Form 990 update: cultivating compliance

22nd Annual Health Sciences
Tax Conference
Form 990 update: uncovering uncertainty,
cultivating compliance

December 4, 2012

Disclaimer

► Any US tax advice contained herein was not intended or
written to be used, and cannot be used, for the purpose of
avoiding penalties that may be imposed under the Internal
Revenue Code or applicable state or local tax law
provisions.

Page 2 Form 990 update: uncovering uncertainty, cultivating compliance

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Presenters

► Michael R. McCullough ► Christopher Boggs
Tax Consultant Ernst & Young LLP
Banner Health Indianapolis, IN
Phoenix, AZ + 1 317 681 7471
christopher.boggs@ey.com

► Linda Mason
► Jennifer Rhoderick
Ernst & Young LLP
Miami, FL Ernst & Young LLP
+ 1 305 415 1395 Indianapolis, IN
linda.mason@ey.com + 1 317 681 7445
jennifer.rhoderick@ey.com


Agenda

► Changes for 2011
► Internal Revenue Service request for comments and
American Institute of Certified Public Accountants
(AICPA) responses
► IRS 2012 Work Plan and other initiatives
► Changes for 2012


2011 Form 990 changes

► Changes to instructions
► General instructions: make reasonable effort to obtain information
from third parties
► Heading items A–M
► Form 990 must be filed even if Form 1023 or 1024 not yet filed
► Name and address of principal officer and website should be current
as of the date of filing

► Part II, Signature Block (paid preparer)
► Must enter preparer’s tax identification number (PTIN )
► May sign using mechanical device software


2011 Form 990 changes (cont.)

► Part IV, Checklist of Required Schedules
► Line 14b:
► Investments specifically identified for purposes of determining
aggregate revenue or expenses in excess of $10,000 outside
the United States for Schedule F
► Also, complete Schedule F, Part I, if the organization had
foreign investments ≥ $100,000
► Lines 15–16: instructions clarify when Schedule F, Parts II or
III, need to be completed
► Line 20b: if operates one or more hospital facilities, must
attach audited financial statements (required for 2011)
► Line 27: additional definition of relationships for Schedule L



► Part VI, Governance, Management, and Disclosure
► Line 1a: governing body consists of one or more persons
► New examples concerning whether board member
compensation is considered officer compensation or director
compensation to determine independence
► If the governing body delegated broad authority to an
executive committee or similar committee, explain in
Schedule O
► Line 2: business relationship change — key employee
exception



► Part VI, Governance, Management, and Disclosure (cont.)
► Line 7b: wording change
► Formerly: “Are any decisions of the governing body subject to
approval by members, stockholders, or other persons?”
► Now reads: “Are any governance decisions of the organization
reserved to (or subject to approval by) members, stockholders,
or persons other than the governing body?”
► Lines 12–14: adoption of a policy by a committee authorized
by the governing body



► Section B, Policies
► IRS now allows organizations to answer yes to questions
regarding policies listed if a subcommittee of board approved
policy
► Changed wording from “does” to “did” to focus on practices
during reporting year



► Section B, Policies (cont.)
► Line 11a: clarification on when an organization can answer yes
(provided a copy of the Form 990 to all members of its
governing body)
► Yes: paper or electronic form, including emailing a link to a
password-protected site
► No: merely informing governing members that a copy is
available upon request
► No: any information redacted (including Schedule B)



► Part VII, Compensation
► Reportable compensation in Column (D) — now refers to greater
of Box 1 or Box 5 on W-2
► Compensation reporting for short year and final return
► Exclude deferred compensation (Column (F)) if paid within 2 ½
months after year end
► Reporting the increase or decrease in actuarial value of defined
benefit plan in Column (F)
► Only one box is to be checked unless person is both an officer and
a director/trustee

Source: IRS Form 990



► Part VII, Compensation (cont.)
► Section B
► Line 1: clarified that independent contractors should be
reported for the calendar year ending with or within tax year



► Part VIII, Statement of Revenue
► Do not net losses on Line 1 for:
► Uncollectible pledges
► Refunds of contribution revenue
► Service revenue
► Reversal of grant expenses
► Reporting of distributive shares of investment income,
royalties and rental income from joint ventures (Internal
Revenue Service (IRS) posted a note on 03/22/12 making
this optional for tax year 2011)



