Coping With Part VI of Form 990: Governance, Management, and Disclosure

Over the last year or more, Dugan & Lopatka has tried to give the readers a better understanding of the new Form 990.  As you might expect, the nuances of the Form 990 have raised numerous questions. One of the areas raising the most questions is Part VI which covers: Governing Body and Management (Section A), Policies (Section B), and Disclosure (Section C).

Q.  Must We Complete Part VI?
Yes.  You must complete Part VI.  The IRS affirms that the policies and practices described in Part VI generally aren't required by the Internal Revenue Code. However, your organization should answer all of Part VI's questions.

 Q.  What does the technical term, “Independence” mean in Question 1b?

Part VI, Question 1b, asks for the number of independent voting members of the governing body. Independence is used to determine whether a particular voting member of its governing body is independent at all times during the organization’s tax year for purposes of Form 990 reporting.

To be independent requires satisfying the following three rules:

• The member was not compensated as an officer or other employee of the organization or of a related organization.

• The member received no more than $10,000 of total compensation or other payments (other than expense reimbursements under an accountable plan or reasonable director's/trustee's fees) from the organization or a related organization as an independent contractor.

• Neither the member, nor any of his/her family members, was involved in a transaction with the organization (whether directly or indirectly through affiliation with another organization) reportable on Schedule L (Transactions With Interested Persons) for the organization's tax year, or in a transaction with a related organization of a type and amount that would be reportable on Schedule L if required to be filed by the related organization.

 

Q.  In Part VI, Question 2, the IRS asks whether any trustee, officer, director, or key employee has a family relationship or business relationship with any other trustee, officer, director or key employee. How thorough of an investigation do you need to make to determine if any relationships exist and what are the consequences if all reportable information can't be obtained?

Your organization need not engage in “more than a reasonable effort” to obtain the necessary information. For example, giving a questionnaire to each trustee, director, officer and key employee asking for the necessary information would be sufficient provided that questionnaire contained (1) the name, title, date, and signature of the person reporting information; and (2) the Form 990 Glossary definitions of independent voting member of governing body, family relationship, business relationship, and key employee.

Q.  What happens if an organization reports that it hasn't adopted a policy covered in Part VI?

While there are no specific repercussions, the IRS will use this and other information in your Form 990 to assess noncompliance with federal tax law by your organization.

Q.  If your organization adopted a policy or practice after the close of its tax year but before filing Form 990 for that year, is it appropriate to assert in Part VI that such policy or practice was in place?

Generally, the instructions provide the specific time or period to be used to answer a particular question. If the instructions to a particular question don't provide a specific time or period to be used to answer the question, your organization can consider practices adopted after the close of the tax year in your response to that question.

For example, a written conflict of interest policy must be in place as of the end of the organization's tax year. If not, Question 12a must be answered “No.” If your organization adopted the policy after the close of the tax year but before filing Form 990, you can disclose having done so in Schedule O.

Q. Why does the IRS need information on members in Part VI, Question 7?

The IRS is gathering information about the governance rights of members/stockholders. This gives the IRS a more complete and accurate picture of where governance authority is vested and about the organization's legal structure.

Q.  Part VI, Questions 9a and 9b, ask about local chapters, branches, and affiliates.  Why does the IRS need this?

Essentially, in Question 9 the IRS wants to be sure that an organization is exercising supervision and control over its chapters, branches, and affiliates so that their activities are consistent with those of the organization.  It wants to be sure your policies and practices extend to all parts of your organization and affiliated entities.

Q.  Should we include information in our Form 990 for related entities?

Part VI is to be completed based on the facts and circumstances of only the filing organization. Thus, you are not required to provide information on the composition of the governing body, policies, or practices of a related organization, such as a joint venture, for-profit subsidiary, parent, or brother-sister exempt organization.

The new Form 990 couldn’t have come a worse time for many nonprofit organizations.  Its complexity is adding to time spent on government compliance as well as to the cost for outside tax preparation.  Couple this with recent auditing standards changes costing nonprofits more time and money and a declining economy which is decreasing revenues, you have what many consider a perfect storm.  If you are having difficulties with Form 990, give us a call.  We welcome your questions and aren’t likely to charge you a dime for the answer.  At this moment, every dime saved helps.

Dugan & Lopatka, CPAs, PC

104 E. Roosevelt Road, Wheaton, Illinois 60187

Tel. (630) 665-4440

www.duganlopatka.com