form 990 update: cultivating compliance

22nd Annual Health Sciences Tax Conference Form 990 update: uncovering uncertainty, cultivating compliance December 4, 2012

Form 990 update: uncovering uncertainty, cultivating compliance

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.


Disclaimer

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. For more information about our organization, please visit www.ey.com. This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP.


Presenters

► Michael R. McCullough Tax Consultant Banner Health

Phoenix, AZ ► Linda Mason

Ernst & Young LLP Miami, FL + 1 305 415 1395 [email protected]

► Christopher Boggs Ernst & Young LLP Indianapolis, IN + 1 317 681 7471 [email protected]

► Jennifer Rhoderick Ernst & Young LLP Indianapolis, IN + 1 317 681 7445 [email protected]

mailto:[email protected]


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

Today’s Form 990


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



► Part VI, Governance, Management, and Disclosure (cont.) ► 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



► Part VI, Governance, Management, and Disclosure (cont.) ► 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

Desired certainty on Form 990


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”?


AICPA recommendations related to 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


AICPA recommendations related to 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.

5,800 10,187 11,449 11,699 1,475

6,773 3,893 3,194

0 2,000 4,000 6,000 8,000

10,000 12,000 14,000 16,000 18,000

FY04 (Baseline)

FY09 FY10 FY11

Figure C: Total number of returns reviewed

Traditional examinations Compliance checks

Figure C displays the total number of returns reviewed in FY 2011, including traditional examinations and the less resource-intensive 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


IRS Exempt Organizations 2012 Work Plan 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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