Dramatic IRS Shift for Nonprofits
The pressure for greater oversight has been building since the 2002 passage of the Sarbanes-Oxley Act, which enhanced financial-disclosure and accountability standards for publicly held companies.
Nonprofits have been required to file 990s since 1942, but the information sought was largely financial: how much money came in and how it was spent. Critics, including members of Congress, have pressed for a broader window into nonprofits. The new form is the response.
"The new form asks for about five times as much information," said Ken Berger, president of Charity Navigator, a watchdog group in Mahwah, N.J. "In the past, the focus was on financial. Now, it's on governance."
For instance, the new form asks about potential conflicts of interests among board members and key staff and whether the organization has written policies on conflicts of interest, whistle-blowers, and document retention and destruction.
It also asks detailed compensation questions, including what methods were used to determine compensation of CEOs.
Elsewhere, its asks whether there was any "material diversion of the organization's assets."
Don Kramer, a Philadelphia lawyer specializing in nonprofit law, said that question alone was significant.
"In the past, if an employee of a nonprofit was caught stealing, they often were fired, but not prosecuted," he said. "That meant they might go on and do it again someplace else. Now, you have to explain how you handled the situation."
The IRS does not require that policies it asks about be in place. The practical result of the questions, however, is that nonprofits will feel pressure to adopt them.
"The form is going to prod organizations to do the right thing," said Eric Fraint, president of Your Part-Time Controller, a Cherry Hill firm that provides financial services to nonprofits.
Elizabeth F. Pilacik, chair of nonprofit and tax-exempt services for the accounting firm of Asher & Co. Ltd., made the same point at a seminar last week on the new 990, sponsored by LaSalle University's Nonprofit Center.