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Spring 2004
990s in the Spotlight
The Once-Obscure Tax Form Emerges as a
Key Accountability Tool for Nonprofits, Foundations
If you were to peruse a list of recent
headline-grabbing national news stories of the nonprofit and philanthropic
sector, you'd find that many of them have one thing in common: They are
based on in-depth investigations of Forms 990, the federal informational
tax returns filed by nonprofits and foundations. These stories bring home
a point that many observers of the field have been making for years:
Organizations that don't pay more attention to their 990 tax returns do so
at their own peril.
Nonprofits and foundations have
traditionally treated their 990s - the 990 and 990-EZ for public charities
and the 990-PF for private foundations - solely as vehicles for reporting
their financial information to the IRS. But the new regulations requiring
foundations and nonprofits to provide their tax forms to anyone who
requests them, combined with the greater accessibility of 990s through the
Internet, have made the 990 forms much more important communications
vehicles for providing all types of information about an organization to
all types of audiences - not just the IRS. Anyone with a computer and
Internet connection has easy access to the tax returns of most foundations
and nonprofits free of charge.
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"The 990 has become
a key vehicle for building and maintaining the public's trust in the
sector," says Rich Cowles of the Charities Review Council.
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"Many nonprofits aren't taking the 990
as seriously as they should," says Rich Cowles, executive director of
the Charities Review Council of Minnesota, a charity watchdog group based
in St. Paul. "They often view the form as part of the audit and don't
take appropriate responsibility for it. But the 990 presents an
organization with an opportunity to put its best foot forward."
Many consider the 990 and 990-PF forms a
poor choice for a person's source of information about an organization.
The forms were not designed primarily for use by the general public, but
rather as documents to help the IRS and state charity regulators ensure
that organizations remain true to their charitable purposes, and that
private individuals do not enrich themselves at the expense of those
purposes.
But according to the Urban Institute, the
Form 990 is now the most commonly used data source about nonprofits. A
growing number of resources are available to help nonprofits use 990-PFs
as a grantseeking tool and to help donors use 990s to make giving
decisions. "The 990 is increasingly being touted as a donor
tool," says Cowles.
The media are also paying more attention to
990s. In The Boston Globe's recent months-long investigative series on
foundation governance and management practices, the main source of
information for the stories was the reporters' analyses of Forms 990-PF.
And The Chronicle of Philanthropy's recent investigative report of
nonprofit loans to officers and directors was based on an analysis of more
than 10,000 Form 990 tax returns (see
related
Giving Forum story).
"This newfound transparency means that
grantseekers, donors, reporters, colleagues and researchers alike will
look to your 990-PF or 990 as one more tool in researching and evaluating
your organization," says Bill King, president of the Minnesota
Council on Foundations. "If your accountant is typically the only
person in your organization who pays much attention to your federal tax
return, now is the time to begin sharing this document with your program
and communications staff, or with board members, volunteers or consultants
who have this expertise. They can help you develop more useful, effective
and complete informational tax returns, which can help advance your
organization's image rather than tarnish it."
Not only can a poorly completed 990 damage
the image and reputation of a single organization, but taken together they
present a tremendous risk of damaging the image and reputation of the
entire field, according to some nonprofit experts. "The 990 has
become a key vehicle for building and maintaining the public's trust in
the sector," says Cowles. "If you have all the 990s being viewed
by the public and the data in them isn't reported properly, it's a public
trust time bomb."
What the Law Requires
All private foundations, regardless of
income or asset size, are required to annually file federal income tax
Form 990-PF. Public charities are required to file either Form 990 or
990-EZ. They can use Form 990-EZ if they have (1) gross receipts exceeding
$25,000 and less than $100,000 and (2) end-of-year total assets less than
$250,000. Public charities with gross receipts of $100,000 or more are
required to file Form 990.
Federal law also requires that a public
charity and private foundation must make available for public inspection,
without charge, a photocopy of its original and amended annual tax returns
for the last three years to people who request them. They must make the
returns available at their principal, regional and district offices during
regular business hours. If the organization does not maintain a permanent
office, it must make the forms available for inspection at a reasonable
location of its choice; it may also mail the information.
Foundations and public charities also are
required to provide copies of their annual returns to anyone who requests
them either in person or in writing, and may set reasonable costs for
copying these materials. However, an organization can be exempt from this
requirement if it makes its tax returns "widely available" on
the Web and directs requestors to the appropriate Web site page, provided
that the online forms are exact images of the originals and can be
downloaded free of charge.
The
GuideStar Web site
posts the 990 and 990-PF forms for many public charities and foundations
in easily downloadable PDF format, and The Foundation Center provides
990-PFs for many foundations on its
Web site. There is
some disagreement among legal analysts as to whether posting a tax form on
either site will satisfy an organization's federal disclosure requirement,
since both sites block out some or all signatures on the online forms due
to privacy concerns. Some analysts have expressed concerns about this
because the regulations require the posting of exact duplicates of returns
on the Web and do not expressly permit the removal of signatures. But
other analysts believe that a publicly available and otherwise unrevised
return meets the spirit of the law. Also remember that you still must keep
hard copies of your complete tax returns on file in your office for public
viewing.
In Minnesota, any public charity that
solicits funds in the state is required to register and report annually to
the Minnesota Attorney General's Office by filing an annual report form
with the appropriate attachments, including the Form 990. The statute
requires board review and approval of the statement itself, not
necessarily the attachments, but the state's reporting form goes further
and requires an organization to attest that its board of directors has
approved the content of the report and all of its attachments.
