Corporate scandals and demands for better accountability in the for-profit world are influencing change in the nonprofit sector, albeit in an unintended way.
The Internal Revenue Service (IRS) is making that case in a recent announcement that the need for greater corporate financial disclosure translates to the nonprofit sector.
The IRS is reviewing ways to change the federal Form 990 to bolster content and improve nonprofit accountability. Proposed changes deal with fundraising, foreign grants, and other disclosure issues, such as whether an organization has an independent audit committee or a conflict of interest policy, according to IRS announcement 2002-87.
The IRS draws comparisons between improved corporate financial disclosures to shareholders and similar changes in nonprofits’ financial disclosures to contributors.
Among other things the IRS asks:
- If a nonprofit should tell the public, via Form 990, whether it has conflict of interest policies or an independent audit committee;
- Whether non-charitable exempt organizations should disclose transactions with “substantial” donors, officers, directors, trustees and key employees, similar to the disclosures of Schedule A, Part III, Question 2;
- If nonprofits should give more information than currently required about financial relationships with “substantial” contributors, directors, officers and other key employees.
Bruce Hopkins, a nonprofit tax law expert and lawyer based in Kansas City, Mo., said the IRS-proposed changes are being influenced by the recently passed Sarbanes-Oxley Act of 2002, which deals with corporate accountability.
Disclosures on the From 990, such as whether an organization has a conflict of interest policy, using a yes-no check box could shame organizations into adopting such provisions, Hopkins said. He explained that other parts of the Sarbanes-Oxley Act, such as a code of ethics, could be grafted to nonprofits.
Another adaptation could be forcing a nonprofit executive to sign off on financial statements, Hopkins wrote in his newsletter, “The NonProfit Counsel.”
Greater disclosure of financial transactions with insiders coupled with intermediate sanctions could be “potent,” Hopkins said.
IRS officials want feedback on these and other proposed changes, such as whether organizations should have to complete Part II of the Form 990 in accordance with SOP-98-2 — accounting rules for joint allocations. Mandating the use of the rule would create “greater uniformity” and make it easier to compare organizations’ fundraising costs, the IRS contends.
Additionally, there has been “concern” since September 11 that potential terrorists could make use of the nonprofit statutes. As a result, the IRS is asking if organizations should be required to file a separate schedule detailing grants to foreign organizations and whether domestic organizations involved in foreign activities should give more specific information about money flow in those activities or about recipients.
The IRS is seeking comment on all proposed changes by Jan. 28, 2003.
The announcement also updates nonprofits on recent changes to the Form 990, such as requiring organizations to report the gross amount raised by an outside fundraiser on Part I, line 1a. Some organizations were reporting the net amount received, which allowed nonprofits to avoid reporting expenses such as fundraising fees, according to the IRS.
In a separate but related issue, the IRS is advising agents to review if organizations are properly reporting fundraising income and expenses. “Agents should check amounts reported on Form 990 against the organization’s audited financial and or other books and records to determine whether the fundraising income and expenses are properly reported,” according to the IRS FY 2003 Exempt Organizations Implementing Guidelines.