By Donn Herring
The Internal Revenue Service in December 2007 released a redesigned version of its Form 990, which is the primary tax return for non-profit organizations.
The redesigned Form 990 imposes a significant increase in the amount and the detail of information reported to the IRS by non-profit organizations. As a result, leaders in the nonprofit sector will need to carefully review the redesigned Form 990 in order to determine how the new reporting requirements will impact their organizations, the actions taken by their organizations in achieving their missions and the manner in which their organizations documents these actions.
This is especially true in the health care industry, given the amount of information required by the redesigned Form 990 about certain issues specifically relevant to non-profit health care providers.
The biggest change imposed by the redesigned Form 990 for non-profit health care providers is in Schedule H, which mandates that licensed hospitals exempt from income tax under Section 501(c)(3) of the Internal Revenue Code provide a description of the charity care and other community benefits they provide.
Additionally, Schedule H asks for information about community-building activities that might be serving at-need members of the general populace. It also examines the manner in which non-profit hospitals deal with patients suffering with a heavy financial debt load, through a review of the hospital's collection practices, bad debt expenses and Medicare write-offs.
Non-profit hospitals should also be cognizant of the new reporting requirements on the use of the proceeds of tax exempt bonds required in Schedule K to Form 990. The information requested in Schedule K represents the most significant and concerted effort by the IRS to gather information about how nonprofit hospitals use the proceeds of the tax exempt bonds they issue.
By obtaining this information, the IRS will be able to determine whether the non-profit hospitals have met certain legally imposed limitations on the use of the proceeds of tax-exempt bonds and penalize those nonprofit hospitals that have failed to comply with such limitations.
Corporate governance
In addition, similar to Sarbanes-Oxley (which does not apply to nonprofit hospitals), the redesigned Form 990 delves into corporate governance issues. In particular, the new form asks for information on a variety of policies that may have been implemented by the non-profit organization - including a conflict of interest policy, a whistleblower policy, a policy on document retention and destruction, and a charity care policy.
In obtaining information about the non-profit entity's governance practices, the IRS is essentially trying to ascertain whether the organization's governance policies will assist the organization in meeting its obligations as a non-profit organization, thereby justifying the privileges it is afforded by its nonprofit status.
The redesigned Form 990 also requires that non-profit organizations provide substantial information regarding the compensation they provide to their officers, directors, key employees, highly compensated employees and highly compensated independent contractors.
For the most part, this information will be used by the IRS in its ongoing efforts to monitor and curtail excessive executive compensation (an effort that has been under way since 2006).
More details
The IRS released the redesigned Form 990 in December 2007 following a six-month public comment period. The change that was probably most welcome in the health-care sector is the removal of a requirement in Schedule H that non-profit hospitals report proprietary hospital billing and revenue data.
This requirement was struck from the final form of Schedule H. The IRS also scaled back the amount of information needed on Schedule K to exclude information about bonds that were issued before 2003. The IRS also struck a proposal to gather ratios of revenue and expenses.
The June draft also proposed repealing the option for non-profit groups to file a group tax return if they are subject to a group ruling. This proposal was also eliminated from the final version of the redesigned Form 990.
Despite all of these changes, however, the redesigned Form 990 still requires non-profit organizations to supply a good deal more information about their operations, practices and governance than in the past.
In order to comply with the requirements of the redesigned Form 990 for the 2008 tax year, non-profit organizations will need to begin to develop the systems necessary to track, capture and report the type of information requested by the redesigned Form 990. Non-profit organizations will also need to brief their board of directors, officers and other leaders about the new requirements imposed by the redesigned Form 990, along with any operational and substantive modifications that will need to be implemented by the organization in order to comply with these new requirements.
In perspective
The redesign is the first major revision to Form 990 since 1979. The redesign was triggered by the IRS' realization that the non-profit sector has undergone massive growth and change since the Form 990 was last revised.
Of particular concern to the IRS was the realization by both the IRS and the public that non-profit organizations are not immune to the same type of corporate scandals that have plagued the business world during the last several years.
The redesigned Form 990 is part of the effort to address these concerns. In particular, the IRS believes the increased reporting required by the redesigned Form 990 will result in: (1) enhanced transparency by providing the agency and the public a realistic picture of non-profit organizations; (2) increased compliance by accurately reflecting operations of non-profit organizations; and (3) reduced administrative burdens on the agency resulting from non-profit organizations filing the redesigned Form 990.
The IRS seems to believe the transparency provided by redesigned Form 990 will motivate non-profit organizations to more carefully monitor compliance with the legal requirements imposed on non-profit organizations. In turn, this self-monitoring, coupled with the wealth of information available through the redesigned Form 990, will substantially reduce the burden to the IRS of overseeing the non-profit sector, while enhancing the IRS' ability to oversee the non-profit sector. Finally, through this self-monitoring and enhanced oversight, the non-profit sector will be healthier and enjoy greater public confidence.
The redesigned Form 990 will go into effect for the 2008 tax year. For fiscal year non-profits, the Form becomes effective for all tax years that begin in 2008.
This means that the time to start implementing and developing a Form 990 compliance plan is now.
Donn Herring is a member in Lathrop and Gage's health care practice area, in the firm's Clayton, Mo., office. He advises health care clients including hospitals, physicians, home health providers, durable medical equipment companies and nursing homes, on the full range of regulatory and business issues. He also advises tax-exempt entities (both inside and outside the health care industry) on the business and tax issues unique to tax-exempt entities.
March 2008 / MWIH
