Introduction
In the contemporary world, nonprofit organizations play a vital role in mainly due to their working approach and motive. Basically, they are more or less oriented to improving the standards of the society rather than making profits, and their efforts are mostly evident as they set up programs that are aimed at helping the needy, promoting social welfare such as education, health, environmental conservation among others. Although, these organizations may generate some surplus from their operations, such surpluses are not distributed to the owners as dividends but are usually ploughed back to the organizations to further their objectives. In addition, in the US, they are exempt from tax although they still need to provide periodic returns to the Internal Revenue Service whose responsibility is to regulate tax laws as well as collect taxes. These returns are provided through the form 990, ‘Return of Organizations Exempt from Income Tax’ and contain information related to the organization’s mission, programs and finances. However, for the last two decades or so, various changes have occurred in nonprofit organizations including in corporate governance and leadership, staffing and fund-raising to an extent that the methods earmarked for profit-making organization find their way in these organizations. It is for these changes that the IRS has revised the form 990 in order to clarify and incorporate certain reporting requirements.
This paper will discuss the revisions made in form 990 including the reasons that may have led to those revisions. In addition, the paper will discuss the importance and application of the form 990, why it is a requirement by IRS to file it, as well as the past drawbacks and positives contained in the form.
Characteristics and use of form 990
Nonprofit organizations, which include charities and other service organizations, are tax-exempt as per the tax laws of the country. However, the IRS requires that these organizations file annual returns through form 990 and to include the information contained therein. Basically, the organizations that are required to file the form 990 include nonprofit organizations whose annual receipts exceed $25,000 and all private foundations except for faith-based organizations, nonprofit organizations whose annual receipts are less than $25,000 and those that have not been registered by IRS as tax-exempt.
The IRS form 990 is basically a tax return form used by the IRS to gather information related to a tax-exempt organization’s financial position, internal governance and donors, as well as to educate the organizations about, and enforcement of, the tax laws requirements (IRS, 2009). The form contains schedules and parts with specific information requirements about the filing organizations; however, the form 990 has two other sub-forms each specifically applicable to specific organization. For instance, the IRS form 990-EZ is a short form for form 990 that is applicable to nonprofit organizations whose annual receipts are between $100,000 and $1 million and assets that are below $2.5 million while form 990-PF is applicable to private foundations and non-exempt charity trusts as per 2008 IRS requirements; however these specifications have changed in the year 2009 and 2010 where a nonprofit organization filing form 990-EZ needs to have receipts of less than $200,000 and assets below $500,000 in year 2010 and beyond.
Generally, the IRS’s requirement for filing of form 990 is to ensure that the tax-exempt privileges are not abused by the nonprofit organizations and to ensure that there is accountability in the operations of such organizations while at the same time ensuring that any income received in business not related to the primary objective of the qualifying organization is taxed according to the applicable laws. However, in the event that a tax-exempt organization violates the rules or fails to file the returns within the specified time (15th day of the 5th month after close of accounting period) or fails altogether to file the returns, the IRS imposes penalties to such organizations as provided in the statute (IRS, 2009).
Reporting Requirements for nonprofit organizations by IRS
The general requirement for annual reporting for the nonprofit organizations is that all the information as requested for in form 990 must be disclosed to the IRS. Basically, just like for-profit organizations, the nonprofit organizations have an obligation to their stakeholders as well as they need to be legally binding in their operations. Most nonprofit organizations get donor aids from various sources and it is always important to account for the application of these funds; thus the returns tend to ensure that accountability and responsibility is observed in relation to authenticity of donors and the application of funds. In addition, the nonprofit organizations are required to disclose other non-financial information that may be relevant as required by IRS including missions, goals, programs, achievements and donors.
Although this information is important for taxation purposes, the same information becomes more important when shared with the various stakeholders including the donors, researchers, governing agencies, media and the public, all of whom rely on the information supplied to understand the nonprofit organization in question (Guidestar, 2010). Basically, the information filed is stored in databases and circulated to the users by Guidestar, an agency that “gathers and publicizes information about nonprofit organizations” and the work they do in the society (Guidestar, 2010).
The nonprofit organizations are also required to file information related to the withholding of income tax and other statutory deductions from their employees during the accounting period. This is in addition including information related to tax payment for the incomes generated from activities that are not part of their primary objectives or are not related to philanthropic or tax exempted activity.
