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Exempt Organizations

Exempt Organizations
September 2002

Form 990 Changes

In Announcement 2002-87, the IRS discuses recent and proposed changes to the Form 990, Return of Organization Exempt From Income Tax. The Announcement covers four key areas and reflects an awareness of recent items that have appeared in the business news.

Fundraising Reporting

Form 990 currently requires that organizations report the gross amount raised by outside fundraisers as opposed to a net amount. As a result, related fundraising expenses are required to be disclosed on the statement of functional expenses. Currently, only §501(c)(3) and (c)(4) organizations and certain nonexempt charitable trusts are required to break out expenses among program, management & general and fundraising (Form 990, Part II, columns (B), (C) and (D)).

The IRS is seeking comments on the following possible changes to Form 990:

  • Should it be mandatory for all organizations to complete columns (B), (C) and (D) of the Statement of Functional Expenses?
  • Should all organizations be required to complete the statement of functional expenses in accordance with the AICPA’s Statement of Position 98-2 (Accounting for Costs of Materials and Activities of Not-for-Profit Organizations and State and Local Government Entities That Include Fund Raising)?
  • Should the Service make any other reporting changes that could provide the Service, the states and the public with additional information about fundraising practices?

The comment period ends on January 28, 2003.

Section 527 Organizations

The IRS is also seeking comments on reporting by §527 political organizations. New reporting and disclosure requirements were previously imposed on tax-exempt political organizations in July, 2000, including the requirement to file Form 990.

The IRS is considering the following reporting alternatives:

  • Should the service require §501(c)(4), (5) and (6) and §527 entities to complete Schedule A? In particular, the IRS notes that compensation information, as well as details regarding transactions with non-charitable exempt organizations, may be of relevance.
  • Alternatively, should Form 990 be modified to require additional reporting regarding transfers and transactions between §501(c)(4), (5) and (6) organizations and §527 organizations?

On a related note, a U.S. District Court has ruled that portions of the §527 disclosure requirements are an unconstitutional infringement of freedom of speech. National Federation of Republic Assemblies vs. US (USDC, Southern District of Alabama, 8/27/02). In an amended declaratory judgment, the court advised that the decision only affects the parties to the litigation.

Foreign Grants

A third area in which the IRS is seeking comments is that of foreign grants. The IRS is concerned about the improper diversion of charitable funds, particularly after the events of last year. Accordingly, the Service is seeking comments in connection with the following:

  • Should a separate schedule of grants to foreign organizations be required?
  • Should domestic charities conducting foreign activities be required to provide more specific information about the flow of funds to foreign grantees?
  • Should transactions other than grant-making, such as sales or leases where funds flow outside the United States, be more extensively reported?

Corporate Responsibility

The IRS sees similarities between the need for veracity in the public information used by shareholders in making investment decisions and the needs of contributors and others in dealing with tax exempt organizations. As a result, the Service requests comments on the following:

  • Whether exempt organizations should be required to disclose whether they have adopted conflict of interest policies or have independent audit committees.
  • Whether non-charitable exempt organizations should be required to disclose information about transactions with insiders.

Odds and Ends

  • The new standard mileage rate for 2003 is 36 cents/mile for business mileage (down from 36.5 cents). The rate for charitable uses remains at 14 cents/mile.
  • GuideStar’s second annual Nonprofit Compensation Report is now available; see The report provides information regarding exempt organization salaries and benefits based on Form 990 filings.
  • The North American Securities Administrators Association (, formed for investor protection, has added charitable gift annuities to its list of “Top 10” scams. Its report notes that “[w]hile most annuities offered by charitable organizations are legitimate investments, investors should be cautious of little-known organizations or those that provide only sketchy information.”

Should you have any questions regarding the foregoing, please contact John Kikuchi at (925) 944-7666 or by email.

The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

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