AICPA Comments on Form 990 Redesign 

    Published June 20, 2005


    June 4, 2004

    Ms. Lois G. Lerner
    Acting Director, Exempt Organizations Division (T:EO:RA:T)
    Internal Revenue Service
    1750 Pennsylvania Avenue, NW, Room 341
    Washington, D.C. 20224

    Dear Lois,

    The AICPA Tax Exempt Organization Taxation Technical Resource Panel respectfully submits the following suggestions for redesigning the Form 990.

    Form 990 has grown beyond a mere information return into a publicly scrutinized document and fundraising tool, particularly for § 501(c)(3) organizations, providing as much information on the activities of the organization as it does on its financial status. Many more individuals are now utilizing Form 990 and its related attachments in determining whether an organization is conducting appropriate activities, is worthy of funding, etc. Users include the Internal Revenue Service, the various State Attorneys-General, local taxing authorities, the media, funders, and private individuals.

    While we acknowledge that Form 990 must continue to be an information return for use by the Internal Revenue Service in determining the continued viability of organizations as exempt organizations, propriety of uses of the funds of such organizations, and taxability or non-taxability of revenue generated by such organizations, we believe that it can be improved to provide better information to many other organizations and individuals.

    We believe that one of the problems with the current Form is that it is used for nearly all categories of exempt organizations. The particular rules applicable to § 501(c)(3) organizations have led to the use of Schedule A. However, we feel that providing separate forms for § 501(c)(3) organizations and others would allow the Service to tailor each form to the specific needs of the filing group and the users of the form. Because so many of the rules applicable to § 501(c)(4) organizations are similar to those under § 501(c)(3), we suggest that you use the same version for both categories. Therefore, we recommend (1) changing the format of Form 990 to address the new uses and users; (2) simplifying the form by combining Form 990, Schedule A and Schedule B into a single form with attachment of details as appropriate; and (3) creating two separate forms —one for organizations exempt under § 501(c)(3) and (c)(4); and one for all other categories of exempt organizations.

    Proposed Changes to a Form 990 for § 501(c)(3) and (c)(4) Organizations

    We suggest the following order and content of information on a new Form 990 for § 501(c)(3) and (c)(4) organizations. We will reference each section of our proposed form to the current version.

    Identifying Information

    We recognize the need for the information in this section of the return. However, we propose making Schedule B a response form to a question in Part VI, so we do not think a specific question is needed in this section as to whether it is attached.

    Part I—Statement of Program Service Accomplishments

    We believe that many users of returns filed by § 501(c)(3) and (c)(4) organizations are more interested in an organization's activities than its financial results. Therefore we recommend that you move the current Part III to first position, facilitating public inspection of the organization's operations. Users would be able to identify the nature of the organization immediately. This change would also allow the organization to describe its operations to the public and provide the Service confirmation of the reason for its exempt status.

    Part II—Revenue, Expenses, and Changes to Net Assets or Fund Balances

    This would be the current Part I, detailing how an organization obtains the resources it uses for the program service accomplishments outlined in Part I.

    Part III—Statement of Functional Expenses

    This is Part II of the current Form 990. Although most of the information is appropriately segregated in the current Part II, we suggest that account classifications should more accurately reflect the nature of the operations of § 501(c)(3) and (c)(4) organizations. The current line descriptions seem to reflect the typical accounts used broadly by many organizations, but many common expense categories are not present. Therefore, many organizations report a majority of their expenses on line 43 under "Other Expenses Not Covered Above." Examples include insurance and independent contractor fees (not including fundraisers, legal or accounting). In addition, given the current state of employee benefits (medical insurance, workers compensation, etc.), we recommend the Other Employee Benefits line should be broken up into more detail to allow readers to ascertain the often-increasing costs of such benefits. If there is not sufficient space, perhaps you could combine certain other lines, such as postage, telephone, supplies and equipment rental, into a category of Office Expenses.

    Part IV—Balance Sheet

    We recommend keeping the Balance Sheet as Part IV of the return. We believe the format could benefit from condensing certain categories and requiring the details on supporting schedules, as needed. For example, the three investment lines could be condensed into one line with one supporting schedule detailing all investments, rather than three schedules supporting three different types of investments. In addition, the receivable lines for all items other than receivables from officers, etc. could be condensed, with a supporting schedule used to indicate the nature of the item.

