Webinar Slides: Problem Areas of Forms 990 and 990-T

CBIZ & MHM Executive Education Series™
Problem Areas of Forms 990 and 990-T: IRS Focus Areas & How
to Improve Compliance
Presented by: Craig Klein and Brenda Booth
June 6 and June 18, 2014

2#CBIZMHMwebinar#CBIZMHMwebinar
 To view this webcast in full screen mode, click on view
options in the upper right hand corner.
 Click the Support tab for technical assistance.
 If you have a question during the presentation, please use
the Q&A feature at the bottom of your screen.
Before We Get Started…

 This webcast is eligible
for CPE credit. To receive
credit, you will need to
answer periodic
participation markers
throughout the webcast.
 External participants will
receive their CPE
certificate via email
immediately following the
webcast.
CPE Credit

Any tax advice contained in this program is not intended
to be used and cannot be used for the purposes of
avoiding any penalties that may be imposed by the
Internal Revenue Code.
Circular 230 Notice

5#CBIZMHMwebinar
Today’s Presenters
Craig Klein, CPA
Managing Director, CBIZ MHM
617.761.0509 | cklein@cbiztofias.com
Craig, a CBIZ Managing Director in the Not-For-Profit & Education Practice,
has over 20 years experience in the tax industry and works exclusively with
educational institutions, cultural organizations, health and human services
providers, associations, foundations and other complex not-for-profit
organizations. Craig assists clients with the preparation and review of tax
returns, advice and planning regarding unrelated business income,
transactions and maintenance of tax-exempt status.
Brenda Booth, CPA
Manager, CBIZ MHM
617.761.0729 | bbooth@cbiztofias.com
Brenda is a Manager in CBIZ’s Not-For-Profit & Education Tax Practice.
She has over eight years of experience working with not-for-profit
organizations in the education, cultural and health and human services
sectors. She provides tax return preparation and review services, and
consultation regarding Form 990 reporting, tax reporting related to limited
partnership investments and unrelated business income.

 Excerpt from FY 2013 IRS Workplan:
 “…we [the IRS] find that the Form 990 responses of
some organizations do not always accurately reflect
their activities. If those organizations had been more
careful in completing their returns, they might not have
been identified by our indicators or selected for
examination. Because of the new ways we are
analyzing return data and selecting cases, it is more
important than ever that organizations follow
instructions, compute properly and report accurately on
their Forms 990…The IRS uses the Form 990
responses to select returns for examination…”
Introduction

 Form 990 Practice tips, best practices and areas of IRS
focus
 Form 990-T areas of IRS focus
 Foreign filing requirements and FBAR Reminder (New
electronic-only form due June 30)
Today’s Agenda

FORM 990 PRACTICE TIPS, BEST
PRACTICES AND AREAS OF IRS
FOCUS

 The principal officer should be the current principal officer (as of filing)
 The number of voting members of the governing body should be as of
the last day of the fiscal year
 The number of volunteers can be estimated and can include unpaid
board members
 Best Practice: review your website (as the IRS may)!
 Consider …
 Prohibition on political activity
 Limitations on lobbying activity
 Unrelated business activity
 Significant Changes:
 remember NOT to include social security numbers
 clarification that only hospitals should attach their audited financials
Form 990, Heading and Part I - Summary

 Report new significant program services or changes in
how programs are conducted on Form 990. Describe in
Schedule O. Do not report to the IRS via letter.
 Best Practice: Take advantage of the Statement of
Accomplishments to showcase your programs and
achievements to all constituents, including donors,
employees, regulators, the media, etc.
 The IRS is currently scrutinizing organizations with
limited charitable activity (and excessive
compensation).
Form 990, Part III – Program Service Accomplishments

 Total expenses should tie to the program service
expenses reported on the statement of functional
expenses (SFE).
 Total grants should tie to the grants reported on the
SFE.
 Revenues should generally tie to the “related” or
exempt revenues on the statement of revenue.
Form 990, Part III – Program Service Accomplishments

 Best practices:
 To be able to answer “yes” to the question regarding
compliance with backup withholding rules for reportable
payments to vendors.
 To be able to answer “yes” to the question regarding filing of
all required federal employment tax returns.
 To be able to answer “yes” to the question as to whether
Form 990-T has been filed for organizations with greater than
$1,000 of unrelated business gross income.
Form 990, Part V – IRS Filings and Tax Compliance

