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IRS Form 990 A tool with the potential to improve transparency, governance, fundraising and your charity’s overall reputation By David Ratcliffe Is your public charity getting all it can out of IRS Form 990? Are you employing best practices when it comes to assessing your organizational risk exposure and readiness to complete the form? Preparing the necessary documents? Educating the board and others at your charity about governance issues? And allying with third-party providers? Form 990 is more than a public charity’s annual information return. We believe it can be a valuable tool for guiding organizations through the process of applying the latest principles of prudent governance, allowing them to confirm and focus on their mission, compensate key personnel fairly and consistently, avoid conflicts of interest, and — perhaps most important from a potential donor’s point of view —  increase transparency.

Although all public charities file the IRS Form 990, many organizations may be underestimating its significance. When the IRS redesigned the form, applicable to tax year 2008, its main goal was to encourage greater transparency, which it has. Form 990 takes an in-depth picture of the prudent practices of a public charity, and puts it up for public inspection, so that anyone seeking to research the organization — online or offline — can do so. A High-Def View of Your Organization, Seen by Millions

Not only are public charities required to detail how they govern themselves, but this highly detailed snapshot of the organization is also more accessible and in public view than ever — thanks to the internet. It’s not just donors looking at this information online; it’s everyone. Form 990s are available on state attorneys’ general websites, clearinghouses such as the National Center for Charitable Statistics (NCSS) site, CharityNavigator, and elsewhere online. That’s not the best news for public charities that aren’t run well, in our view. But for organizations that can demonstrate good governance, it’s a reward for their work in filing Form 990s. Today’s Form 990 is longer, more detailed, and more work than ever. What began 60 years ago as a two-page form is now a multipage document: 12 pages for the form itself and additional pages for charity-specific schedules.1 Completing the form can be time-consuming and tedious, but this annual exercise presents a valuable opportunity for public charities to evaluate their governance practices, programs and mission. This process can be one of the most beneficial activities an organization undertakes all year, potentially having an effect on its operations, fundraising efforts and overall reputation. 1

About the Author David Ratcliffe is managing director of U.S. Trust’s National Philanthropic Solutions Group.

Smaller charities file the much shorter Form 990-EZ if they meet certain levels of assets and gross receipts.

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I RS F orm 990

Keeping public charities on a path to success

Helping public charities improve as organizations

At its most basic level, the process of completing the Form 990 can help to keep an organization on track, helping it realize whether or not its programs are consistent with its missions and that relevant policies and procedures are in place.

When approached as a template for good governance, Form 990 goes beyond keeping public charities on track. It can help them become better organizations. Form 990 fosters the opportunity for encouraging and elevating an organization to understand and implement best practices. Transparency, accountability, and good governance compel board members to review each element of the form, understand it, and put it into action. Additionally, the form is designed to help organizations think through the alignment their current programs have with their mission. The process could reveal a need to revise or update the mission to reflect the current programs and services. For instance, a charity originally founded to help migrant workers but that now provides full community outreach should reflect that expanded service in its mission.

It is essential that the board understands its organization’s policies and how it is being run. Additionally, the form requires the board to describe its process for reviewing the Form 990 prior to submission. The IRS will follow through with public charities whose Form 990s indicate they don’t meet current standards of good governance. At 12% of the U.S. gross national product, the nonprofit sector represents a sizable amount of “lost” tax revenue. Even though IRS resources are limited, the number of nonprofit audits has increased exponentially. The IRS may be the least of your public charity’s worries. Even loyal donors are using the easily accessible online Form 990 to evaluate if an organization is operating with prudent policies and practices. The consequences of negative indicators could have an extremely negative effect on donor loyalty, reputation and, ultimately, fundraising efforts.

A More Collaborative IRS

The IRS is keen on helping nonprofits navigate the Form 990 and abide by its good governance principles. Disclose what you’re doing on the form, and if it raises red flags internally, you can work with the IRS to address them. If you don’t, today’s IRS staff is more likely to come to you.

Good governance can help fundraising efforts. It is a fairly simple exercise for donors to compare the Form 990s of multiple organizations, comparing organizational efficiencies and best practices. The reflection, through this document, of how well organizations are run will play a strong role in the donors’ decision making and case support. Some of the More Important Aspects of the Form 990

Confirming the mission statement An organization has the opportunity to tell its story up front. Section III — Statement of Program Service Accomplishments —  prominently states the mission . Questions are similar to those asked when organizations first apply for tax-exempt status. It is, in fact, an extension of the 501(c)3 determination process, so the IRS can ascertain that tax-exempt organizations still qualify as such. If an organization’s mission has changed, it must be reported in this section. The IRS is most interested in: • The three largest areas of accomplishment • Succinct descriptions that clarify why your organization is tax-exempt.

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Explaining executive compensation

FUNDERS AND FORM 990

In Section VII, an organization must make a rigorous case for the salaries it is paying. The questions in this section showcase in great detail the compensation of highest-ranking and highestpaid employees, directors, and trustees from the aggregate compensation expense reporting. Additionally, an organization must explain how it determined these compensation levels.

For donors, the latest iteration of Form 990 has proven to work exactly as the IRS intended — by driving greater transparency and accountability for nonprofits. Increasingly, donors are using the form as a measurement tool for evaluating nonprofits and making grant decisions in an environment of rapidly proliferating charitable organizations where dollars are being deployed more selectively. The form shows donors — clearly — how nonprofits have structured themselves to be productive, their guidelines and policies, their procedures for avoiding conflicts of interest, and how they’re spending their money. Moreover, Form 990s themselves are more available than ever, as multiple services offer them for free, and any nonprofit that’s serious about transparency has its 990 form posted on its website; this is a dramatic turnaround from the situation 10 years ago. For nonprofits seeking donor dollars, the growing importance of Form 990 is hard to underestimate.