Filing of tax return forms has also been credited with the government’s resource allocation, more so because the reports of the nonprofit organization are used to establish the census of the needs that the community wants to be fulfilled. It is in this view that the government calls for the nonprofit organizations to encourage the community to file their census forms in Colorado, as it understands that the nonprofit organizations are more likely to be trusted by the community due to their social programs (Colorado Nonprofit Association, 2010). Moreover, the government is confident that the nonprofits have the key to the creation of jobs and improvement of the economy, necessitating it to provide stimulus funds to these organizations in Colorado (Colorado Nonprofit Association, 2010).
Changes in form 990
Since 2007, the form 990 has been undergoing changes as the IRS tries to capture as much information as possible from the nonprofit organizations. Previously, only organizations that had annual incomes exceeding $25,000 were required to file form 990; however, in order to capture some information from the small nonprofit organizations and without having to force them to do so, the IRS introduced the form 990-N requiring these small filers to file minor information online as from 2007. Other changes followed that involved the overhaul of the form 990 to include non-financial information that the IRS deemed necessary and eliminate the disconnection that existed between the form 990 and form 1023 (McRay, 2009). Indeed, the changes were meant to make form 990 more comprehensive and avoid dwelling exclusively on the financial and quantities information.
Basically, the old form did not provide sufficient and adequate information required by the users. Indeed, Berger (2010) contends that the fiscal information that was predominantly provided by the form 990 led to flawed rating of nonprofit organizations by the Charity Navigator, a US agency with the responsibility of rating nonprofit organizations. It is for this reason of insufficient data in form 990 that charity Navigator has changed its rating system to incorporate other measures including accountability, transparency and effectiveness (Berger, 2010), though the success of this rating will only be realized when the form 990 captures a wide range of relevant information.
The new form 990 as well as the short form 990-EZ contains information about corporate governance, compliance, internal organizational structures, procedures and detailed activities of the organization as a way of enhancing transparency and accountability. Indeed, the IRS has realized that, due to the fiduciary nature of the nonprofit organizations, it is important to apply tight controls on their procedures, governance and accounting as a way of ensuring that their operations are open and legitimate. Moreover, the requirement to disclose the board of governance has an inherent advantage of authenticating the motives of the organization, for instance, if the board consists of directors that have previously, in their own capacity been charged with criminal or civil malpractice such as corruption or tax evasion, the course for the nonprofit organization may be put into question.
In relation to fundraising, the old form captured only the net amount received by the filing organization and including the related expenses as part of program expenses. However, the new form 990 requires that the organization report the gross amount raised by the external fundraiser including the expenses incurred in the process. Moreover, the organizations must specifically disclose the name and relevant information of the donor. Another change involves grants made to foreign recipients whereby the organizations are required to specify the recipient and the purpose of grant incase such grants are made to other organizations or individuals in relation to scholarships or research activities.
Corporate governance and organizational ethics have also been incorporated in the form 990. in actual sense, the nonprofit organizations have undergone a lot of transformation since the 1980s and they a operated and managed more or less like for-profit organizations; thus there is need to ensure that integrity and ethics are, observed in their reporting, more so given that the public information they provide is very important for the contributors and all other users of such information in making independent decisions.
In matters of compensation, the form 990 requires that the organization includes in the report, the five highest compensated employees who are not officers, directors of key employees; however, the compensation for an employee who has been a key employee only partly during the year should also be reported. Moreover, the filer must include all compensation made by a related organization to listed persons during the year (IRS, 2009).
Conclusion
The nonprofit organizations play a vital role in the economy and therefore need to be well managed in order to derive the most benefits from them. However, considering the huge amounts of money they operate with and the magnitude of their operations, yet they are exempt from tax, they may ten d to abuse their exempt status. It is in this view that all important information should be collected from them periodically to ensure that they are managed in manner that is truly beneficial to the society. Therefore, the changes in the form 990 provide a better platform to capture pertinent information related not only to financial management but also to the governance and internal alignments to ensure transparency and accountability.
References
Berger, K. (2010). Charity Navigator Responds. CharityNavigator.org. Web.
Colorado Nonprofit Association. 2010 Census: why Nonprofits? Web.
Guidestar. (2010). About Us. Web.
Guidestar. (2010). 2009 Form 990 – Significant Changes. Web.
IRS. (2009). Filing Requirements – Exempt Organizations. Web.
IRS. 2009 Form 990 – Significant Changes. Web.
McRay, G. (2009). Radical Changes for Form 990. Web.