 The IRS is very interested in good governance within tax-
exempt organizations!
 Responses to governance questions, in combination with
other Form 990 data, can be expected to influence an
organization’s examination risk.
 Best Practices:
 “yes” responses to the questions regarding:
 contemporaneous documentation of meetings
 providing a complete copy of Form 990 to all board members
 having a written conflict of interest policy, a whistleblower policy, and
document retention and destruction policy
 meeting the “rebuttable presumption of reasonableness” criteria when
setting executive compensation
Form 990, Part VI – Governance, Management and
Disclosure

 Be aware of the specific requirements for the desired
“yes” response to be appropriate for each of the
following questions:
 providing a complete copy of Form 990 to all board members
 having a written conflict of interest policy, a written
whistleblower policy, and a written document retention and
destruction policy
 compensation setting of CEO and other officers or key
employees meeting “rebuttable presumption”
Form 990, Part VI Form 990, Part VI – Governance,
Management and Disclosure (continued)

 Colleges and Universities Project Final Report
 Examinations focused mainly on compliance with the Section
4958 Intermediate Sanctions provisions.
 Organizations may pay no more than reasonable
compensation to their disqualified persons, i.e. officers,
directors, trustees and key employees (ODTKEs).
 Rebuttable presumption of reasonableness safe harbor
(RPR), when:
 Use of an independent body to set the compensation
 Reliance on appropriate comparability data to set the compensation,
and
 Contemporaneous documentation
Compensation and Rebuttable Presumption

 IRS findings with compensation: The Good
 Most examinees attempted to meet the rebuttable
presumption standard.
 94% of ODTKEs at examined institutions had compensation
set using a procedure intended to satisfy RPR.
 Broad existence of compensation policies.
 Procedures designed to avoid conflicts of interest
 Compensation setting for ODTKEs by the Board of Directors or by a
compensation committee
 Recusal by individuals from discussions about their compensation
 Documentation of the basis for setting compensation.

 IRS findings with compensation: The Bad
 About 20% of examinees failed to meet the RPR standard
because of problems with their comparability data, including:
 Inclusion of institutions not similarly situated to the school relying on
the data (location, endowment size, revenues, net assets and
number of students).
 The compensation studies failed to document the selection criteria
for the schools included or explain why those schools were deemed
comparable to the school relying on the study.
 The compensation studies failed to specify whether the data
included just salary or included other forms of compensation.

 IRS next steps regarding compensation setting.
 IRS plans to make tax-exempt organizations more aware of
the importance of using appropriate comparability data when
setting compensation.
 In other words…education and examinations.

 Every organization should report as officers 1) the top
management official, and 2) the top financial official.
 For “Position”, only one box should be checked for each
individual, unless both a board member and officer.
 Do not mark “former” if a person served in their capacity
as ODTKE at any time during the fiscal year.
 Significant changes:
 Hours per week for related organizations now required to be
reported.
 Public utilities and insurance providers should not be
reported as independent contractors.
Form 990, Part VII – Compensation

 Donated services or use of facilities should not be
reported on the Statement of Revenue.
 Non-cash contributions should tie to Schedule M (if
Schedule M is required).
 Expense items should be reported as reconciling items
on Schedule D.
 Fundraising revenues and expenses should tie to
Schedule G (if Schedule G is required).
Form 990, Part VIII - Revenue

 Miscellaneous income that is NOT regularly carried on
should be reported in the miscellaneous revenue
section instead of the program service revenue section.
 Significant Changes: The instructions clarify that
discounts on services cannot be reported as
contribution revenue.
Form 990, Part VIII – Revenue (continued)

 Lobbying expenses reported here should tie to Schedule C,
unless employee compensation is included within the
expenses reported on Schedule C.
 Professional fundraising services should tie to Schedule G (if
Schedule G is required).
 Significant changes: If “other fees for services” exceeds
10% of total expenses, these expenses should be listed on
Schedule O.
 Best practice: Pay close attention to the allocation of
expenses, e.g. program vs management & general versus
fundraising. Note: The IRS expects an organization with
substantial income from fundraising to report fundraising
expenses.
Form 990, Part IX - Expenses

