Inside the Board Room: What the New 990 Means for Your School’s Trustees
December 19, 2008
Meghan D. H. Walsh- Boston
A major influence on governance practices at nonprofit institutions today is the organization that has the power to grant or deny a school its tax-exempt status: the Internal Revenue Service (IRS). The IRS’ role stems from the Form 990, which nonprofit institutions must file annually with the IRS and make publicly available. A school’s 990 is relied upon by state charity regulators, donors, advisors, the media, and the general public. In many cases, it is the best way for an outsider to see how a school tells its own story.
In December of 2007, the IRS issued a revised Form 990 effective for the 2008 tax year for organizations with either gross receipts of $1 million or more, or total assets of $2.5 million or more at the end of the tax year. In August 2008, it released several background papers describing the update process as well as helpful instructions for completing the form. This article outlines part of the Form 990 that addresses practices of the board of trustees and summarizes the available IRS guidance. It then identifies changes that can be made to improve board practices before year-end so that questions on this topic may be answered in the affirmative when completing the Form 990 for 2008.
The New Form and Its Impact on Board Practices
One of the major changes in the new form is the addition of a section dedicated to corporate governance. The section asks about the governing body, management, policies, and public disclosure of information. The IRS and federal tax law do not require that nonprofits have all of the practices and policies about which it inquires in place. It instructs a nonprofit to consider its own type, size, and culture to determine whether or not to adopt certain practices and policies. Significantly, however, the IRS has indicated that answers to its questions may be considered in determining whether an organization maintains its tax-exempt status. IRS, “2008 Instructions for Form 990 (Core Form) Part VI Governance, Management and Disclosure,” at 1.
Although several of the questions in the corporate governance section ask about policies regarding whistleblowers, document destruction, joint-ventures, and affiliates – all of which are important issues for a school board to consider– many of the questions directly address the practices of the board of trustees. The following are three areas of focus:
1. The form focuses on the independence of trustees from three angles.
First, it asks how many trustees are independent and whether any trustees have a familial or business relationship with other trustees. Second, it asks whether the school has a written conflict-of-interest policy. A conflict of interest arises when a trustee, officer, or manager may benefit financially from a decision, including indirectly, through benefits to family members or businesses with which the person is closely associated. The Form 990 distinguishes between policies that merely require trustees to sign an annual form disclosing an interest that might cause a conflict and policies that also have procedures in place to monitor conflicts and enforce the policy throughout the year. Third, the 990 asks whether decisions about executive compensation are voted on by independent trustees.
2. The form focuses on board practices in three ways.
It asks whether minutes are taken contemporaneously at board meetings and subcommittee meetings. It requires a school to describe the process by which the board reviews the organization’s Form 990 before it is filed. Finally, in asking a school to describe the process it uses to determine executive compensation, it specifically asks whether trustees looked at studies of comparable salaries at other institutions and whether they documented and justified the decision-making process.
3. The form focuses on how a board makes its school’s story publicly available.
It requires a school to state how it will make its Form 990 public. It asks a school to list the states with which the form will be filed. It has the organization describe whether it voluntarily makes other documents, such as its governing documents, financial statements, and conflicts-of-interest policies, available to the public.
Navigating the IRS Guidance: The Background Papers and Instructions
The best way to understand how the new Form 990 questions apply to a school’s organization is to review the background papers and instructions. With several hundreds of pages of new material released in August 2008, however, it is important that schools not feel overwhelmed by the Form 990 changes. A brief overview of the IRS background documents is provided below:
- Background Paper – Summary of Form 990 Redesign Process: A five-page document that describes the transparency provided by the Form 990 and provides the reasons for the 990 redesign. It summarizes comments from the nonprofit sector and explains the goal of having a Form 990 that allows organizations to “tell their story.” The document also provides a brief overview of new 990
sections, one of which is the governance section.
- Background Paper – Changes to April Draft Instructions: A 29-page overview of the comments received by the IRS from the nonprofit sector and the changes that were made in response to the comments. It also identifies areas of further study for possible future changes to the Form 990.
- Background Paper – Forms 990, Moving From the Old to the New: A 57-page document that summarizes each part of the new Form 990 and its instructions.
In addition to the background documents, the IRS instructions further describe the questions and provide examples of situations that may be comparable to yours. They consist of:
- 2008 Instructions for Form 990 Return of Organization Exempt from Income Tax: Twelve pages of general instructions regarding who must file, how to file, amended returns, group returns, and requirements for a properly completed Form 990.
- 2008 Instructions for Form 990 (Core Form): Separate instructions for each part of the Form 990. For example, there are 11 pages of instructions and examples for the section on Corporate Governance.
- 2008 Instructions for Form 990 (Core Form) Appendix of Special Instructions to Form 990: Thirty-five pages of detail on nine topics relating to the Form 990, such as the use of the Form 990 to satisfy state charities division filing requirements, the public inspection of the Form 990, and excess benefit transactions.
- 2008 Instructions for Form 990 (Core Form) Glossary: Nineteen pages of definitions including “conflict of interest policy,” “director or trustee,” “disqualified person,” “excess benefit transaction,” “family member,” “independent voting member of governing body,” and “school.”
Action Items for Board of Trustee Practices
The voluminous nature of the IRS guidance demonstrates the number of policy changes that can be made in response to the new 990. Improved board practices alone will not allow a school to avoid IRS scrutiny on other questions in the Form 990. Best practices, however, in a board’s leadership body are the first step in the right direction. They likely will satisfy or even impress those who use the Form 990 as a window into the board room to see how your school is telling its story for 2008.
Therefore, your school should immediately review existing policies and consider adopting the following practices for your board of trustees:
Trustee Independence
- Prepare a written conflict of interest policy that both requires an annual disclosure of potential conflicts and outlines the procedure for identifying conflicts throughout the year to determine whether they are proper.
- Ensure that the board has enough independent trustees to conduct votes on transactions in which other trustees may have conflicts of interest, such as decisions involving executive compensation.
Board Practices
- Require the board of trustees and all subcommittees to take contemporaneous notes of all meetings as permitted by state law. Contemporaneous means by the later of the next meeting of the governing body or within 60 days of the meeting.
- Prepare a written procedure that sets out how the board of trustees reviews the Form 990. Allow for at least each voting member of the board as well as management to review and provide feedback on the form before it is filed with the IRS.
- Prepare a written procedure that describes the mandatory data required when considering executive compensation packages and requires detailed documentation of decision-making.
Transparency
- Ensure that your institution’s Form 990 is readily available to the public on your Web site or www.guidestar.org.
- Consider posting additional documents to boost IRS confidence in your transparency and encourage donor interest as well.
For more information, contact:
Meghan D. Hely
617.305.2135
meghan.hely@hklaw.com
toll free: 1.888.688.8500
About Our Education Practice
Related Practices