Summary of Certain Significant Changes to April Draft Instructions

The background paper lists the following significant changes to the draft instructions released in April. This is not a comprehensive list of all changes made to the April draft.

1) Defines “key employee” for purposes of reporting executive compensation in Part VII and Schedule J; transactions with interested persons in Schedule L, Part VI; and other items. In general, the three-part key employee definition will require reporting as a key employee only those employees—other than officers, directors, and trustees—who:

• Had reportable compensation exceeding $150,000 for the year (the “$150,000 test”)
• Had or shared organization-wide control or influence similar to that of an officer, director, or trustee, or managed or had authority or control over at least 10% of the organization’s activities (the “responsibility test”); and
• Were within that group of the organization’s top 20 highest-paid employees for the year who satisfied both the $150,000 test and the responsibility test (“top 20 test”).

2) Lists those countries included in each of nine geographic regions to be used for reporting foreign activities on Schedule F

3) Specifies reporting requirements for which the filing organization may rely on an express reasonable efforts process to obtain information required from interested persons or third parties. These are:

• Part VI, line 1b (determining the number of voting members of the governing body who are independent) and line 2 (determining whether an officer, director, trustee, or key employee had a family relationship or a business relationship with any other officer, director, trustee, or key employee)
• Part VII, Section A, (determining compensation paid to such persons by related organizations)
• Schedule L, Part III, and Part IV, (determining whether an interested person was involved in a Part III or Part IV transaction). The instructions provide examples of what may constitute reasonable efforts with respect to each of these separate reporting requirements.

4) Revises definition of independent voting member of the governing body for Part VI, line 1b

• Replaces the "material financial benefit" prong of the independence test with a Schedule L reportable transaction prong. A voting member of the governing body meets this prong if the member and his or her family members were not involved in a transaction or relationship that is reportable on Schedule L, or a transaction or relationship with a related organization that would be reportable on Schedule L if filed by the related organization.

5) Schedule H changes are discussed separately below

6) Schedule K reporting of certain refunding bonds. The instructions exempt from reporting in Schedule K, Part III, refunding bonds issued after 2002 to refund pre-2003 bonds. For this purpose, a refunding bond issue also includes allocations and treatment of bonds of a multipurpose issue as a separate refunding issue under Reg. section 1.141-13(d). All other parts of the schedule must be completed with respect to such refunding bonds under the generally applicable rules.

7) Clarifies compensation reporting in Part VII and in Schedule J, Part II:

• Compensation reporting is required for two types of compensation—“reportable compensation” and “other compensation”—the instructions provide definitions and examples regarding these terms, and other guidance regarding when, how and where to report compensation included in these types
• Definition of reportable compensation. The amount to be reported as “reportable compensation” in columns (D) and (E) of Part VII and columns B(i)-(iii) of Schedule J for each person to be reported are:

For employees, generally, amounts reported in Box 5 (Medicare wages) of Form W-2

For employees not subject to Medicare wage reporting, amounts reported in Box 1 (wages, tips and other compensation) of Form W-2

For directors or trustees, Box 7 (non-employee compensation) of Form 1099-MISC

The instructions provide and explain a “$10,000 per related organization” exception to reporting reportable compensation paid by a related organization

Definition of other compensation. Other compensation to be reported in column (F) of Part VII, and in columns (C) and (D) of Schedule J, Part II, includes compensation not reportable on Form W-2 or 1099-MISC, including certain amounts relating to retirement plans, health benefits, deferred compensation, and nontaxable fringe benefits

Clarifies that amounts for retirement plans, health benefits, and deferred compensation are reportable regardless of amount, but that such amounts may be estimated if actual amounts are not readily available; other items of “other compensation” need not be reported if they satisfy a “$10,000–per-item exception”

Deferred compensation. Retains the reporting convention that such compensation generally is reported as the services are rendered rather than when vested or paid

Defined benefit plans (qualified and nonqualified): eliminates the 120% applicable federal rate (AFR) threshold for reporting accruals under defined benefit plans, and limits reporting to the increase in actuarial value, which may be estimated

Defined contribution plans (qualified and nonqualified): limits reporting to contributions; need not include earnings in qualified or nonqualified defined contribution plans.

