990 Nonprofit Tax Form Undergoes Major IRS Overhaul
On December 20, 2007 the IRS released an updated and redesigned Form 990, the return that various nonprofit hospitals and charities file annually. Form 990 is a key IRS enforcement and transparency tool and is a cornerstone for public accountability and a primary source for policy making. Form 990 is also a way for the public to peek inside the financial workings of nonprofit organizations. It is used by the media, donors, grant makers, labor unions, medical staff, employees, competitors and academics and is subject to public inspection including Internet access through www.guidestar.org

Prior to 2007, the IRS had made minor modifications to Form 990. However, Form 990 has not been significantly revised since 1979 and has been criticized for its failure to keep pace with the increasing size, diversity and complexity of the nonprofit hospital sector.

The overhauled 990 follows the IRS's release on June 14, 2007 of a draft 990 for public comment. During the 90 day comment period, the IRS received nearly 700 comments. Underscoring the importance of public input, Lois Lerner, the IRS's Director of Exempt Organizations, said, "We could not have done this without the tremendous input of the tax-exempt sector, the practitioner groups and the states." She also said that the IRS continues to work with the nonprofit sector and plans to release detailed instructions on how to carry out the changes in the new Form 990 in early 2008.

Specific changes
Primarily as a result of corporate governance reforms, Sarbanes-Oxley, and the evolving industry-led governance best practices, new Form 990 follows the IRS's emphasis on corporate governance. As a result of the comments, significant changes were made to the 11 page core 990 and the series of 16 reporting schedules. Major changes include:

• Changes to order of core form: In response to consistent commentary that the organization "tell its story" before reporting other information, program descriptions and service accomplishments moves up from the end of the form to page 2.
  
  
• Revised summary page: In response to criticism from commentators that certain governance practices are not required by law and that such responses might be ambiguous, Section VI clarifies that the information related to the Governing Body and Management, Policies and Disclosures pertains to best practices and is not required by the Internal Revenue Code.
  
  
• Ability to report supplemental information: In response to the need for complete and balanced reporting, there are opportunities throughout the form for organizations to explain their activities and provide supplemental information.
  
  
• Checklist of schedules: The 37 question checklist functions as a trigger to determine which supplementary reporting schedules the filing organization must complete.
  
  
• Governance best practices vs. de facto requirement for tax exemption: In response to criticism from commentators that certain governance practices are not required by law and that such responses might be ambiguous, Section VI clarifies that the information related to the Governing Body and Management, Policies and Disclosures pertains to best practices and is not required by the Internal Revenue Code.
  
  
• Expanded compensation disclosures on Part VII, Schedule J and Schedule L: In March 2007 the IRS released its first report on its Executive Compensation Compliance Initiative Project. The results alarmed the IRS and resulted in some IRS audits. Practitioners have cautioned that exempt hospitals can expect continued and increasing enforcement presence in this area. The new Form 990 expectedly requires expanded information related to transactions with the hospital's key management, board members and others who are in a position of influence. Reporting is no longer required for nontaxable expense reimbursements, nontaxable minimal fringe benefits, and nonqualified deferred compensation must now only be reported once.
  
  
• Revised Schedule H for hospitals: Organizations licensed as hospitals under state law will be required to complete Schedule H, which continues the energetic national and state debate on the standard for, and the reporting of, community benefit. The American Hospital Association, Catholic Health Association, Healthcare Financial Management Association, American Institute of Certified Public Accountants, and various state organizations continue to be active in this debate. While bad debts and Medicare shortfalls will not be reported as part of community benefit, such information will be reported on Part III. In response to universal opposition regarding the increased information collection burden as well as competitive considerations, the original billing and collections table has been eliminated. New Part II requires information related to community building activities. Schedule H will also mandate community benefit reporting on an entity (EIN) basis, not on a group or healthcare system basis.
  
  
• Revised Schedule K for tax exempt bonds: In 2007 the IRS initiated a tax-exempt bond compliance initiative based on concerns about post issuance compliance in the areas of record retention, private business use, arbitrage yield restriction and rebate as well as debt management policies and procedures. The new Schedule K significantly expands reporting by hospitals with tax exempt bonds.
  
  
• Other: There are new schedules for related organizations, foreign activities and non-cash contributions. New Form 990 also retains group filings for certain organizations with group exemption rulings such as religious health care systems. Meanwhile, the IRS has relieved various small nonprofits from some of the new reporting requirements.
  
  

Effective dates and phase-in
New Form 990 will be used for the 2008 tax year (returns filed in 2009). Schedules H and K will be phased in over two years with certain identifying information required for the 2008 tax year, and completion of the entire schedules required for the 2009 tax year. "This phase-in process will allow organizations to become familiar with the new Form 990," Lerner said. The form is available at www.irs.gov/charities/article/0,,id=176613,00.html

Although the reporting requirements aren't effective until 2009, healthcare organizations should consider taking the following action as soon as possible:

1. Educate hospital leadership and board members on the new requirements.

2. Encourage the finance committee or Board to establish its level of involvement and due diligence related to reviewing the new Form 990.

3. Establish a multi-disciplinary tax force to evaluate the organization's readiness and Form 990 information gathering processes.

4. Seek the advice of tax and legal professionals for further information on the new Form 990.

IRS Compliance Plans for 2008
In addition to conforming to the new Form 990 requirements, healthcare organizations should be aware of the planned activities of the IRS, Exempt Organizations (EO) division for 2008. Here are a few highlights from the IRS' "2008 Implementing Guidelines:"

• EO will continue to collect data from the industry through both audits and compliance checks. Following the same model as the Hospital Project, the IRS will also expand its surveys to include colleges and universities to determine areas of noncompliance. Thus, university hospitals and their physician practice groups, and other related organizations, will have to disclose their executive compensation policies, endowment investment and spending, and income and expense allocation for UBIT, among other things. Failure to participate in the survey could result in an audit.
  
  
• Non-filers will have amnesty in 2008. Organizations with un-filed returns from the three most recent tax years can file them, and pay all applicable taxes and interest, without facing any penalties.
  
  
• Supporting organizations in their 3rd to 5th year of existence will be reviewed by the IRS to determine if they still qualify for tax exemption.

The IRS will continue its focus on executive compensation practices and move into Phase III of its compliance project. This will entail an anticipated 200 more compliance checks and 50 single issue audits focusing on organizations with loans to officers, directors and trustees, and on executive compensation paid by colleges and universities.

• Enforcement will also focus on organizations that fail to file employment tax returns. The IRS has a multi-faceted system to cross check Social Security Administration records, W-2 forms and state records to identify non-compliance.
  
  
• TE/GE determinations will be processed quicker in 2008. As a pilot project, the IRS will scan all incoming applications for exemption and begin to process application files in a totally online environment.
  
  For more information, 2008 Implementing Guidelines can be found at www.irs.gov/pub/irstege/fy08_implementing_guidelines.pdf

If you have any questions regarding this Client Alert, please contact Wendy Pearson at 206-622-5511.

*The published article was co-authored with Nolan Newman, a Seattle CPA. He can be reached at 206-284-1383.