Many industry experts recommend that the
boards of all public charities and private foundations review and approve
their organization's 990 or 990-PF. A
report
released last fall by
Independent Sector and BoardSource recommends that a 990 or 990-PF be
reviewed by an organization's CEO and CFO, and reviewed and approved by
the audit committee and board before the form is submitted. This is one of
the governance practices that the report encourages nonprofits to adopt
voluntarily in order to address provisions in the American Competitiveness
and Corporate Accountability Act of 2002 (known as the Sarbanes-Oxley
Act), which applies primarily to publicly traded companies. Congress
passed Sarbanes-Oxley in response to the recent corporate and accounting
scandals of Enron, Arthur Andersen and others, to help rebuild public
trust in America's corporate sector.
"It would be much wiser for our field
to voluntarily adopt the measures in Sarbanes-Oxley that contribute to
good governance, including board review and approval of 990s, rather than
having these measures thrust upon us," says King. "Many of the
provisions in Sarbanes-Oxley are sound governance practices for any
organization - whether for-profit or nonprofit."
There are signs that some sector leaders
are beginning to heed this advice. In a fall 2003
survey of 129 CEOs of
some of the nation's largest foundations, conducted by the Center for
Effective Philanthropy, one-third of respondents said their boards have
made changes in response to the recent corporate governance scandals and
increased media and legislative scrutiny of foundation practices. One of
the top three changes they noted was that they have begun to require
either a board review of a foundation's 990-PF or that the CEO and/or CFO
sign off on the filings and personally attest to their accuracy.
Completing the Form 990
According to Cowles of the Charities Review
Council, two of the most misreported and critical sections of the Form 990
are program service accomplishments and fundraising expenses.
The program service accomplishments section
of the Form 990 (Part III) presents a nonprofit with the opportunity to
describe in detail its accomplishments and its benefit to the community,
according to Cowles, but this is a missed opportunity for many. "This
is where you can tell your story," he says, "but too few
organizations take this section seriously."
Cowles notes that many organizations report
only a cursory description of their programs and the dollar amounts spent,
and often duplicate the same language in this section from year to year.
This practice fails to comply with IRS instructions and could amount to
false reporting if changes in programs are not reflected. Cowles
recommends that an organization's program descriptions in its 990 be
consistent with the descriptions in its annual report and audit.
Perhaps an even more critical part of the
990 for nonprofits is the section where they report on their fundraising
expenses (Part II). Cowles notes that rightly or wrongly, donors are
paying more attention to the fundraising costs in an organization's 990 to
help them make their giving decisions. Because organizations fear they
will be judged harshly for spending money on fundraising, they sometimes
feel pressure to keep this figure as low as possible on their tax form.
It is perhaps not surprising, then, that
one of the top complaints of the IRS, state regulators, and newspaper
reporters looking at Forms 990 is that organizations understate or falsely
report fundraising costs, according to Cowles. He notes that it is often
the case that organizations report no fundraising expenses while raising
thousands of dollars from grantwriting done by paid staff, or sponsor
sales events specifically to raise money for the organization but fail to
reflect the event expenses as fundraising.
"Under-reporting fundraising expenses
is a recipe for disaster," says Cowles. "The best policy is to
tell your story as it is - not as you want it to be. That's part of what it
means to be transparent to the public. Misrepresenting or misreporting
fundraising expenses destroys transparency and can undermine public
trust."
To help nonprofits improve the data
reported in these and other sections of the Form 990, CRC convened a group
of sector leaders — including the Minnesota Council on Foundations and the
Minnesota Council of Nonprofits — to form the
Nonprofit Accountability
Collaborative, which has developed several useful resources for
completing 990s. The project received funding from the
Otto Bremer
Foundation,
The St. Paul Companies, Inc. Foundation and the
Surdna Foundation.
Completing the Form 990-PF
For private foundations, the two most
misreported and critical parts of the Form 990-PF relate to grant
guidelines/application procedures and grants/contributions paid, according
to King. Both parts are reported in the supplementary information section
of the form (Part XV).
In many ways, the supplementary information
section of the 990-PF is comparable to the program service accomplishments
section of the 990. "This section gives foundations an opportunity to
tell their story about the good work they are doing in the
community," King says, "and to give details on their grantmaking
program."
The "grants and contributions
paid" part of this section (line 3) is where foundations can provide
details on the grants they made in the reporting year. Along with listing
the grant amounts, King notes that funders should include a brief
description of the purpose of each grant (e.g., "Gen-op grant for
school math program"), which can provide a more complete picture of
how their grants are benefiting the community. A foundation must provide
this information if it awarded any grants in the reporting year. Failure
to complete this line and/or to state a purpose for each grant is the most
common mistake that foundations make on their 990-PFs, according to the
IRS.
The IRS reports that the second most common
mistake foundations make on their 990-PFs is to not provide information on
their grant guidelines and application procedures (lines 2a-2d of Part
XV). This section must be completed unless a foundation only makes grants
to preselected charities and does not accept unsolicited grant requests.
"This is not the kind of information that an accountant typically
pays attention to," King says. "So your communications or
program staff or volunteers should review this section to ensure that the
language is consistent with your other information materials."
A New Era of Accountability
King is hopeful that 2004 will mark a
turning point for the nonprofit sector in paying more attention to the
once-lowly 990. "We are clearly seeing the emergence of a new era of
accountability for the field," he says. "Our sector can take an
important step forward in advancing our accountability by recognizing that
our 990 tax returns have become one of our most important tools for
communicating to our constituencies, demonstrating our transparency and
maintaining public trust."
More Information
Forms 990 & 990-PF Online:
Form 990-PF Resources:
Form 990 Resources:
Legal Disclaimer
None of the information in this article
should be construed as offering legal advice. The specific advice of legal
counsel is recommended before acting on any matter discussed in this
article.
© Copyright 2004 Minnesota Council on
Foundations
Reproduction in any form without the written permission of the publisher
is prohibited.
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