Navigating trouble spots on revised Form 990

Many nonprofits, having filed extensions for more time to prepare the revised Form 990 for 2008, are now wrestling with some of the form’s questions. If your nonprofit has more than $1 million in gross receipts and over $2.5 million in total assets, it’s required to file the new form.

Do questions about policies perplex you?

Form 990 asks questions about whether your nonprofit has certain written policies relating to organization governance, such as conflict-of-interest and whistleblower policies. On the one hand, the Internal Revenue Code doesn’t require you to have these policies. But the IRS has stated it will use your responses “to assess noncompliance and the risk of noncompliance” with federal tax law. The message: A lack of these policies could result in closer IRS scrutiny.

Organizations often ask if they can adopt a policy after the close of their tax year and still respond on the form that they have the policy in place. This depends on the policy — the instructions to these Part VI questions indicate the specific time or period to be used to answer particular questions.

What’s an “independent voting member”?

Nonprofits frequently ask about the definition of “independent voting member of the governing body.” Form 990 instructions are exact about the three-part test to be used to determine whether a board member is independent — all three parts must apply at all times during the year:

1. The member isn’t compensated as an officer or other employee of the organization or a related organization,

2. The member didn’t receive total compensation or other payments exceeding $10,000 from the organization or related organizations as an independent contractor, and

3. Neither the member nor any family member was involved in a “transaction with interested persons” as required to be reported on Schedule L.

Your nonprofit must make a “reasonable effort” to obtain information about independence. According to the IRS, it would be reasonable to distribute a questionnaire annually to each of your officers, directors, trustees and key employees.

Your questionnaire should define “independent voting member” and ask for the information required to respond to Questions 1 and 2 in Part VI. These questions address whether the board member is independent and whether officers, directors, trustees and key employees have family or business relationships with other officers, directors, trustees or key employees.

What about controlled entities?

Another major governance issue is whether a controlled entity can state that it has certain policies in place if its controlling entity has them. Yes, the controlled entity can respond affirmatively if it has officially adopted the controlling organization’s policies.

If it hasn’t, the controlled entity should explain in Schedule O that it is governed or otherwise affected by the policies of the controlling organization.

What are “related organizations” in Schedule R?

Many organizations are uncertain if they have “related organizations” as mentioned in Schedule R. To determine this, refer to the definition for related entities in the glossary located in the Form 990 instructions. The same definition for related organizations is used throughout the form.

Related organizations also include organizations that are indirectly owned. For example, if Nonprofit Filing Organization A owns 80% of Taxable Corporation B, which is a 70% partner in Partnership C, A controls both B and C. And Organization A must report both entities in the appropriate parts of Schedule R.

Where to find more answers

The IRS has issued FAQs for the compensation sections (Part VII and Schedule J) of Form 990. Additional FAQs and other filing tips are posted every several weeks on irs.gov/charities and are archived on the site. Your CPA also can help answer questions that aren’t addressed in the form’s instructions. •