 Significant Changes:
 The Part X instructions clarify that if any receivable is
reported on line 6 (loans and receivables from other
disqualified persons) then Schedule L, Part II is required.
 The Part XI net asset rollforward includes new lines for
unrealized gains/losses on investments, donated services
and use of facilities, investment expenses, and prior period
adjustments.
Form 990, Parts X and XI – Balance Sheet and
Reconciliation of Net Assets

 Schedule A should be prepared using the same
accounting method used to prepare the overall 990.
This includes the “look-back” data from prior years
required to be presented on the current Schedule A.
 New development: Schools described in Section
170(b)(1)(A)(ii) that follow the special rule allowing for
abbreviated reporting on Schedule B will have to
complete the Schedule A public support schedule and
show at least 33 1/3 % public support.
Schedule A – Public Charity Status and Public
Support

 Schedule B should be prepared using the same accounting
method used to prepare the overall 990.
 If the organization uses the accrual method of accounting,
pledges of non-cash contributions should be reported on
Schedule B even if not received in the fiscal year
 Organizations can not list a donor as “Anonymous” unless
the organization does not know the donors’ identity.
 Best Practice: Do NOT include Schedule B in your public
disclosure copy. Do NOT post Schedule B on your website.
Schedule B - Contributors

 Rev. Proc. 75-50 describes criteria for tax exemption as a
school, including private secondary schools, colleges and
universities.
 Schedule E asks several questions that go to ongoing
qualification of the school as tax-exempt.
 Does the organization include a statement of its racially
nondiscriminatory policy toward students in all its brochures,
catalogues, and other written communications with the public
dealing with student admissions, programs, and scholarships?
 Has the organization publicized its racially nondiscriminatory policy
through newspaper or broadcast media during the period of
solicitation for students?
 Does the organization certify that it complied with the applicable
requirements of sections 4.01 through 4.05 of Rev. Proc 75-50?
Schedule E - Schools

 For schools, make sure your organization understands
the Rev. Proc. 75-50 criteria for tax-exemption.
 Understand that Schedule E responses that indicate
non-compliance with the Rev. Proc 75-50 criteria may
invite attention from the IRS.
Schedule E – Schools (continued)

 Excerpt from FY 2013 IRS Workplan:
 “[the IRS] is interested in ensuring that assets and
income of domestic charities are not diverted to non-
charitable purposes when the funds are sent abroad, as
well as whether U.S. charities comply with regulations
on recordkeeping and reporting when they operate or
donate funds overseas.”
Schedule F – Foreign Activities

 According to the IRS, historic issues include:
 Failure to file FBAR’s
 Inadequate recordkeeping
 Lack of discretion and control over funds sent abroad
 Failure to file employment tax returns (or filing incorrect
returns)
 Recent IRS focus on examinations of organizations with
high amounts of foreign grant expenditures.
Schedule F – Foreign Activities (continued)

 To determine whether a grant expense should be reported
on Schedule F versus Schedule I, look to where the money
is to be spent. It is not determined by whether the individual
recipient is a US citizen or not.
 Consider scholarship to US student for study abroad.
 Consider scholarship to foreign student for study in the US.
 Grants and program service expenses should be reported
separately.
 Part IV of the schedule asks questions regarding foreign
investments. “Yes” answers regarding transfers to foreign
corporations, ownership of foreign corporations, and/or
foreign partnerships, etc. indicate that additional forms MAY
be required.

 Foreign investments are reportable, by region, on
Schedule F, Part I.
 Significant change: new guidance confirms that a filer
does not need to report in Schedule F, Part I its
investments in entities domiciled overseas but traded on
a U.S. stock exchange.

 Fundraising events: The FMV of attendance at the
event should be reported on Schedule G as gross
receipts from fundraising.
 The amount that a person paid for the event that
exceeds the FMV should be reported as contributions.
 Remember that the portion that is considered the FMV
is not deductible to the taxpayer.
 Reporting the income in this manner often results in a
net loss from the fundraising event being reported on
Schedule G.
Schedule G - Fundraising

 To determine whether a grant expense should be
reported on Schedule F versus Schedule I, look to
where the money is to be spent. It is not determined by
whether the individual recipient is a US citizen or not.
 Consider scholarship to US student for study abroad
 Consider scholarship to foreign student for study in the US
 Note that on Schedule I, Part II (Grants to
organizations), only grants more than $5,000 are
required to be reported, whereas on Schedule I, Part III
(Grants to Individuals), there is no minimum threshold
for reporting.
Schedule I – Grants to Recipients in the US

