David B. McRee, CPA. The Nonprofit Tax Guy

On IRS Form 990, and on Form 1023, the IRS asks each organization to indicate whether it has adopted any of the following three policies:

1. Written Conflict of Interest Policy.
2. Written Whistleblower Policy.
3. Written Document Destruction Policy.

There is currently no law, regulation, or IRS ruling that requires any of these policies. However having such policies in place is generally considered a “best practice.”

The IRS goes so far as to include a sample conflict-of-interest policy in the instructions to Form 1023.

Adopting any of these policies is a serious undertaking, not because it is complicated or difficult, but because having such policies can create liabilities for the officers and directors. Why?

Many organizations, particularly the smaller nonprofits, have a very informal governance structure and a high turnover of directors. Policies are often not enforced or communicated to succeeding board members. A board which is not following its own policies could find itself in breach of its duty of care to the organization. So, in some cases, it may be better not to adopt any of these policies if it seems likely that they will not be carefully followed.

On the other hand, a board that is unable to effectively follow a conflict-of-interest policy, a whistleblower policy, and a document destruction policy, is not a very effective board, and should take a good look at itself and consider changes.

Where does one find samples of these policies? A quick Google search will turn up quite a few sample policies that an organization can customize to fit its needs. Involving an attorney is probably a very good idea, but many small organizations take a DIY approach. Here are some samples of each of the three policies (links take you to the Blue Avocado website for nonprofits and will open in a new window):

Conflict of Interest Policy

Whistleblower Policy

Document Retention/Destruction Policy

Two More Policies Nonprofits Should Consider Adopting.

Another important policy for all sizes of organizations to adopt is a Tax Compliance Policy. It sound boring, but it can be very simple and may save the organization unwanted correspondence from the IRS. I’ll be writing about that in an upcoming article and will link to it from here when it is published.

Additionally, many nonprofit organizations reimburse officers, directors, employees, and volunteers for expenses they pay on behalf of the organization. In order that these reimbursements do not become taxable income to the recipients, a written Accountable Plan should be adopted. More on that soon.

Applies to 2016 Form 990 series returns.

This new law only applies to exempt organization tax returns for years beginning after December 31, 2015.

This means that it will apply to 2016 Form 990 and later years, which will generally be due in 2017  or later (except for certain short-year 2016 returns).

For returns beginning in 2015 or earlier years, the protocol for obtaining extensions still requires that in order to receive a six month extension of time to file, the organization must request a three month extension, then before the first extended due date expires, it must request a second three month extension.

Form 990-T has always had a six month extension of time to file and that will not change.

The new law granting six month extensions of time to file an exempt organization return found in Section 2006 of H.R. 3236, aka Surface Transportation and Veteran’s Health Care Choice Improvement Act of 2015

The language in the law states, in relevant part:
(b) MODIFICATION OF DUE DATES BY REGULATION.
—In the case of returns for taxable years beginning after December 31, 2015,
the Secretary of the Treasury, or the Secretary’s designee, shall
modify appropriate regulations to provide as follows:

(4) The maximum extension for the returns of organizations
exempt from income tax filing Form 990 (series) shall be an
automatic 6-month period ending on November 15 for calendar
year filers.
(5) The maximum extension for the returns of organizations
exempt from income tax that are required to file Form 4720
returns of excise taxes shall be an automatic 6-month period
beginning on the due date for filing the return (without regard
to any extensions).

Note that the 6 month extension is considered “automatic,” which means that the organization does not have to provide a reason for requesting an extension of time to file. It does NOT mean that the extension automatically goes into effect without any action by the organization. The organization or its representative must file with the IRS, either electronically or on paper, a request on the designated form (currently Form 8868), on or before the due date of the return. Filing an extension request even one day late will normally result in an invalid extension.

This revision in the extension provision is great news and will reduce the filing burden on exempt organizations and their representatives. Many organizations currently find themselves in penalty situations either because the thought the first extension for six months and failed to file a second extension, or they simply forgot to file a second extension request.

Preparers of Form 990 should take care not to disclose information which might compromise the safety or privacy of an individual.

In years past, the IRS asked exempt organizations to disclose the names and addresses of officers and directors. Most professional preparers sensitive to the privacy of their clients declined to use personal addresses, and instead listed the organization’s address for each officer, director or key employee.  With the increase in identity theft today, the IRS no longer requests addresses for officers, directors and key employees. Instead, it simply asks (Part VI, Section A, Line 9) whether there are any officers, directors, or key employees that cannot be reached at the organization’s mailing address. If “yes,” the IRS asks that the person’s name and address be provided in Schedule O.  It is hard to imagine a scenario where an organization would need to answer “yes” to that question.

Another common place where personally identifying information of individuals might be improperly disclosed is on Schedule O or Schedule I of Form 990 regarding grants, scholarships, or financial assistance paid to individuals. The IRS requires that grants and scholarship awards be disclosed on the Form 990. However, the phone numbers, addresses and social security numbers of the recipients do not have to be disclosed and should not be disclosed on Form 990 since it is a publicly available document.

An article in The Courier, a newspaper in Findlay, Ohio, reported in March 2016 an alarming story of a charitable organization printing hundreds of social security numbers of grant recipients on its Form 990 over a number of years. The Courier found that Associated Charities of Findlay disclosed the social security number of at least 1,000 charitable beneficiaries on its 2012 Form 990.

According to the article in the Courier:

Associated Charities, headquartered in the Family Center, 1800 N. Blanchard St., has helped needy individuals and families in Findlay and Hancock County for 102 years. It typically provides cash vouchers to pay for emergency shelter, utilities, clothing, repairs, medicine, and doctor or dental visits. Since its founding, Associated Charities has provided over $4 million in aid to over 100,000 individuals and families, it said.