► Part IX, Statement of Functional Expenses
► Heading now includes a check box to indicate that
Schedule O contains a response for this section
► Report payments for information technology services on
Line 14
► Report medical supplies incurred on Line 24



► Part X, Balance Sheet
► Report distributive shares of assets on Line 12 based on
capital account on Schedule K-1 (IRS posted a note on
03/22/12 making this optional for tax year 2011)
► Line 25: IRS has further defined “other liabilities” as those
“including federal income tax, payables to related third
parties, and other liabilities not included on Lines 17–24”



► Schedule A
► Explain in Part IV if current year or any of the four prior years were
short years
► Instructions explain how to report a loss on an uncollectible pledge
that was reported as public support on a prior year’s Schedule A:
► Deduct the loss from the contribution amount for the year contribution
was originally counted as contribution revenue



► Schedule C
► 501(c)(3) organizations
► Made 501(h) election and part of affiliated group — must list each
member’s name, address, employee identification number (EIN),
expenses and share of lobbying expenditures
► Did not make 501(h) election organization — must describe lobbying
activity in Part IV



► Schedule D
► Part V, Line 2c: “Term endowment” renamed “Temporarily
restricted endowment”
► Part V, Lines 2a, 2b and 2c, should equal 100%



► Schedule F
► Part I
► Round investments to nearest $1,000
► Report funds transferred to non-interest-bearing foreign accounts for
program services as expenditures when funds are used for program
services outside the US, not as an investment
► Parts II and III
► Report grants given to domestic entity or individual for understood
purpose of engaging in foreign activities



► Schedule F (cont.)
► Report payments to foreign independent contractors
► Report activity with more than $10,000 in revenues even though
no expenditures to report in Column (f)
► Need not report foreign investments held indirectly through a
domestic pass-through entity



► Schedule F (cont.)
► Part IV, trigger questions about foreign filings
► Forms 926, 3520, 5471, 8865, 8621
► May need to answer yes, even if filing is not required
► Part IV, need to consider proportionate share of foreign
investments held by domestic pass-through entities



► Schedule H
► Part III: “At Cost” has been removed from Bad Debt lines
► Part V, Sections A and C: can list by size, using any reasonable
method; need not be by revenue
► Part V, Section B, Line 9: added instruction to explain “no”
response
► Part V, Section B, Lines 15–16: added “before making reasonable
efforts to determine patient’s eligibility under FAP”*
► Part V, Section B, Line 19: clarified that this question pertains to
those FAP eligible

► * Financial assistance policy



► Schedule H, Part V — reminders
► Section A: reporting hospital facilities only
► List in order of size, by any reasonable method (largest to smallest)
► Section B: for each hospital facility reported in Section A,
additional specific information is required (IRS Notice
2011-37)
► Lines 1–7 are currently optional; will be required for tax years
beginning after 03/22/12
► Lines 8–21 must be completed for the 2011 tax form



► Schedule H, Part V — reminders (cont.)
► Section C: list other facilities that are not licensed, registered
or similarly recognized as a hospital facility
► List in order of size, by any reasonable method (largest to
smallest)
► Copy of audited financial statements needs to be attached
► American Hospital Association Schedule H survey project
► http://survey.ey.com/ScheduleHProject/



► Schedule J
► Value of housing does not have to be reported as compensation if
such value is a working-condition fringe
► Cell phones for business purposes are working-condition fringes
and not reported as compensation



► Schedule K
► Instructions for Part II, Line 6: report actual amount of proceeds,
including investment earnings (may differ from 8038)
► Part III, Line 2: instructions make clear that lease arrangements
with a 501(c)(3) lessee may still bring about private business use if
the lessee is engaged in unrelated trade or business activity



► Schedule K (cont.)
► Part III, Lines 3b and 3d: split up the 2010 question 3c; IRS
emphasizes it wants to know if, for the filing year, the entity had
outside counsel review both management contracts and research
agreements
► Part III, Line 7: written procedures relating to remediation
provisions
► post-issuance compliance includes restrictions on private business
use, arbitrage restrictions and “other applicable tax law”



► Schedule K (cont.)
► Part V is a new section, “Procedures to Undertake Corrective
Action,” in which a yes/no option prompts the filing entity to say
whether it has written procedures to ensure that violations are
identified in a timely fashion and are corrected through the
Voluntary Closing Agreement Program if self-remediation is not
available under applicable regulations.



