Were the Final Regulations for Form 990 Different from the Proposed Regulations?
A. Yes. The information return, which generally must be filed annually by tax-exempt organizations, was redesigned and significantly expanded recently. Here is an explanation of the key areas addressed by the new final regulations.
Form 990 Requires Diligence and Thoroughness
The IRS has issued final regulations related to the recently redesigned Form 990 (Return of Organization Exempt from Income Tax), which is required for most tax-exempt entities. Not surprisingly, the final regulations generally follow guidelines established by proposed regulations in 2008. The sweeping changes approved by the final regulations took effect on September 7, 2011, and generally apply to tax years beginning on or after January 1, 2008.
New Form IRS 990 Digs Deep
The new Form 990 is designed to increase transparency of tax-exempt organizations. It requires extensive reporting about governance and management policies, as well as the organization’s relationship with board members, officers and key employees.
Currently, the entire Form 990 must be filed for an organization with gross receipts of $200,000 or more and total assets of $500,000 or more. An organization that fails to file Form 990 for three consecutive years will lose its tax-exempt status.
The information an organization must obtain from board members, officers and key employees includes answers to these questions:
- Did any of their family members engage in business transactions with the organization?
- Did they (or their families) own more than 35 percent of entities and engage in business transactions with the organization?
- Did they do business, other than as a member of the general public, with another board member, officer, or key employee? Or did they do business or with an entity of which another board member, officer, or key employee is a director, officer or more-than-35 percent owner?
- Did they have a family relationship with any other director, officer or key employee of the organization?
- Are they a director, officer, or greater than 10 percent owner of an entity of which another of the organization’s directors, officers, or key employees is a director, officer or more-than-10 percent owner?
Here are some of the key areas addressed by the new final regulations (TD 9549), and how they compare with the earlier proposed regulations:
Advance ruling process – Previously, an organization seeking to be recognized by the IRS as a publicly supported charity had to complete a two-step process. First, the organization was required to declare that it expected to remain publicly-supported on a consistent basis. Second, after five years had passed, the organization had to file Form 8734 (Support Schedule for Advance Ruling Period) showing that it had satisfied this test.
The proposed regulations treated an organization as a publicly supported organization in its first five years if it could show on its application that it reasonably expected to receive the required public support during this period. Now the new final regulations follow suit. This effectively eliminates the advance ruling requirement.
Public support test – This test requires an organization to receive more than one-third of its support each tax year from qualified gifts, grants, contributions or membership fees, or gross receipts from activities that are not an unrelated trade or business.
The proposed regulations changed the period for determining public support from the four years prior to the tax year being tested to the five years ending with the tax year being tested.
Under the final regulations, an organization that fails the public support test for two consecutive tax years will be treated as a private foundation for limited tax purposes. The organization will be treated as a private foundation for all tax purposes beginning on the first day of the third consecutive tax year.
Accounting methods – One of the goals of redesigned Form 990 is to provide consistent tax and financial reporting. Accordingly, if an organization computes its public support and reports the information on Schedule A (Public Charity and Public Support), the proposed regulations required it to use the same accounting method to report the information on Form 990. The final regulations continue this treatment.
Reliance – As with the proposed regulations, the new final regulations allow donors to rely on an organization’s determination letter that it is a public charity unless the donor was responsible for, or aware of, any action resulting in the loss of the status.
The final regulations also restore language that was inadvertently deleted from the proposed regulations giving limited grantor and donor reliance based on a written statement from the organization.
Compliance with the new final regulations is essential for tax-exempt groups. Filing Form 990 can be a complicated process and it requires diligence and thoroughness. Your tax adviser can provide assistance and more information about how the regulations affect your organization.
Cross-posted from the Raffa Online Tax Guide.