The U.S. Internal Revenue Service (IRS) has been saying for months that tax-exempt organizations will be using a revised Form 990 tax return for their tax year beginning in 2005. The IRS issued the revised Form 990 on October 7 in draft form for public comment. As exempt organizations consider the changes to the Form 990, they should bear in mind that all information included on the 990 is available to the general public.
Exempt organizations have been anticipating major changes to the Form 990, and in particular to the manner in which compensation and benefits of officers, directors, trustees and key employees must be reported. Following months of public disclosures of executive compensation scandals, U.S. Congressional hearings, enforcement actions and legislative initiatives, the IRS has stated that future 990s will require much more detailed reporting of executive compensation, deferred compensation and benefits. While the changes to the 2005 Form 990 do not constitute the major overhaul the IRS has been promising, they do make tactically important changes that will assist the IRS in addressing perceived shortfalls in disclosure of key issues.
The revised Form 990 has been issued in two stages. In August the IRS issued a revised Form 990 Schedule A on which organizations will have to disclose the compensation provided to the five highest paid independent contractors for professional services and the compensation provided to the five highest paid independent contractors for all other services. (For years before 2005, this disclosure was a single chart covering independent contractors for all types of services.) This added and separate disclosure of professional service arrangements will help the IRS monitor potential conflicts of interest between professional service providers and senior leadership of the exempt organization (both senior management and board membership).
The second stage is the revised Form 990 itself. Two major revisions to the Form 990 have to do with the disclosure of compensation, deferred compensation and benefits for officers, directors, trustees and key employees.
Compensation Split Among Related Organizations and Conflicts of Interest
The first revision covers situations in which an officer, director, trustee or key employee receives compensation from more than one related organization, as well as conflict of interest issues. In past years, line 75 of Form 990 asked simply whether any officer, director, trustee or key employee received aggregate compensation of more than $100,000 from the exempt organization and from all related organizations (of which more than $10,000 was provided by the related organizations). In that case, the compensation from related organizations had to be summarized on an attachment to the 990. For 2005 reporting, the IRS instead asks the following series of questions in line 75:
- Disclose the total number of officers, directors and trustees entitled to vote on the exempt organization's business at board meetings
- Disclose whether any officers, directors, trustees or listed key employees (or any listed highest paid employees, professional service independent contractors or other independent contractors) are related to each other through family or business relationships—and attach a statement naming the individuals and explaining the relationship. Note that this question asks for family and business relationships between uncompensated directors as well as other business and family relationships
- Disclose whether any officers, directors, trustees or listed key employees (or any listed highest paid employees, professional service independent contractors or other independent contractors) receive compensation from any organization related to this exempt organization through common supervision or common control
- Disclose whether the exempt organization has a written conflict of interest policy
This series of questions clarifies the broad type of relatedness that triggers this disclosure of compensation arrangements with related organizations. Not only do other types of relationships need to be described (such as business relationships between key employees and the highest paid service providers to the organization), but any compensation paid by any other organization under common supervision or common control must be described. This change makes it clear that all compensation, deferred compensation and benefits provided to officers, directors, trustees and key employees, regardless of the source, must be disclosed if provided by an organization that is related in some way to the exempt organization.
Compensation to Former Officers, Directors, Trustees or Key Employees
A new Part V-B to Form 990 includes a schedule for reporting loans and advances, compensation, employee benefits and deferred compensation contributions and expense allowances to former officers, directors, trustees or key employees. This appears intended by the IRS to close a perceived "loophole" in which exempt organizations did not report deferred compensation, severance pay, consulting pay and benefits promised to officers and key employees while employed and then were not required to report after they terminated employment. However, the requirement to report payments to former officers, directors or key employees includes deferred compensation and other benefits even if previously reported.
These revisions to Form 990 are incremental changes that show the direction in which the disclosure of executive and board compensation is headed. While these changes are not the "extreme makeover" the IRS had promised (which will be for 2006 at the earliest), they do indicate the seriousness of the IRS in compelling exempt organizations to disclose their executive and board compensation, deferred compensation and benefits arrangements in greater detail.
Two questions concerning foreign activities have also been added to the Form 990. One asks whether the organization owns or has signatory authority over a foreign account. This question is identical to that already asked taxable corporations on their tax returns. The second asks whether the organization has an office in a foreign country. These questions reflect increased attention to exempt organizations’ foreign activities in line with anti-terrorism measures.