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The New IRS Form 990 - Impact on Smaller Nonprofits

Many smaller organizations will need to address the areas below. They may need to develop or formally adopt new policies and procedures, revise their accounting practices or provide additional staff and Board training. In most cases they can expect to see an increase in accounting and administrative costs, at least for the first year while they are developing new systems and putting them into place, and may require the services of outside consultants to assist them with the process. The new questions regarding governance may be especially difficult, since small organizations with volunteer boards and few or no paid staff may not have formal policies already in place.

Governance practices

• The organization’s mission statement needs to answer all of the following: why the organization exists, what it hopes to accomplish, who it intends to serve, and what activities it will undertake and where. If the mission statement does not address all of the above, it may need to be updated or rewritten by the Board.
• The organization must report the number of governing body voting members and number of independent voting members. This is intended to identify related parties who receive compensation from the organization and have authority to vote on decisions, which could result in a conflict of interest. Therefore, any conflict of interest policies should specifically address when a CEO, Executive Director, or other related party who is also a voting board member should abstain from voting, and more informal Boards may need to create specific by-laws or policies regarding how members are selected and create or review their conflict of interest policy in regards to board members, including when and how a board member must report a possible conflict of interest, what action is taken if they fail to report, etc.
• The organization must report if it documents meetings held or decisions made by the governing body. This may require a change in how minutes are kept at each meeting, a policy determining at what point telephone calls or emails between board members are considered a meeting and how those are documented, etc.
• The organization must state whether or not they have a written conflict of interest policy, describe any such policy, and explain how they monitor and resolve conflicts of interest, including how recent conflicts were disclosed at board meetings, what happened, and whether or not the parties involved participated in the discussion or decision making process.
• This requires boards to keep more extensive and complete records than they may have in the past, and create a formal policy and conflict resolution procedure if one does not already exist, since it’s a giant red flag to not have one. Small organizations may not have formal policies in place, or the policy may be incomplete or unclear. Organizations which have changed the composition of their board may need to review existing policies, especially if any board member or relative of a board member receives compensation or other benefits from the organization. If a conflict of interest policy does not currently exist, or does not address conflicts with voting members of the governing body, legal advice may be needed to develop one.
• The organization must state whether or not a written whistle blower policy exists. A whistle blower policy should encourage staff to report policy violations or illegal activities, identify staff, board members or other people they can report to in confidence, and obligates the organization to protect the whistle blower from retaliation. This can be complicated for smaller organizations since the policy needs to identify at least two unrelated parties an employee or volunteer can report to who have the ability to bring the issue before the board, while protecting the whistle blower from retaliation is difficult when there are only a few employees, since other staff will ‘know’ who the whistle blower was and there’s no ability to transfer someone. Many small organizations do not have a formal policy covering this.
• The organization must state whether or not it has a written document retention and destruction policy. While most organizations have informal policies regarding paper or electronic document retention and destruction, they often haven’t put them into writing. The issue can be further complicated when the organization uses volunteers, staff do work on their own computers, etc.

Compensation practices

The new 990 requires full disclosure of the process the nonprofit uses to determine executive compensation or ‘insider’ compensation, including:

• What process is used to review and approve compensation for senior staff, outside contractors paid significant compensation, and any ‘insiders’ (such as board members) who receive compensation
• What review was done of comparable compensation information for similar positions at other organizations
• What documentation and record keeping exists with respect to meetings/review/approval of compensation packages for senior staff or board members
• In addition, Schedule J requires that all forms of compensation be reported, not just wages. This includes health insurance, and retirement benefits, which are pretty straight-forward, but also more esoteric things like the difference in cost between first class travel and coach if someone traveled first class.

This helps the IRS determine whether or not there is a formal procedure for determining compensation and what policies exist to ensure insiders or friends of the board are not overly compensated. This may require the creation of a more formal process than currently exists, a review of job descriptions for senior staff, and creation of a formal ’bid’ or review process for contract or outsourced work. These policies may also need to be tied into conflict of interest policies.

Review of the Annual Form 990

Nonprofits must now disclose whether or not the Board reviewed the 990 prior to filing, the process used for review, and whether such review happens before or after filing, including who did the review and when, what process was used and the extent of the review.

This is to determine the Board’s involvement in fiscal oversight of the organization, and may require the creation of a more formal policy than currently exists, as well as more extensive record-keeping for related meetings. It may also require additional board training, since in smaller organizations it’s often the case that only one or two board members really understand the financials, and the financials are only a small part of the new Form 990. Part I, Part III and Schedule O are definitely areas where the Board should consider greater involvement in preparing information than they may currently have. These are also ‘opportunity’ areas, as a well written Summary and Statement of Accomplishments, and clear information on Schedule O explaining or providing additional information to answers from the other forms and schedules will be of use with donors and funding sources.

Board composition and member relations

Nonprofits must now disclose any business and family relationships between board members. If such relationships exist, the Board must provide details of the relationship. These relationships should conform to any conflict of interest policies.