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Exempt Organizations

Exempt Organizations
June 2011

On June 2, the IRS issued Announcement 2011-36, requesting public comments on several portions of the revised Form 990. Although the revised form has been in use since 2008, the IRS “continues to refine the Form in response to questions and comments from the public.” The promotion of transparency is a recurring theme in this evaluation process. The public is invited to comment on eleven items.

  1. Activity Codes. The Form 990 has space (currently unused) for activity codes which can be used by the IRS for categorizing different Form 990s. Although possible coding systems exist, the IRS suggests “these systems do not adequately reflect the wide range of program service activities provided by tax-exempt organizations. These systems also lack the consistency, flexibility, and real-time adaptability that would be needed to facilitate complete and accurate reporting.” The public is asked to comment on whether removal of the codes is preferable to the adoption of a coding system.
  2. Compensation to management companies and leasing companies. The question in the Form 990 regarding payments to management companies and leasing companies was intended to address and capture information regarding additional compensation from these sources paid to officers, directors, trustees and/or key employees (ODTKEs). Current rules require that the compensation to the management company be reported, if at all, as a payment to one of the five highly compensated independent contractors, rather than as compensation directly to ODTKE. (an exception exists for common law employees, who must be treated as if the person was an employee of the organization).

    There are some who argue that the current rules do not provide sufficient transparency as to payments to ODTKEs. Others voice concerns regarding the privacy of employees of other companies. Comments are requested regarding the current reporting rules.
  3. Threshold for reporting compensation of key employees, etc. The current Form 990 has a number of reporting thresholds that apply to different categories of individuals; e.g., $150,000 for key employees; $100,000 for highly compensated employees. The IRS invites comments on whether the thresholds should be lowered (in an effort to promote transparency) and whether a single, uniform threshold should be adopted.
  4. Reporting revenue from governmental units. Payments from governmental units can be classified as contributions (grants) or program service revenue. There is some concern that there is not sufficient transparency when revenue from governmental units is reported as program service revenue as opposed to government grants. The IRS invites comments regarding the classification of government revenue.
  5. Net asset reconciliation. The original, redesigned, Form 990 core form did not include a net asset reconciliation. A reconciliation was included in Schedule D. In the 2010 Form 990, the net asset reconciliation has been added to the core form. Comments are invited as to whether the Schedule D, Part XI reporting is now redundant.
  6. Reporting on audited financial statements. Form 990 currently asks organizations to indicate whether their financial statements were compiled, reviewed or audited by an independent account, and whether the financials were issued on a separate or consolidated basis. The public is asked to comment on whether additional questions should be included—e.g., were the statements audited on a separate basis; what type of opinion was issued?
  7. Names and EINs of foreign grantees. While there is space on Schedule F for this information, the spaces have been shaded out by the IRS in response to concerns about the confidentiality of sensitive foreign operations and the safety of grantees. The IRS invites comments on whether the sections should be unshaded or, alternatively, deleted.
  8. Indirect foreign expenditures. Because of the difficulty in tracking indirect foreign expenditures (e.g., the expenses of listing a “study abroad” program in a school’s website or paper catalog), organizations have not been required to report such indirect expenditures. Comments are requested on whether such reporting should be required.
  9. Reporting bank deposits as loans or business transactions on Schedule L. For purposes of the disclosure of Transactions with Interested Persons on Schedule L, deposit and withdrawals from a bank account need not be reported. Comments are requested on the pros and cons of requiring such reporting as business transactions or loans.
  10. Reporting component parts of community trusts on Form 990-series returns. The IRS asks whether additional reporting should be required of certain organizations that currently avoid filing by being treated as a component part of a community trust.
  11. Scope of related organization reporting on Schedule R. Concerns have been raised by the public that Schedule R reporting is overly burdensome and compromises confidentiality in some cases. Comments are requested on whether certain organizations should be excepted from Schedule R reporting.

Comments are requested by the IRS on or before August 1, 2011.

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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