IRS Project Manager
Internal Revenue Service
Form 990 Redesign
1111 Constitution Avenue, NW
Dear Ms. Pattara:
Pursuant to the request for comments in IR-2007-117, enclosed are comments prepared by the American Institute of Certified Public Accountants (AICPA) regarding the new draft Return of Organization Exempt From Income Tax (Form 990). The AICPA is the national, professional association of CPAs, with approximately 350,000 members, including CPAs in business and industry, public practice, government, and education; student affiliates; and international associates. Our members provide audit and tax services to thousands of not-for-profit organizations. These comments were developed by the 990 Task Force of the AICPA’s Not-for-Profit Organizations Expert Panel and Exempt Organizations Taxation Technical Resource Panel.
The Task Force commends the IRS for undertaking the comprehensive project of redesigning the Form 990. The importance of the Form 990 has increased significantly in recent years as it is used by regulators, nonprofit organization stakeholders and the general public to monitor organizational performance. The users of the Form 990 are diverse in many respects: sophistication, areas of interest, objective. The integrity of the information presented in the Form 990 is compromised if reporting among similar organizations is not complete and consistent. As such, we believe the Form 990 and related instructions must be clear as to reporting requirements. However, this objective should be balanced by the fact that the administrative burdens of compliance must be reasonable.
Attached to this letter are detailed observations on the draft redesigned Form 990 along with our recommendations for improvements. Our primary focus in the recent weeks has been on the forms themselves; however, we have noted opportunities for improving instructions and details of the forms which we believe are important but less urgent to the overall redesign process as we understand it. Some of our more fundamental recommendations are summarized below:
Keys to Success in Implementation
The proposed changes to Form 990 are significant for tax-exempt organizations of all sizes as well as for advisors, stakeholders and regulators (IRS and others). The changes offer many improvements to transparency of reporting which is valuable in performance assessment and oversight. We believe successful implementation of the redesigned Form 990 extends far beyond issuing final forms and instructions including:
Timely, two-way communications with Form 990 users throughout the development process to ensure the reporting framework achieves stated objectives and to offer assurance that concerns have been heard, understood and addressed reasonably. This process can be critical to developing user understanding of the value of the requirements thereby encouraging compliance.
Developing and testing systems to process new reported information, including strategizing on creative alternatives to the status quo to improve enforcement effectiveness.
Communicating reporting requirements to software developers to allow them to develop and test reporting systems to accommodate reporting and electronic filing.
Seeking feedback from other regulatory agencies on the reporting changes and opportunities for simplification and/or coordination of effort.
Educating reporting organizations and their advisors regarding the reporting requirements before the time at which the reporting becomes effective to allow them to implement internal reporting changes to gather required information.
Assisting in education of stakeholders and other users in appropriate interpretations of the reported data.
We encourage IRS representatives to be thoughtful and deliberate in proceeding with steps necessary to implementation, even if it means delaying the effective date of some or all parts of the form. Managing the change will require the investment of significant resources for tax-exempt organizations under pressure to control administrative costs. Advance preparation will be critical to their successful implementation of the change. Rushing implementation of the change may result in significant costs to taxpayers as well as to the IRS and may be a deterrent to taxpayers’ efforts to improve the quality of overall tax reporting.
Add Executive Summary
With the volume of information required to be reported, the complexity of the reporting requirements and the diversity of users of Form 990, a clear “Executive Summary” of key information for the reporting organization can be very valuable. The Task Force is pleased to see that concept reflected in the proposed Part I. However, we are extremely concerned by the current interpretation of important elements to include in the summary. We are particularly troubled by the limited information on tax-exempt purpose, by the use of performance metrics that do not have significant industry-wide acceptance and the level of emphasis on compensation.
Exempt purpose and program accomplishments are the most important information to review in assessing an organization’s performance. The qualitative nature of the disclosure should not minimize its importance to IRS and other users of the Form 990.
Performance metrics offer the advantage of clarity in the amount reported on a particular line. However, they do not provide meaningful information on an organization’s real performance without context and deeper analysis. Unsophisticated users of Form 990 are likely to misinterpret data reported, to limit review to the summary and to view reported metrics as an IRS endorsement of information which is relevant to their review. In addition, some of the proposed metrics are not particularly relevant to all types of organizations required to file Form 990. We believe the summary instead should be used to highlight key information on performance (including exempt purpose accomplishments) which is widely accepted as relevant and to direct readers to more detailed information which may be valuable to their analysis.
With the significant diversity in the tax-exempt organization sector, it is very difficult to define the change to taxpayer burden resulting from the redesigned Form 990. We believe most organizations will experience a significant increase in burden and more complex organizations may at least double the time required to complete the returns. Some of the areas which contribute most to the additional burden are new Schedule H for hospitals, new Schedule K for exempt bond details, new Schedule M for noncash contributions, new Schedule F for foreign grant reporting and gathering additional detail for compensation and governance disclosures. We have made a number of detailed suggestions in our comments for ways to mitigate the burden on these and other areas without, we believe, compromising transparency. The additional burden might be mitigated to some degree by having adequate time to prepare for the change. As such, we recommend taxpayers be given at least a year after the reporting requirements are finalized and published to implement changes needed to comply. In addition, implementation of new schedules creating the most significant burden should be deferred further to reflect the time needed to build systems to gather and present required information.
Clarity and Comparability in Compensation Reporting
Compensation reporting has historically been one of the most controversial aspects of Form 990 reporting. Compensation is only one of a number of elements which are important in oversight of an organization’s use of its available resources. However, the volume of compensation information reported, the reporting redundancies and the potential for negative inferences are troubling to many tax-exempt organizations which struggle to compete with the for-profit world for top talent.
IRS and others have acknowledged the need for more clarity and consistency in compensation reporting. We make a number of detailed suggestions regarding compensation reporting in the attached analysis based on the same objectives. Some of the fundamental concerns we have are:
Reporting requirements should be abundantly clear to encourage compliance with requirements and comparability of reported data. We make a number of suggestions for simplifying and clarifying proposed requirements.
Amounts required to be reported should be fair, reflecting economic value the individual received for services provided. Reporting requirements should avoid unnecessarily inflating compensation amounts. We believe this occurs with requirements to report nontaxable expense reimbursements and fringe benefits and the potential double reporting requirements of Part II and Schedule J. Intermediate Sanctions, while not applicable to all exempt organizations, does provide an objective standard for defining compensation. The Task Force believes economic benefits reportable as compensation in Form 990 should be consistent with those which are considered under Intermediate Sanctions.
Appropriateness of arrangements can not be assessed without consideration of qualitative data. Benchmarks or arbitrary reporting thresholds should be avoided due to their potential use in place of thoughtful consideration of the arrangements in their entirety. If arbitrary benchmarks or reporting thresholds are retained, they should be combined with prominently displayed qualitative data to provide necessary context on arrangements.
The Task Force recognizes what a truly momentous task implementation of the new Form 990 represents. Please understand that the enclosed comments are offered in the spirit of further improving a reporting framework which has clearly been thoughtfully developed to this point.
Thank you for this opportunity to share our suggestions on improving the new Form 990. If you would like to discuss these comments, please contact me at firstname.lastname@example.org; or George White, AICPA Technical Manager, at 202-434-9268, or email@example.com.
Naomi Horsager, Chair AICPA 990 Task Force