    Part V—Compensation Disclosures

    Our Proposed Part V would incorporate the current Part V, and Parts I and II of the current Schedule A. The purpose of this Part is to ensure corporate responsibility and transparency of the organization's management. The section will disclose information about the individuals who are responsible for the organization's operations, use of resources, and obtaining of resources. The schedule will include the following:

    1) The current Part V's officers, directors, trustees, and key employees;

    2) The five highest paid employees (from the current Part I of Schedule A); and

    3) The five highest paid independent contractors for professional services (from the current Part II of Schedule A).

    We also recommend increasing the reporting threshold for individuals reported as part of (2) and (3) above from $50,000 to a figure more appropriate with the salaries and wages in the current economy. Possible figures could be (1) the "highly compensated" § 414(q) number applicable to § 4958 (currently $90,000), or (2) figures tied to retirement or ERISA thresholds ($80,000).

    We also suggest that you formalize the current rule for disclosing management company compensation for those organizations that use a professional management company. The management company's compensation can be a required disclosure in this new Part of the form, even if it falls below the threshold otherwise applicable.

    Part VI—Other Information

    Proposed Part VI would incorporate current Form 990, Parts IV–A, IV–B, Parts VII through X, and current Schedule A, Parts III through VII. The service can do this by asking questions that would require supporting schedules only if they are answered positively. This change would reduce the size of the Form 990 and make it more useful for both the government and public needs. Because this form will only be filed by §501(c)(3) and (c)(4) organizations, you should eliminate items that only apply to other organizations.
    To illustrate this design, a positive response to a question on lobbying activities would trigger the need to file a supporting schedule similar to current Schedule A, Parts VI–A and VI–B. However, no additional information or forms would be needed if the organization makes a negative response.

    We believe that proposed Part VI should include, at a minimum, questions and related schedules on the following:

    1) Schedule of Donors. A positive response to a question on whether the organization has donors meeting the $5,000 or 2% of contributions threshold will require a supporting schedule providing the donor information. This supporting schedule could be the current Schedule B. This question would eliminate the need for Question M in the Identifying Information.

    2) Foreign Grant Information. A positive answer as to the existence of foreign grant making or receipt by the organization of such grants would require the attachment of a schedule detailing such grants. This requirement will apply to any organizations with operations in foreign countries or those that receive significant funding from outside the United States. Details could include:

    a. Grant recipient or originator;

    b. Grant dates;

    c. Grant purposes;

    d. Grant amounts; and

    e. Grant provisions.

    3)     Fundraising Activities and Special Events. The organization would be required to attach a statement as to the nature of such activities if the organization answers the question positively. The statement should include details as to the types of fundraising activities (bingo, auto donation programs, dinners, etc.), use of professional fundraisers, etc. This statement should include special events and sales of merchandise listed in Part II.

    4) Reconciliation of Audited Financial Statements. A positive response to the question of whether the organization has audited financial statements would require a reconciliation of revenue and expenses per the audit to the Form 990. This supporting schedule would be the current Parts IV-A and IV-B of the current Form 990.

    5)  Non-Private Foundation Status Confirmation. The organization would be required to attach a schedule showing the reason for Non-Private Foundation Status (Part IV of the current Schedule A) and the Support Test Schedule (Part IV-A of the current Schedule A), if necessary. Additionally, if the regulatory requirements are changed, we recommend that organizations should compute the support tests using their general accounting method, as opposed to cash receipts. The current requirement leads to a lot of additional paperwork, which some organizations may currently choose to ignore.

    6) Private Benefit, Inurement, Intermediate Sanctions and Excess Benefit Transaction questions. These should include some of the questions currently in Part VI of Form 990, as well as Part III of Schedule A. A positive response indicating the occurrence of any of these items would require an attachment identifying the facts and circumstances surrounding the positive response.

    7) Lobbying. The organization would be required to attach Part VI-A and/or Part VI-B of the current Schedule A if a positive response is indicated to the question of lobbying activities on the part of the organization.

    8) Relationships with charitable and non-charitable exempt organizations. A positive response to a question on the existence of such relationships would require an attached schedule outlining the nature of such relationships. This schedule would be created by the organization to fit the nature of the necessary responses.

