Five Things to Consider in Completing Form 990: Tips from an Expert

We are pleased to offer a guest post by Warren Kerper, Managing Principal in the Boston office of Sullivan, Cotter and Associates, Inc.Warren advises tax-exempt employers, especially health care organizations and colleges and universities, in the design and establishment of a wide variety of executive compensation arrangements and related corporate governance matters. Many thanks to Warren for submitting this very helpful post.__________________________________________________________________________________

It is IRS Form 990 season again. Many tax-exempt organizations will file their Form 990s between now and August 15. This will be the third year for which exempt organizations will use the “new” more detailed version of the 990, finalized in 2008. Many of our clients spend more time developing and reviewing their 990s now, knowing that this form provides a window into the organization’s financial viability and operational effectiveness, as well as the organization’s executive compensation and governance practices. With regard to executive compensation, we expect to see more detailed disclosures as organizations get more comfortable with the form and move toward greater transparency.

As you read or prepare your organization’s 990, here are five things to think about:

You Are What You Disclose

The 990 is a public disclosure form that says a lot about your organization. While executive compensation gets the most attention, this disclosure also says a great deal about how your organization is run. The form will be read by donors, community members, employees, journalists and the local media, regulators and others. Take advantage of the opportunity to tell your story and use the disclosure to your advantage. In addition to consulting with tax advisors, consider using your public relations resources to review the narrative portions of the 990 before it is filed. Increase disclosure about the organization’s achievements toward its mission and to the community, and consider this an opportunity to promote your organization’s commitment to transparency.

It’s All About Process

The 990 is an opportunity to provide more detailed information on your organization’s governance. The IRS has indicated that good governance is important to maintaining tax-exempt status, especially as it relates to executive compensation and the IRS intermediate sanctions regulations. Therefore, it is best to ensure that independent Board members rely on independently produced compensation market data and document their deliberations on a timely basis. Additionally, the Board should review the 990 in advance of its filing and have access to independent advisors if necessary to assure that they understand what’s in it. While not directly asked for in the 990, good processes include having a compensation committee charter, a compensation philosophy, regularly schedule meetings, and following the three rules of the intermediate sanctions regulations (independent board, independent data and timely documentation).

What You Do Today, You Will Disclose Tomorrow

You can’t cover up defects or gaps in past practices by modifying this year’s disclosure. However, this is a good time to review your current practices and consider revisions to your governance and compensation programs. Now is also an opportune time to compare your organization’s compensation and governance arrangements to those of your peers and competitors. Lastly, consider preparing pro-forma 990s that will provide the Compensation Committee or Board with a full understanding of what your 990s will look like in the future. This can help assure that Board leaders are well educated and thoroughly engaged in this important aspect of governance.

Key Employees

Take the time to correctly identify your “key employees.” Key employees are generally individuals who can exert significant influence over the organization (or important segments of the organization’s operations), are within the top 20 highest paid individuals (outside of the top five officers) and who earned more than $150,000 during the year covered by the filing. Use the preparation of Form 990 as an opportunity to review the compensation of key employees and perhaps as a springboard for the development of appropriate compensation guidelines and processes if you don’t already have them. Also, don’t forget to notify each key employee that he or she will be included in the 990.

Avoid Red Flags

Perquisites and executive benefits can be red flags to reviewers of the 990, so it is important to review and document the reasons for all perquisites and executive benefits. “Little things” such as first class travel or personal services can garner a lot of attention. Other red flags include significant items such as executive retirement plan payments and severance payouts.

The IRS is stepping up its scrutiny of executive compensation arrangements maintained by tax-exempt employers. Keep these five considerations in mind and use Form 990 as a diagnostic tool to help you set goals and priorities in compensation policy and corporate governance.