If you did the math on that, you’d find it works out to an average donation of $40 per individual or family, or about $40,000 per year in total given away over the 102 years the charity has been in existence. So, we’re not talking about big donations. Nevertheless, someone made the decision to disclose the social security numbers of the needy individuals who received small amounts of cash assistance from Associated Charities, as though these poor folks don’t already have enough problems.

Instead of admitting their error and lack of judgment, and perhaps an ethical failure as well, both the organization and its CPA firm doubled down on their violations of privacy of thousands of individuals, asserting that they broke no laws, while promising that they will stop publishing social security numbers on future returns.

Rather than being a malicious act, this violation of privacy most likely resulted from a desire to comply with the IRS’s extensive documentation and disclosure requirements related to grant-making and scholarships. The IRS has devoted an entire schedule to the disclosure of recipients of grants, scholarships and other financial assistance. The instructions that come with Form 990 and Schedule I are lengthy. Nevertheless, the IRS makes it abundantly clear that names, addresses and social security numbers of individual recipients of assistance must not be disclosed on Form 990.

Form 990-EZ instructions indicate that grants only need be disclosed if a grant to a particular individual, family, or organization exceeds $5,000. Even then, personal identifying information such as names, addresses and social security numbers for individuals should not be disclosed.

Form 990 requires more extensive disclosures. All grants, scholarships and assistance to individuals must be disclosed if the total awards to all recipients exceed $5,000. Still, no personally identifying information should be disclosed with regard to individuals. Grants and scholarships and other financial assistance can be sub-totaled according to type of assistance.

Form 990-PF does not require that an individual recipient’s address be disclosed. Nor does it require that an individual recipient’s name be disclosed unless the recipient is a disqualified person with respect to the foundation making the donation, or has received assistance from the foundation totaling more than $1,000 during the year.

Before disclosing information on Form 990-EZ, Form 990, or Form 990-PF, be sure to read the form instructions carefully and when it comes to disclosing personal information, ask: Am I required to disclose this on the return? Is this sensitive information?

For purposes of IRS Form 990-N filing, a tax-exempt organization’s gross receipts are considered to be $50,000 or less if the organization:

• Has been in existence for 1 year or less and received, or donors have pledged to give, $75,000 or less during its first taxable year;
• Has been in existence between 1 and 3 years and averaged $60,000 or less in gross receipts during each of its first two tax years; and
• Is at least 3 years old and averaged $50,000 or less in gross receipts for the immediately preceding 3 tax years (including the year for which calculations are being made).

Note that for the first year of existence, donor pledges (promises to give) are counted as gross receipts (even though the donation has not actually been received yet). For the subsequent years, the IRS makes no mention of including pledges.

Form 990-N is an IRS form which serves as an annual notice for small tax-exempt organizations in lieu of filing Form 990-EZ or Form 990-N.

Form 990-N is not available as a paper form; it can only be filed electronically.

Recently the IRS has announced a transition. Beginning February 29, 2016, the Form 990-N should be filled out and submitted through the IRS.gov website, rather than through the Urban Institute’s website. Prior to February 29, 2016, the Urban Institute provided the official free online filing of Form 990-N. The IRS has noted that some bugs in the new system are possible, so it urges organizations to file at the Urban Institute’s website by February 28, 2016. It is evident that even the government has little confidence in its ability to implement a relatively simple website.

Beginning February 29, 2016, to electronically submit Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or Form 990EZ, use the Form 990-N Electronic Filing system (e-Postcard).

• All organizations are required to register at IRS.gov prior to filing Form 990-N. You won’t be asked to register again the next time you file.
• Form 990-N must be completed and filed electronically. There is no paper form.
• Form 990-N filers may choose to file a complete Form 990 or Form 990-EZ instead.

If you are concerned about using the IRS e-file feature, never fear–private industry has stepped in to help nonprofits submit their Form 990-N with a minimum of inconvenience. The following services offer free or low-cost submissions of Form 990-N:

www.file990.org $39.95

www.aplos.com Free if filed before the due date.

www.expresstaxexempt.com Advertised as free for current year.

WARNING: Filing a Form 990-N online is a simple matter and anyone can do it. However, filing Form 990-EZ or Form 990 online, or through a low-priced online service provider is NOT recommended. These forms require considerable expertise and should be prepared by an expert CPA or Enrolled Agent with specific training and experience in nonprofit tax law. The largest part of my practice is fixing returns that were prepared for free or low-cost by preparers who knew just enough to be dangerous. IRS penalties for improperly prepared return start at $20 per day, and the IRS may not notify an organization of a problem with the return for more than a year after it was filed. Twenty dollars per day X 365 days is $7,300. It adds up fast.

Other fun facts about Form 990-N:

• Form 990-N is not considered a “return.” It is an electronic “notice.”
• Form 990-N is not “filed”; it is “submitted.” These distinctions are important.
• Generally an organization may be eligible to submit Form 990-N if it normally has annual gross receipts of $50,000 or less.
• The Form 990-N is due four and one-half months after the organization’s year end. That’s May 15th for an organization that uses the calendar year for its annual accounting period.
• There are no extensions of time to file available, however there is no monetary penalty for submitting Form 990-N after the due date.
• Failure to either submit Form 990-N, or to file Form 990-EZ, or Form 990 for three consecutive years results in the automatic revocation of the organization’s tax-exempt status.
• An organization eligible to submit Form 990-N may instead choose to file Form 990-EZ or Form 990-N.

Compliance tip:

An organization should appoint more than one board member to keep track of the filing due dates and to make sure the 990-N is submitted on time. Assigning the entire responsibility to the treasurer or to a third party preparer is a BIG mistake.