 Best practices –
 The fewer executive perquisites reported the better.
 The more boxes that an organization can check regarding different
elements of the executive compensation setting process, the better.
 Seek consistency between the “rebuttable presumption” responses
in Part VI (governance) and the related responses on Schedule J.
Best practice is to establish and report “rebuttable presumption.”
 Take advantage of the Schedule J open narrative section to explain
any anomalous looking compensation amounts.
 Significant Change: The instructions clarify that the
organization may check a box in line 3 (as for reliance on a
compensation survey) if it relied on a compensation
consultant that used that element.
Schedule J - Compensation

 Qualification as a 501(c)(3) bond must be maintained
throughout the entire time the bond is outstanding.
 The IRS has an active examination program applicable to
tax-exempt bonds and takes post-issuance compliance very
seriously.
 Schedule K is all about reporting qualitative and quantitative
information relevant to the ongoing qualification of the bond.
 Compliance with private use limitations
 Compliance with arbitrage rules
 Existence of adequate books and records and written procedures
Schedule K – Tax-Exempt Bonds

 Various questions and related best practices
 Does the organization maintain adequate books and records
to support the final allocation of proceeds? Best practice is
“yes.”
 Does the organization routinely engage bond counsel or
other outside counsel to review any management or service
contracts relating to the financed property? Best practice is
“yes” if management or service contracts exist.
 Does the organization routinely engage bond counsel or
other outside counsel to review any research agreements
relating to the financed property? Best practice is “yes” if
research agreements exist.
Schedule K – Tax-Exempt Bonds (continued)

 Does the bond issue meet the private security or payment
test ? The desired answer is “no.”
 Has the organization established written procedures to
ensure that all nonqualified bonds of the issue are
remediated in accordance with the requirements under the
[private use] Regulations ? Best practice is “yes.”
monitor the requirements under section 148 [arbitrage] ? Best
practice is “yes.”

ensure that violations of federal tax requirements are timely
identified and corrected through the voluntary closing
agreement program (VCAP) if self-remediation is not
available under applicable regulations ? Best practice is
“yes.”
 All organizations should consider adopting these written
procedures.
 If such written procedures have not been adopted, check
“No” to the Schedule K questions but consider making a
comment in the Part VI open narrative section, if appropriate,
that such written procedures are under consideration and
are expected to be in place by ____________.

 Continued “No” responses to the Schedule K
governance questions can be expected to increase your
organization’s risk of a bond examination by the IRS.
 Note: even if a bond examination results in “no
change”, your organization may be referred for a UBIT
examination.

 Schools that provide scholarships, fellowships, and
similar financial assistance to interested persons are not
required to identify the interested persons by name.
See Schedule L instructions for alternative reporting
requirements.
 An organization is not required to provide information
about a business transaction with an “interested person”
it the organization is unable to obtain information
regarding interested person status after making a
reasonable effort to obtain the information.
Schedule L – Transactions With Interested Persons

 Significant Change: the Form instructions now clarify
that investment management or service fees, but not
the value of investments, are reportable as business
transaction amounts in Schedule L, Part IV.
Schedule L – Transactions With Interested Persons

 Donated services or the donated use of facilities,
equipment, or materials should not be reported.
 Contributions of non-cash items should be reported
even if sold immediately after receiving the item.
 For the question that asks if the organization uses a
third party to solicit, process, or sell noncash
contributions, if the third party is a broker organization
who sells publicly traded securities donated to the
organization, this question should be answered "no."
Schedule M – Noncash Contributions

 Best Practice:
 Use Schedule O to provide additional explanation, as
needed. Strong disclosures can be further amplified.
Mitigating factors or explanatory language can be provided
for weaker form disclosures.
Schedule O – Supplemental Information

 On Schedule R, Part IV, you do not have to identify the
name of a split-interest trust (e.g. charitable remainder
trust, charitable lead trust, or pooled income fund) its
EIN, or its address. See Schedule R instructions.
 Significant changes:
 Schedule R includes a new column that asks if a related trust
or corporation is a Section 512(b)(13) controlled entity.
 Schedule R now asks if there were any dividends received
from related organizations.
 The Form instructions now clarify when a VEBA is a “related
organization.”
Schedule R – Related Organizations