► Schedule L, Part IV
► Business transaction with an entity > 35% owned is not reportable
if entity is a 501(c)(3), a governmental unit or a 501(c) organization
of the same subsection as the filing organization
► “Key employee” was removed from third bullet point of definition of
interested person
► Individual reported on Part VII who was serving as a key employee
of an organization no longer requires reporting in Schedule L



► Schedule N
► If organization has disposed of its assets, then total assets and
total liabilities on the balance sheet should equal $0

► Schedule R
► Direct Controlling entity, Parts I–IV
► Enter the name of the entity that directly controls the disregarded
entity, even if that is the filing organization
► Definition of related party includes:
► Sponsoring organizations of a voluntary employees’ beneficiary
association (VEBA) and
► Contributing employers of the VEBA



► Schedule R (cont.)
► Part III, Column (i): Schedule K-1, Box 20, is not controlling with
respect to organization’s unrelated business income

► Part IV: report split-interest trusts by type
► Do not include trust’s name, employee identification number (EIN), or
address
► Include trusts in which filing organization has greater than 50%
beneficial interest

► Part V: describe method used to determine value of services, cash
and other assets involved in transaction



► Schedule R (cont.)
► Part VI
► Requires information on each unrelated organization treated as
partnership for federal tax purposes through which filing organization
conducted more than 5% of its activities
► Unrelated partnerships: contains new columns
► Column (d): predominant income (related, unrelated, excluded from tax
under Section 512-514)
► Column (f): share of total income
► Column (k): percentage ownership
► Aside from listing entity’s direct controlling entity, Part VI now requires
same information as Part III



► Glossary: revised definitions
► Control: term “managing partner”
► Grants and other assistance: certain VEBA payments and
payments to affiliates not organized as separate legal entities
excluded
► Significant disposition of net assets: includes specific situations not
considered significant

► Appendix K: contributions
► Text message contributions


AICPA recommendations related to
Form 990

► Notice 2012-25: public comment invited on
recommendations for 2012-2013 guidance priority list
► AICPA responded with comments related to exempt
organizations (see pdf letter at:
www.aicpa.org/Advocacy/Tax/DownloadableDocuments/Notice_2012_25.doc)
► AICPA comments:
► Issue guidance under sections 501(r) and 6033 on additional
requirements for tax-exempt hospitals as added by section
9007 of The Patient Protection and Affordable Care Act
► Who constitutes a “patient” for purposes of the definition of
“patient care”?


Form 990 (cont.)

► AICPA comments:
► Group rulings
► Allow all members of a group ruling to file a single consolidated
return
► Limit the reporting on Form 990, Schedule R, Parts III and IV,
of brother-sister related-party affiliates of central or subordinate
members of a group exemption to only those related parties
directly controlled by the filing organization or with whom the
filing organization has engaged in transactions exceeding a
fixed dollar amount
► Extension process for Form 990
► Change to a single six-month extension


Form 990 (cont.)

► AICPA’s exempt organizations taxation technical resource
panel letter to IRS
► Part IV, Line 20b
► Definition of “audited financial statements”
► Part VI, Section B, Questions12–14 (policies)
► Board approval requirement should be written into the question
► Part VIII
► Optional Schedule K-1 reporting requirements of Announcement 2012-
19 should be made permanent
► Consider a separate schedule to report income from partnerships
using information from Schedule K-1
► Schedule H, Part V, Section B (facility policies and practices)
► Form should contain a check box for filers to easily indicate whether all
facilities would answer the same to all questions


IRS Exempt Organizations 2011 Annual Report
and 2012 Work Plan and other initiatives
It is not your imagination.
Figure C displays the total number of returns reviewed in FY 2011, including
traditional examinations and the less resource-intensive compliance checks.

