Charities will have their tax work cut out for them in 2009

Charities and other nonprofit organizations that haven't started planning for the massive Internal Revenue Service overhaul to forms for the 2008 tax year need to get in gear, according to BKD LLP.

"This return is going to take a lot of time; it's not something you can do a few weeks before it's due," said Edward Priem II, who works with BKD's Not-For-Profit and Government Group.

Officials from the certified public accountant and advisory firm, which has an office in Colorado Springs, spoke about the changes Wednesday to about 25 representatives from local nonprofits.

The revisions to the returns, which nonprofits file yearly to retain tax-exempt status, will affect 800 to 1,000 nonprofits in Colorado Springs, including religious organizations, service clubs, trade associations, social service agencies and health care organizations.

Nonprofits will start using the new forms for the fiscal year ending in 2008. The forms will be due, for example, May 15, 2009, for organizations that end their fiscal year on Dec. 31. Filing instructions will be released next month.

The new forms aim to provide detailed disclosure about how nonprofits get their money and where they spend it. The IRS wants to create more transparency and compliance in the industry.

Even though another of the IRS's goals in revising the return was to "minimize the burden" to nonprofits, the 990 core form and 16 additional schedules will take longer to fill out, particularly for the 2008 tax year, said Rita Worster, a CPA and a manager with BKD's Not-For-Profit and Government Group.

Nonprofits have averaged 152 hours per year on the filing process, she said, but the IRS call for written explanations about the scope and work of organizations will require extra time.

The revision is the first since 1979 and was based on 3,000 pages of comments the IRS received from the public. Several factors prompted the change, Worster said, including recent charity fraud and financial mismanagement.

"The IRS also is recognizing that charitable organizations are a significant segment of the economy, and the 990s are a public document, so they're trying to incorporate information of use to the public, who use them to make decisions on charitable contributions and grants," he said.

Some parts of the return are new, Worster said, including documentation required for "activities outside the U.S.," and extensive information from health care organizations. Another first: Small organizations with less than $25,000 in annual revenue will have to file an electronic postcard. In the past, such organizations did not have to file anything, Worster said.

On the positive side, the new 990 is more logically organized, Worster said, and forces nonprofits to consider what characteristics the IRS considers "best practices" for operation. For example, along with finances, all nonprofits now have to define their mission, accomplishments and governance structure.

The IRS wants to know whether organizations have policies addressing conflict of interest and "whistleblowers," which protect staff, volunteers, vendors and others from retribution in reporting unethical and illegal activities of the organization.

There are also questions about how organizations determine compensation, whether decisions require board approval and whether comparative salary studies are used.

Failure to follow the IRS guidelines can result in fines or possible revocation of exempt status for smaller organizations, Priem said.

GETTING READY FOR THE CHANGES

Nonprofit organizations should form a team to review requirements of the new 990, said Edward Priem II, who works with BKD's Not-For-Profit and Government Group. That team can determine which schedules will need to be filled out and begin examining organizational governance, management and disclosure practices. Organizations then can make changes in policies and procedures, if needed, he said.

"You're going to need to get the whole organization involved - marketing, the board, the CEO and staff, and legal counsel," Priem said.