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Assisting the Board: How to Review Form 990

“So what exactly does the IRS want me to do?” he said.

“I don’t know," she said, "they don’t really say.”

“I know."

That conversation, which involves Internal Revenue Service (IRS) Form 990, which was revised in 2008, includes this question: “Has the organization provided a copy of this Form 990 to all members of its governing body before filing the form?” Next is a request for information: “Describe in Schedule O the process, if any, used by the organization to review this Form 990.”

Those two innocuous sentences continue to puzzle many colleges and universities. The confusion arose when an earlier draft of Form 990 included the question: “Does the organization have a policy for the organization’s governing body, or for an approved committee, or individual, to review Form 990 before it is filed?”

After vigorous public comment, Form 990 was revised and that question was replaced. Still the topic of reviewing Form 990 remains a particular frustration for colleges and universities.

For the record, there is no statutory or regulatory requirement that a college or university board or its designated committee review IRS Form 990 before it is filed. The IRS intent however, is clear: colleges and universities should have policies that increase their board members’ awareness of the extensive information that is now reported on Form 990.

Every college and university should develop its own policy. Our recommendation is that members of the audit or finance committee should review their entire Form 990 (including the Schedule B), before filing their Form 990, and that a copy should be made available to all board members electronically. The policy adopted should be described on Schedule O of Form 990. But, you may ask, what really constitutes an effective and thorough review of Form 990 by a volunteer board member?

First and foremost, board members must understand that the intended focus of Form 990 is upon greater institutional scrutiny and on reporting requirements. Form 990 places more importance on compliance and governance, in these specific areas:

  • Executive Compensation and Benefits
  • Conflict of Interest Disclosures and Policies
  • Transactions with Related Parties or Disqualified Persons
  • Board Governance and Oversight Policies
  • Compliance with Government Reporting Requirements (i.e. 1099s, W-2s, etc.)
  • Adequacy of Internal Controls
  • Supplementary disclosures are made on Schedules A through R (a total of 16 schedules, including “Schedule E, Schools” that will be completed by all tax-exempt colleges and universities).

If Trustees scrutinize these specific areas, their review of Form 990 will prove to be more productive and efficient. Items of consideration in performance of that review should include the following elements:

Parts I and II

Look at Parts I and II, the Summary and the Signature block on the first page. Review the mission statement.

Part III

Read the college’s or university’s description of programs and services for accuracy and thoroughness. Have the descriptions been updated for any new program services?

Part IV

A 38 question checklist will determine which supplementary schedules are required for your college or university. Review all “yes” answers to determine if they are consistent with your expectations. Check a sampling of negative answers as well.

Part V

Read each of the 14 questions that examine whether your college or university has complied with IRS reporting requirements. “Yes” answers indicate a filing requirement. If any answer does not make sense, or ring true to you, seek further clarification.

Part VI

For the first nine questions about the college’s governing body and its management, check the accuracy of any “no” answers. Perform the same review on the next seven questions regarding policies, including the question regarding the “Board Review Process.” The final four questions of Part VI relate to public disclosure of Form 990. Does the college post Form 990 on its website? While this may not have become a common practice yet, we believe that it should be, unless mitigating circumstances warrant otherwise.

Part VII

The “Compensation of Officers, Directors, Trustees, Key Employees, Highly Compensated Employees and Independent Contractors” is comparatively easy to review for the appropriate names. Check the reasonableness of the salaries paid and benefit information reported. Ask if compensation from any related organizations is included and look at Schedule J for further information. This is an area of particular IRS focus, given that they have seen numerous errors and omissions in this specific section of the form.

Parts VIII – XI

These schedules include financial information that comes directly from audited financial statements and should not require any detailed review. A brief review for reasonableness is appropriate.

Part XII

One of the questions in Part XII has significance with respect to the Board of Trustees:

  • "Does the organization have an audit and is that audit subject to Board oversight via an Audit/ Finance Committee?" This completes your review of the main form, but you should examine any of the 16 supplementary schedules that may be filed by your institution. In addition to “Schedule J”, related to compensation, which has been previously mentioned, here are additional schedules that should be reviewed:

Schedule B: Schedule of Contributors – Remember that names and addresses of your contributors should be redacted from the public disclosure copy. This information should be provided to the board, however, in order to enable them to perform a thorough review of the form.

Schedule D: Supplemental Financial Statements – Information from your audited financial statements should not need detailed review.

Schedule E: Schools – This schedule is specific to tax-exempt colleges and universities, as well as tax-exempt elementary and secondary schools. The schedule’s primary focus is upon an institution’s nondiscrimination policies and how those policies are communicated to the community that they serve.

Schedule F: Statement of Activities Outside the United States – Be alert for ownership interests or transfers of property to foreign corporations or partnerships. Ensure that management has consulted with the institution’s tax advisors to ensure the timely completion of all required tax filings.

Schedule G: Information Regarding Supplemental Fundraising or Gaming Activities – Review the net profit or loss from each fundraising event, and investigate all unusual results.

Schedule I: Grants and Other Assistance to Organizations, Governments, and Individuals in the United States – Part III includes all scholarships and awards that have been made to U.S. citizens. This information should agree to the audited financial statements.

Schedule J: Compensation Information – A primary IRS focus area has been compensation of “Officers, Directors, Trustees, and Employees." This was highlighted in the 2013 IRS report on 400 private college and universities that were surveyed in 2008. Schedule J solicits information on benefits provided to these individuals and the processes for establishing compensation for the institution’s President.

Schedule K: Supplemental Information on Tax-Exempt Bonds – This schedule includes information on the use of bond proceeds and whether those proceeds were ultimately used for private business. The institution’s bond and legal counsel should be engaged in the completion of this schedule to ensure proper compliance.

Schedule L: Transactions With Interested Persons – Interested persons consist primarily of current and former officers, trustees, key employees, or substantial donors, as defined by the IRS. Transactions with these individuals require disclosure with respect to their specific relationship and the nature of their transactions with the institution.

Schedule M: Noncash Contributions – Ensure that all noncash contributions reported on Schedule B are fully described in this schedule.

Schedule O: Supplementary Information – This schedule contains expanded and explanatory information on matters addressed in Form 990; check disclosures for their completeness and accuracy. Ask questions about any unusual items noted.

Schedule R: Related Organizations and Transactions with Related Persons – Contains complicated rules for those (defined) related parties. Review the Schedule R to ensure that all related parties have been included.

Unrelated business income, as it has been reported in Form 990-T, continues to be an area of high focus by the IRS. The IRS’s college and university study has identified approximately $90 million of additional unrelated business taxable income (UBTI) among its respondents that was not reported to the IRS on Form 990-T. Specific areas that increased UBTI include:

  • Disallowances of expenses that were not connected to unrelated business activities,
  • Lack of profit motive;
  • Improper expense allocations;
  • Errors in computation or substantiation;
  • Reclassification of exempt activities as unrelated.

Your institution should work closely with your tax advisor to ensure proper identification of all sources for unrelated business income and the subsequent calculation of unrelated business income tax. In general, colleges and universities are now filing three to five times the amount of information that was once required on the old Form 990.

Craig Stevens is a partner based out of our Rochester, NY office. Joseph Peplin is a partner based out of our Rochester, NY office. Gerald Archibald is a partner serving both of our Rochester, NY, and New York City offices.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.