Figure C: Total number of returns reviewed
18,000
16,000
14,000 6,773 3,893 3,194
12,000
10,000
8,000
6,000 1,475 11,699
10,187 11,449
4,000
5,800
2,000
0
FY04 FY09 FY10 FY11
(Baseline)
Traditional examinations Compliance checks

IRS Exempt Organizations 2012 Work Plan
and other initiatives

► Form 990 as a compliance tool
► Increase transparency
► Improve compliance
► Identify non-compliant and potentially non-compliant organizations
► Develop targeted compliance projects
► Supplement educational efforts
► Expect fewer significant changes for 2012 per
Stephen Clarke, IRS project manager for the redesign of Form 990


and other initiatives (cont.)

► New and ongoing initiatives
► Revocation for non-filers
► Requirements for tax-exempt hospitals
► Reporting requirements for 501(c)(29) organizations and tax-
exempt hospitals
► Accountable care organizations
► Unrelated business taxable income
► The international project
► National research program’s study of employment tax returns
► Group rulings



► Revocation for non-filers
► Requirement of the Pension Protection Act of 2006
► Monthly updates as organizations fail to file for a third
consecutive year
► Updated as needed to remove organizations listed in error
► As of November 2011, list totaled about 380,000 organizations



► Requirements for tax-exempt hospitals
► IRS review of community benefit activities
► Notice 2011-52 on community health needs assessment
► Reg-130266-11: proposed regulations on 501(r)(4), 501(r)(5) and
501(r)(6)
► IRS not planning to make substantive changes to Schedule H or
instructions until regulations are finalized
► IRS will make clarifications and improvements, particularly to
Schedule H, Part V, Section B



► Reporting requirements for 501(c)(29) organizations and
tax-exempt hospitals
► Qualified nonprofit health insurance issuers
(Section 501(c)(29))
► Notice 2011-23 provides guidance for tax exemption and filing
requirements
► Revenue Procedure 2012-11
► Notice 2011-20 summarizes guidance to organizations that
participate in Medicare Shared Savings Program through
accountable care organizations
► Form 990 changes



► Accountable care organization
► Participation in Medicare Shared Savings Program
► Notice 2011-20 Guidance for 501(c)(3) organizations
► Fact Sheet 2011-11: additional guidance for participation



► Unrelated business taxable income
► Looking at organizations that report unrelated business
activities on Form 990 but have not filed a Form 990-T
► Analyzing Form 990-T data to develop risk models that will
help identify organizations that consistently report significant
gross receipts from unrelated business activities but declare
no tax due



► International
► International activities are consistent with the organization’s
charitable purposes
► Assets dedicated for charitable purposes internationally are
not diverted for non-charitable purposes
► IRS Exempt Organizations business unit (EO) has partnered
with other agencies to gather international information
► Other IRS business units
► Agencies in other countries



► National research program’s study of employment tax
returns
► Looking at employment tax matters involving taxable and
tax-exempt organizations, large and small businesses and
the government sector
► EO’s portion of the project involves examining the
employment tax returns of 1,500 organizations, with 500
selected randomly each year over a three-year period



► Group filings
► Questionnaire to be sent to more than 2000 exempt
organizations
► Information about your organization (6 questions)
► Information about your subordinates (27 questions)
► Communication with your subordinates (5 questions)
► Relationships with your subordinates (12 questions)
► Services you provide for your subordinates (6 questions)
► Inclusion of subordinates in your group exemption ruling (5 questions)
► Form 990-T filing information (2 questions)
► Annual information returns, notices and group returns (11 questions)
► Annual group exemption update (6 questions)
► Expansion of educational efforts for group ruling members


Further compliance with tomorrow’s
Form 990

Looking ahead to 2012 — Form 990
changes

► Draft 2012 forms posted by IRS as of October 31, 2012
► Form 990
► Schedule A
► Schedule D
► Schedule F
► Schedule J
► No instructions released


Looking ahead to 2012 — Form 990
changes (cont.)

► Part VII, Section A, Column B
► Added a second row for related entity hours
► Schedule D, Part XI, reconciliation of change in net
assets from Form 990 to audited financial statements has
been removed

Source: IRS Form 990


Conclusion

► 2012 Form 990
► Few major changes, more fine-tuning
► Continued interest in Form 990
► IRS
► Public
► Focus on
► Schedule H
► Group returns


Questions


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