must be reported, regardless of their terms (2005 Form 990 FAQ #V-4).
Compensation for independent contractors. Part I of Schedule A requires disclosure of the information required by Part I of the 2004 Schedule A. Part II of Schedule A has been expanded into Parts II-A and II-B. Part II-A, "Compensation of the Five Highest Paid Independent Contractors for Professional Services," requires compensation and benefit information for the five highest-paid independent contractors (whether individuals or firms) for professional services who receive annual compensation over $50,000. New
Part II-B, "Compensation of the Five Highest Paid Independent Contractors for Other Services," requires the same information for the five highest- paid independent contractors for services other than professional services who receive annual compensation over $50,000. Parts II-A and II-B require disclosure of the total number of independent contractors who receive over $50,000 for professional services and other services, respectively.
Foreign activities. There are more inquiries about "foreign activity" throughout the new form. For example, there are foreign grants information requests in line 22 of Part II, "Statement of Functional Expenses," and in Part III, "Statement of Program Service Accomplishments."
The new line 91b of Part VI, "Other Information," asks whether the organization had an interest in or signature authority over any foreign financial accounts, and if so, asks for a list of the countries where the accounts are located. New line 91c asks whether the organization has an office outside the United States, and if so, asks for a list of the countries where the offices are located.
Supporting organizations. Line 13 of Part IV, "Reason for Non-Private Foundation Status," of Schedule A now requires supporting organizations to indicate whether they are Type 1, Type 2, or Type 3.
Qualified conservation contributions. New line 3c of Part III, "Statement About Activities," of Schedule A asks whether the organization received a contribution of a "qualified real property interest," defined as the entire interest of the donor (other than a qualified mineral interest), a remainder interest, or a conservation easement.
Failure to adhere to the new requirements for Form 990 may result in penalties for individuals or the organization as a whole and/or may trigger an IRS compliance check, which could evolve into a more detailed examination, depending on the circumstances. It is critical that tax-exempt hospitals review Form 990's revised reporting requirements and ensure that their forms are filled out accurately and completely in order to avoid potential penalties and scrutiny.
Phillip Royalty is a partner/principal, Ernst & Young, LLP, Washington, D.C. (firstname.lastname@example.org).
The author would like to acknowledge the assistance of W. Taylor Marshall of Ernst & Young's National Exempt Organizations Tax Practice.
The History Behind Form 990
Tax-exempt organizations, with certain exceptions, are generally required to file an annual information return with the IRS. Most tax-exempt organizations, other than private foundations, must file Form 990, Return of Organization Exempt from Income Tax. (Private foundations are required to file Form 990-PF rather than Form 990.)
On Form 990, organizations are required to report their revenue, expenses, and balance sheet; provide a statement of program service accomplishments; report information about officers, directors, trustees, and key employees; answer a series of questions about the organization's activities; provide an analysis of income- producing activities; and provide information regarding taxable subsidiaries and disregarded entities.
Organizations described in Section 501(c)(3) of the Internal Revenue Code that are required to file Form 990 must also file Schedule A (Form 990). Schedule A requires information concerning the organization's compensation of certain employees and independent contractors, transactions with certain insiders and related parties, reasons for nonprivate foundation status, lobbying activities, and transfers to/transactions and relationships with political organizations and tax-exempt organizations other than charitable organizations.a
A tax-exempt organization must make available for public inspection at the organization's principal office (and at certain regional or district offices) a copy of its three most recent Form 990s, including Schedule A. The names and addresses of contributors to the organization (other than private foundations) need not be disclosed.
Tax-exempt organizations with at least $100 million in assets and that file at least 250 returns per year (including income, excise, employment tax, and information returns like Forms W-2 and 1099) are required to file their Form 990 electronically for tax years ending on or after Dec. 31, 2005. Further, for tax years ending on or after Dec. 31, 2006, the IRS will expand the electronic filing requirement to include the Form 990 of tax-exempt organizations with $10 million or more in total assets that file at least 250 returns per year, and the Form 990-PF of private foundations regardless of size that file at least 250 returns per year.
a. Certain tax-exempt organizations are also required to file Schedule B, Schedule of Contributors. In addition, exempt organizations with $1,000 or more in gross income from an unrelated trade or business must file Form 990-T, Exempt Organization Business Income Tax Return.
a. In addition to changes for 2006, at a program sponsored by the AICPA on June 15, 2006, representatives of the IRS said that the IRS hopes to release a draft version of a revised Form 990 for public comment in May 2007 ("IRS Foresees Draft of Revised Exempt Organization Information Return by Next Spring," 2006 TNT 116-1 [Tax Analysts, June 16, 2006]).
Publication Date: Tuesday, August 01, 2006