    9) Taxable Subsidiaries. The organization would be required to attach a schedule (currently Part IX of Form 990) if a positive response is indicated as to the existence of such entities.

    10) Private School Information. The organization would be required to attach the current Part V of Schedule A if a positive answer is noted with respect to the organization being exempt as a Private School.

    11) Provision of scholarships, fellowships, or other forms of student aid. A positive answer as to the existence of these items would require a statement outlining the nature of such aid, selection process and criteria and expenditure responsibility.

    12) Personal Benefit Contracts. A positive answer as to their existence would require a schedule to be attached detailing the nature and conditions of such contracts.

    You can use a similar format for other issues that are not presently included on Form 990 if you decide that the information is useful to the users of the information.

    Part VII—Unrelated Business Income

    This section will include the current Parts VII and VIII of Form 990.

    Final Section

    This section would include signature, preparer information and identify whom to contact regarding the information presented. We strongly suggest a check box to authorize the return preparer or some other person to discuss the return with the Service. This will facilitate telephone inquiries, if the Service decides to use this tool.

    Proposed Changes for a Form 990 for Other Exempt Organizations

    We believe that many of the changes indicated above will also improve the form filed by other types of exempt organizations. Following the recommendations above, we suggest making the following additional alterations to the current Form 990 to create a new version specifically for organization that are exempt under sections other than § 501(c)(3) or (c)(4).

    Identifying Information

    The information currently requested is generally appropriate for non–§ 501(c)(3) or (c)(4) organizations.

    Part I—Statement of Program Service Accomplishments

    In our experience, most other organization use only brief explanations that do not add much to the utility of this information. Therefore, we believe you should consider eliminating this part altogether. The activities of these organizations are generally known to their members through other means, or they are extremely limited by the nature of their exemption.

    If you feel that this Section is still needed, we recommend moving it to Part IV.

    Part II—Revenue, Expenses, and Changes in Net Assets or Fund Balances

    We recommend that you eliminate lines that are unlikely to apply to other organizations. For example, we do not see the need for detail on contributions and special events.

    Part III—Statement of Functional Expenses

    Although most of the information is appropriately segregated in Part II of the current 990, account classifications should more accurately reflect the nature of the operations other organizations. We recommend using only one reporting column and using broader account categories. For example, an "office" category could include office supplies, equipment rental, telephone, postage and shipping. We also recommend changing Line 30 to include all consultants and professionals other than legal and accounting, as most other organizations do not retain professional fundraisers. There should be no need for the joint cost question.

    Part IV—Balance Sheet

    See the above discussion of proposed changes for § 501(c)(3) and (c)(4) organizations.

    Part V—Compensation Disclosures

    This proposed section would be identical to the one used in Form 990 for § 501(c)(3) and (c)(4) organizations; however, there is no need to include other employees or independent contractors. Information on these people is not provided currently.

    Part VI—Other Information

    This proposed section should have a format similar to the one proposed in Form 990 for § 501(c)(3) and (c)(4) organizations.

    1) It would only include items 4 and 9 from the above list for § 501(c)(3) and (c)(4) organizations; and

    2) Add a question on Dues and Fees. If the organization collects dues or fees and engages in lobbying or political activity, then a separate schedule would need to be attached. The schedule would require the information that is currently covered by Question 85 of the current Form 990.

    Part VII—Unrelated Business Income

    This would include the current Parts VII and VIII of Form 990.

    Final Section

    The final section would be the identical to that of the Form 990 for § 501(c)(3) and (c)(4) organizations.

    Thank you for this opportunity to make comments and recommendations. We appreciate your consideration of our comments, and urge you to improve the Form 990 as soon as practical. If we can be of further assistance, please contact myself at (703) 637-2670; John Valenzuela, panel member at (714) 528-8958; or Lisa A. Winton, AICPA Technical Manager at (202) 434-9234.


    Harvey J. Berger
    AICPA Tax Exempt Organization Technical Resource Panel

    cc: Dave Rosner
         Paul Streckfus

    Panel Members

    Harvey Berger
    Jody Blazek
    Eve Borenstein
    Diane Cornwell
    Howard Donkin
    Deborah Kosnett
    Marci Krause
    Patricia O'Malley
    Mary Rauschenberg
    Fred Rothman

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