The IRS wants evidence that nonprofits have criteria for reviewing and vetting compensation and that they are paying attention to how salaries conform to market standards. It can be a red flag if an organization is paying more than similar organizations. It is a prudent practice to create and adhere to an Executive Compensation Policy. The IRS is most interested in: • Getting five types of compensation — base, bonus, other taxable, deferred compensation and nontaxable benefits — from current institutional trustees, officers, key employees and other five-highest-compensated employees, and people holding these positions during the previous five years. Steering clear of conflicts of interest Part VI — Governance, Management, and Disclosure — confirms that 1) an organization has no conflict of interest; 2) key people are required to disclose on a yearly basis all interests that could result in a conflict of interest; 3) there is regular and consistent monitoring and enforcement; and 4) procedures exist for enforcement. The board should be engaged in creating the conflict-of-interest policy and committed to adhering to it. The IRS is most interested in: • Family and business relationships of officers, directors and trustees, and key employees. Protecting the messenger The creation of and adherence to a whistleblower policy is an indication of good governance coming straight out of Sarbanes-Oxley. Anyone on a public charity staff and volunteers alike should be able to report, without risk, that the executive director is doing something out of the ordinary, or that accounting practices seem unusual.

Best Practices for Filing Form 990

The IRS makes a wealth of information available on its website, www.irs.gov. Every nonprofit can benefit from implementing what we consider to be the following best practices as it prepares Form 990. 1. Assess. A formal assessment can detect whether the required policies and documents are adequate. U.S. Trust walks each client through an assessment and provides the client with a summary evaluation of each of the policies. An organization can review it with us and with outside tax or legal counsel. From there, it’s easy to develop a checklist of what’s in place and where there may be gaps. 2. Prepare. The biggest task by far in filing Form 990, at least the first time, is finding the required documents. Preparers often have trouble getting information from the organization. To facilitate the process, we recommend that organizations: • Identify the people tasked with providing specific information. • Explain what’s needed to complete the form. • Clearly communicate to those individuals the importance of the project and precisely adhere to deadlines and milestones.

The IRS is most interested in: • Confirming that there is a whistleblower policy in place. 3

Once information flow is established, it should be maintained. Good recordkeeping is more than just good administration. Records are essential to evaluating programs and determining if you’re reaching your objectives. 3. Educate. Although Form 990 has deep implications for any public charity, directors, volunteers, even executives don’t always have the experience or training to fully understand the governance issues that public charities face. There’s a lot to know. We recommend holding a rotating schedule of internal meetings on specific aspects of the form — conflicts of interest, staying on mission, and so on.

Are you fully leveraging IRS Form 990 for better governance? U.S. Trust can guide your board through an assessment to analyze organizational risk exposure and preparedness for filing Form 990, provide best practices for organization operations and processes, support efforts toward compliance and transparency, and offer suggestions on key governance issues and documents.

For more information

Charity Navigator www.charitynavigator.org

The board in particular needs to be familiar with all the issues and potential liabilities and have an understanding of what it must do to implement policies and procedures. Nonprofits with prudent best practices are making an effort to educate their boards.

BoardSource www.boardsource.org

We suggest an organization consider a board retreat to address every aspect raised by the form and its strategic significance. If a retreat isn’t reasonable, an organization could consider an inperson education forum or, if board members are geographically dispersed, a webinar or phone conference.

Guidestar www.guidestar.org

Finally, continue this education over time. Having a policy in place isn’t sufficient by itself. To ensure good governance, you need a continual focus on implications, review and enforcement. 4. Establish relationships. Teaming up with an experienced provider — particularly one that can act as a fiduciary — can really make Form 990 work for you. Although investment management is our core activity, we bring a holistic approach to clients based on our hands-on experience with the nonprofit sector. Our deep familiarity with issues like Form 990 lets us provide better fiduciary oversight. We recommend seeking a provider with staff that has worked in the sector and truly understands development, effectiveness and efficiency.

Independent Sector www.independentsector.org Council on Foundations www.cof.org

The Internal Revenue Service www.irs.gov > Charities & Non-Profits IRS telephone assistance for exempt organizations, retirement plan administrators, and government entities 877.829.5500. Hours of operation: Monday through Friday, 7 a.m. to 5:30 p.m. Central. IRS Exempt Organizations Update “Free e-mail updates from the IRS about issues of tax policy, services and available information that impact tax-exempt organizations…”  www.irs.gov > Charities & Non-Profits > EO Newsletter > subscribe

For more information on this or any other IRS topic, please contact your U.S. Trust advisor.

This publication is designed to provide general information about ideas and strategies. It is for discussion purposes only, since the availability and effectiveness of any strategy are dependent upon each individual’s facts and circumstances. Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy. Institutional Investments & Philanthropic Solutions (II&PS) is part of U.S. Trust, Bank of America Corporation (U.S. Trust). U.S. Trust operates through Bank of America, N.A. and other subsidiaries of Bank of America Corporation (BAC). Bank of America, N.A., Member FDIC. Banking and fiduciary activities are performed by wholly owned banking affiliates of BAC, including Bank of America, N.A. Bank of America, N.A. and U.S. Trust Company of Delaware (collectively the “Bank”) do not serve in a fiduciary capacity with respect to all products or services. Fiduciary standards or fiduciary duties do not apply, for example, when the Bank is offering or providing credit solutions, banking, custody or brokerage products/services or referrals to other affiliates of the Bank. Bank of America, N.A., Member FDIC. © 2013 Bank of America Corporation. All rights reserved.  |  AR772DEF  |  WP-06-13-0913  |  00-21-3960NSB  |  07/2013 100% post-consumer content.