Generally excludes benefits excludible under section 132, regardless of amount

Reporting of compensation paid by filing organization. All reportable compensation paid by the filing organization to those persons required to be listed in Part VII, section A must be reported in Part VII (and on Schedule J, if applicable). Of the “other compensation” paid by the filing organization, all amounts for retirement plan, health benefits, and deferred compensation must be reported, along with other items of other compensation if $10,000 or more per item (if so, then report the entire amount of the item). The amounts of other compensation of various types may be estimated.

Reporting of compensation paid by related organizations. The organization must report in Part VII reportable compensation from a particular related organization only if it exceeds $10,000 from that related organization (if so, then report the entire amount). The organization need not report amounts of reportable compensation under the $10,000 threshold. This $10,000-per-related-organization exception does not apply to other compensation. The instructions clarify that of the “other compensation” paid by a related organization, all amounts of retirement plan, health benefits, and deferred compensation must be reported, along with other items of other compensation that exceed $10,000 per item, per related organization (if so, then report the entire amount). The amounts of other compensation may be estimated. The $10,000-per-related-organization exception and the $10,000-per-item exception apply separately to each related organization.

Former top five highest compensated employees. Clarifies the reporting of former top five highest compensated employees, by providing that an organization must report a person who was listed as a former five highest compensated employee only if such person: (1) was not an employee of the organization at any time during the calendar year; (2) received reportable compensation exceeding $100,000 for the calendar year; and (3) received reportable compensation that would place the former employee among the organization’s current five highest paid employees if the individual had been employed by the organization during the calendar year.

Both the $10,000-per-item exception and the $10,000-per-related-organization exception apply to Part VII, section A, but neither applies to Schedule J.

8) Narrows the scope of business relationship reporting in Part VI, line 2 by providing two exceptions from reporting:

• The ordinary course of business exception, which requires the transaction to be on the same terms as are generally offered to the public

• The privileged relationship exception—one of three privileged relationships (attorney and client, medical professional and patient, priest/clergy and penitent/communicant)

9) Changes to Schedule L:

• Definition of substantial contributor. Simplifies definition of substantial contributor for purposes of Part III to mean a person that contributed at least $5,000 to the organization during the tax year and that is required to be reported by name in Schedule B.
• Revises thresholds for Part IV reporting to provide that an organization must report with respect to an interested person if:

All payments during the tax year from a single transaction between the organization and the interested person exceed the greater of $10,000 or 1% of the filing organization’s total revenues

All payments during the tax year between the organization and the interested person, whether from one or from multiple transactions, exceed $100,000; or

The organization paid compensation greater than $10,000 during the tax year to a family member of certain interested persons.

Also clarifies that Part IV reporting is based on payments made during the year, regardless of when the transaction was entered into.

10) Clarifies the definition of "officer" for purposes of reporting executive compensation in Part VI, Part VII and Schedule J, Schedule L, and other items, to include both:

• The “top financial official”—the person who has ultimate responsibility for managing the organization’s finances; and
• The “top management official”—the person who has ultimate responsibility for implementing the decisions of the governing body or for supervising the management, administration, or operation of the organization.

11) Clarifies that paid preparers for section 4947(a)(1) nonexempt trusts may list the preparer’s taxpayer identification number (PTIN), if available, or Social Security number, and explains that the number (including the SSN, if provided) will be made public as part of the Form 990 subject to public inspection.

12) Expands required narrative reporting in Schedule O to include several items listed in the Schedule O instructions.

The instructions posted on the IRS Web site are stamped “draft” as they are in regular text format rather than the standard triple-column format used for official and final IRS forms. The final version, expected to be released in late 2008, may contain additional wording and format changes; however, the IRS does not anticipate further significant changes in content.

The IRS has stated that it intends to release draft instructions to the Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, in coming weeks.

Additional information is available on the IRS Web site: http://www.irs.gov/charities/article/0,,id=181089,00.html