The Internal Revenue Service has revised and expanded Form 990, which is filed annually by tax exempt organizations. The expanded form must be used for calendar year 2008 reporting. It requires extensive disclosure of management compensation amounts and the processes by which those compensation amounts were determined.
Each tax-exempt organization filing Form 990 must complete the new Part VI, which asks specific questions about the organization's governance, management policies, and disclosure practices. Although no particular structure or policies are required, the IRS believes that the absence of appropriate structure or policies may lead to “excess benefit transactions,” such as the payment of unreasonable compensation to key employees. Therefore, many of the new questions ask about the independence of directors, documentation of meetings and decisions, conflicts of interest, whistleblower policies, and compensation practices. For example, one new question asks:
“Did the process for determining compensation of the following persons include a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision?
The organization’s CEO, Executive Director, or top management official?
Other officers or key employees of the organization?
Describe the process in Schedule O (see instructions).”
Schedule O of the new form asks for a narrative description of the compensation-setting process.
All organizations filing Form 990 will also be required to complete new Part VII – Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors. Questions here ask for the names of these individuals and the number of hours each one worked. They also ask for compensation amounts paid by the organization (and by related organizations) to each current and former officer, director, trustee, key employee and highest compensated employee. Names and amounts of compensation paid to the five highest paid independent contractors must also be listed.
The IRS does not require tax exempt organizations to follow any prescribed format in setting pay levels but they do encourage them to ensure that:
1. Compensation amounts are reviewed and approved by the Board in advance(with any person who has a conflict of interest being excluded from compensation decisions),
2. Comparability data (amounts paid by similar organizations for similar positions) is collected and used in making decisions, and
3. Decisions are documented at the time they are made.
For more information on how the IRS wants nonprofit Boards to determine pay levels, see Internal Revenue Code section 4958 and the regulations under that section or visit www.CompensationOpinion.com.
An officer of the organization must sign the completed Form 990 under the penalties of perjury.
As in the past, copies of the completed Form 990 must be made available to the public. Therefore, details disclosed on the form will be available to the organization’s employees, donors, state regulators, and the media.