 Underreporting of Unrelated Business Taxable Income
(UBTI)
 34 College & University examinations resulted in:
 Increases to UBTI for 90% of colleges and universities examined,
totaling about $90 million
 Disallowance of more than $170 million in losses and net operating
losses (NOLs)
 Primary reasons:
 Disallowing expenses
 Errors in computation or substantiation
 Reclassifying exempt activities as unrelated
IRS Focus

 Lack of profit motive
 70% of examinees reported losses from activities that generated
consistent losses for many years.
 Unrelated business income (UBI) must be generated by a “trade or
business.”
 An activity qualifies as a trade or business only if engaged in with the
intent to make a profit.
 IRS: “A pattern of repeated losses is generally sufficient to show
a lack of profit motive.”
 Activities were disallowed as “unrelated” where the examinee failed to
show a profit motive.
 More than $150 million of NOLs disallowed (from just the 34
examinations).
IRS Focus

 Improper expense allocation
 Organizations may allocate expenses.
 Allocations must be done on a reasonable basis.
 Expenses offsetting UBI must be directly connected to UBI
activities.
 Expense deductions were disallowed on more than 60% of Forms
990-T examined because of improper allocations between exempt
and unrelated business activities.
IRS Focus

 Reclassifying activities as unrelated
 Nearly 40% of examinees found to have misclassified certain
activities as exempt (and not reportable on Form 990-T).
 Fewer than 20% of such activities generated a loss.
 The IRS reclassified these activities as unrelated, resulting in
nearly $4 million of additional UBI.
IRS Focus

 IRS next steps
 IRS plans to focus on UBI more broadly, and especially on
recurring losses, and allocation of expenses.
 Per the 2013 IRS workplan, IRS will examine a sample of
organizations which reported substantial gross UBI for three
consecutive tax years, but which reported no income tax due
for any of those years.
 The IRS’ concern: whether organizations are accurately
reporting their sources of UBI and correctly allocating and
deducting expenses associated with it.
IRS Focus

52#CBIZMHMwebinar
 Form 926 – Return by a U.S. Transferor of Property to a
Foreign Corporation
 Form 5471 – Information Return of U.S. Persons with
Respect to Certain Foreign Corporations
 Form 8865 - Return of U.S. Persons with Respect to
Certain Foreign Partnerships
 Form 5713 – International Boycott Report
 Attach to Form 990-T
 Heavy penalties may be applied for non-filing
Foreign Forms

53#CBIZMHMwebinar
Important Changes to FBAR Filing
 Form 114 Report of Foreign Bank and Financial
Accounts replaces Treasury Department Form 90-22.1.
 Filed by US residents, citizens and entities, including
corporations, partnerships, and LLC’s with a greater
than 50% direct or indirect financial interest or signature
authority over at least one foreign financial account if
the aggregate value of the accounts at any time during
2013 exceeded $10,000.
 If applicable, must be filed by June 30.
 Electronic filing is mandatory. No paper filing.

Questions?

 Join us for these courses:
 10/7 and 10/22: Potential Changes in the Not-for-Profit
Reporting Model
 12/4 and 12/10: Key Tax Issues Facing Not-for-Profit
Organizations
 Read these related news items:
 IRS Releases Changes to 2013 Form 990 and 990-EZ
 Join us in D.C. for the 2014 AICPA National Not-for-Profit Conference
 Web Presence and Internet Concerns for Nonprofit Organizations:
Hyperlinks
 Sign up for our Not-for-Profit Viewpoint e-newsletter
If You Enjoyed This Webcast…

Connect with Us
linkedin.com/company/
mayer-hoffman-mccann-p.c.
@mhm_pc
youtube.com/
mayerhoffmanmccann
slideshare.net/mhmpc
linkedin.com/company/
cbiz-mhm-llc
@cbizmhm
youtube.com/user/
BizTipsVideos
slideshare.net/CBIZInc
MHM CBIZ

Webinar Slides: Problem Areas of Forms 990 and 990-T

Recommended

Recommended

More Related Content

Similar to Webinar Slides: Problem Areas of Forms 990 and 990-T

Similar to Webinar Slides: Problem Areas of Forms 990 and 990-T (20)

More from MHM (Mayer Hoffman McCann P.C.)

More from MHM (Mayer Hoffman McCann P.C.) (20)

Recently uploaded

Recently uploaded (20)

Webinar Slides: Problem Areas of Forms 990 and 990-T