Banking and Financial Services Sections

Board Responsibility and the Form 990

Understand What Such a Commitment Would Require

Carolyn Bourgoin

Carolyn Bourgoin

As a business professional in Western Mass., there is a high likelihood that you have been approached (or will be approached) to serve on a board.

This region has a significant concentration of nonprofit and charitable organizations, and, therefore, there is often a need for capable and willing board members. When receiving such a request, the first step to take before accepting is determining what roles and responsibilities such a commitment would require.

All too often, however, the review of the organization’s tax filings, including the Form 990, is missing among those responsibilities. This is a significant task and should not be taken lightly.

As a board member of a charitable organization, you have a responsibility to periodically confirm with management that these items are accurate and current. But your responsibility with respect to the Form 990 does not end there, as the IRS expects management to provide the full board with a copy of the Form 990 prior to it being filed. The board may designate a committee to review the Form 990, but must disclose this on the 990.

This filing is open to public inspection on Guidestar and the Massachusetts attorney general’s website. The board should make sure the Form 990 properly represents the organization to potential donors and other interested parties.

Unfortunately, reviewing the Form 990 can seem like a time-consuming task, especially if you are unfamiliar with such tax documents. This article will provide suggestions on what to look for and highlight some of the more critical sections of the form.

• Start by scanning the first two pages of the return to make sure the summary comparison of financial information between the current and prior years makes sense, and that the mission statement is properly disclosed. The organization’s top three programs should be listed along with the related expenses and program revenues. Board members are responsible for ensuring that the organization’s charitable role is being effectively carried out in furtherance of its mission, so it is important to ensure that its programs are in line with its mission.

• Proper governance policies should be your next focus. The IRS encourages charities to adopt a written conflict-of-interest policy that requires directors and staff to act solely in the interest of the charity. The Form 990 questions whether such a policy was adopted and, if so, how the policy was monitored during the year. Also questioned are the policies used for setting executive and top-management compensation.

Both the IRS and the state attorney general’s office expect the board to be involved in approving the compensation and benefits of the CEO, including comparing the salary to other executives in similar fields. A board that is actively involved in setting executive compensation should be at lower risk for complaints being filed regarding excess compensation or private benefits inuring to top officials.

As more and more exempt organizations become involved in joint ventures or similar arrangements, the Form 990 questions whether a charity has adopted a written policy concerning its involvement in these investments. The IRS expects a tax-exempt organization to safeguard its assets and exempt status from a risky investment arrangement.

• A list of board members at year end must be disclosed. This helps determine whether the board is the appropriate size to carry out its duties for the organization. Very large boards may have a difficult time making decisions. In this situation, an executive committee with delegated responsibilities might be effective. Yet, small boards may lack the broad knowledge and skills to properly govern the organization. Regardless of the size of the board, the IRS expects that it not be dominated by employees and others who may not be independent because of family or business relationships. There are several questions on the Form 990 pertaining to this issue.

• Revenue sources disclosed on the Form 990 should be evaluated to determine whether the organization has unrelated trade or business income that may require a Form 990T (required to calculate any potential income tax). Certain partnership investments and activities that do not further the organization’s purpose may generate such income.

• Public charities that solicit funds, which are typically evidenced by the presence of contribution revenue on the Form 990, should make sure that they track and disclose fund-raising costs on the Form 990. Those that hire professional fund-raisers or grant writers must make additional disclosures on Schedule G. Fund-raising events should also be disclosed on this schedule.

• Board members of public charities should look over Schedule A, as the testing on this form determines whether the organization remains a public charity or is converted to a private foundation. While there are different tests to calculate public support, each excludes gifts from certain donors. If the public support percentage is nearing 33.3%, the organization is in danger of becoming a private foundation, and steps must be taken to broaden the overall public support of the organization.

• Transactions between the organization and disqualified or interested persons may require disclosure on Schedule L. This includes business transactions, depending on the amount, as well as grants or loans. One of the main goals of the new Form 990 is to enhance transparency, so it is essential that the organization properly disclose related party transactions.

These are some of the more significant areas of the Form 990. The form, easily obtainable on the Internet, is a reflection on the organization and the board. In order to fulfill your fiduciary duties as a board member, it is important that you have an understanding of this filing and take part in its review.

If you have questions regarding your organization’s tax filings, including the Form 990, be sure to contact your organization’s accounting professional.

Carolyn Bourgoin is a senior tax manager for the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.;  (413) 322-3483; [email protected]

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