You'd think that being tax-exempt would mean you'd be exempt from filing a tax form.

But when it comes to the world of not-for-profits, nothing is further from the truth. Enter the IRS Form 990, a tax-filing document that is the tax-exempts' equivalent to the more familiar Form 1040"”except it can run up to 50 or more pages of complex statements and accountings.

With many not-for-profits looking toward the Internal Revenue Service's final Nov. 15 deadline to file the Form 990, now is the time for agency executives"”as well as the CEOs who sit on these agency's boards and assume at least some fiscal responsibility"”to sit up and take notice.

"Each organization should assess the skill level of its employees to determine if outside guidance is needed," points out Kendra Smith, assurance senior manager at the Cincinnati office of Grant Thornton LLP.

"When in doubt, it's never a waste of money to engage a professional services firm to review the Form 990," continues Smith. "The risk of incorrectly completing the form will far outweigh the cost of acquiring the service."

"Because the Form 990 has become the primary document that the IRS uses (along with many donors and other interested parties), it is important for an exempt organization to pay very close attention to properly completing and filing this form," adds Timothy Wilson, partner in charge at BKD LLP's Cincinnati office. "Because this is a highly complex area of tax law, it is always prudent for a board to consider the outsourcing of the compliance function with respect to tax filings. Failure to comply with the IRS regulations can result in significant monetary penalties."

Professional accountants with expertise in the not-for-profit sector can ease the burden at this taxing time (tax exempts' are generally required to file no later than November 15, but this can depend when their fiscal year ends and whether they have requested an extension). An incorrect filing or failure to file altogether can result in penalties, audits and"”in a worst-case scenari'”a temporary or permanent loss of tax-exempt status.

What's more, the IRS Form 990 takes on a life of its own long after the filing date, since the document is available for permanent public inspection. The numbers reported"”including revenue, expense account details and spending on the salaries of the top-paid executives"”will be in the public arena for all time.

"The impact of widespread availability of 990s, particularly through Internet resources, should be considered," Wilson points out. "GuideStar and Charity Watch are examples of Web gateways that facilitate information access. ...From a mission-centric standpoint, it is essential to present financials in a clear, consistent and informative manner. In our Internet savvy society, professional preparation of 990 and other required forms may better serve exempt organizations."

"The Form 990 is subject to public disclosure," Smith confirms. "Therefore, donors and the public at large can request to see it at any time. It's important to 'get it right' from both a public perception and a legal compliance standpoint."

Why does the government make the Form 990 informational tax filing available to all citizens? Because, the argument goes, the taxpayers are the ones who are underwriting all the breaks that not-for-profits enjoy: exemption from federal, state and local taxes (including property taxes), a special discount rate on postage, and other perks. The Internal Revenue Service has essentially ruled that, if Joe and Jane Citizen are going to involuntarily shell out their own money to fund the nation's tax-exempts, in addition to shouldering their own personal income tax burden, then Joe and Jane deserve the right to hold each organization accountable for how it spends their money.

Accounting firms can advise their clients on what should"”and should not"”be included in the Form 990. For instance, you should exclude the home addresses of board members, Social Security numbers, personal details on contributors, and other confidential information you would not wish to see inadvertently released into the public eye. Protecting the privacy of an organization's officers, directors, trustees and key employees should be a major concern for anybody filling out the tax form. (Remember, too, that Form 2758, an Application for Extension of Time to File, is also a public document.)

It's also important to note that not every not-for-profit must file, says CPA Kathleen Appleton, a practice manager for Kintera, a corporation that serves the tax-exempt sector by designing customized Web sites and fundraising programs. It's required to be filed by all not-for-profits bringing in more than $25,000 in annual revenue per year. Some not-for-profits don't exceed that cap, and hence don't need to file.

A HUGE INDUSTRY

When you think not-for-profits, you often think of churches. But the tax-exempt industry is a whole lot more: Museums, public radio and television stations, golf courses, country clubs, cemeteries, chambers of commerce, foundations, performing arts groups, credit unions, zoos, hospitals, symphonies, charities and more. Many umbrella organizations, such as the National Football League, are not-for-profits, even though the individual franchises they administer, such as the Cincinnati Bengals, are most definitely for-profit.

Thinking that not-for-profits are always the "feel-good" agencies? Charities and shelters, nuns and nurses, or groups that deliver teddy bears to pediatric wards or sponsor Santas on streetcorners?

There's more to the intricate world of tax-exempts than warm and fuzzy. It's an economy of one million organizations employing 6 percent of the American workforce.

It might surprise you that some large, multi-national corporations are actually run as not-for-profits, including the Ocean Spray cranberry conglomerate and Land-'O-Lakes dairy moguls (both operate as "farm cooperatives" and enjoy special tax status).

Accountants are careful to point out that not-for-profits are rarely if ever "non-profits." Of course, there are profits, or there better be, if the heating bill is to be paid and the payroll met. Well-run organizations don't routinely go into the red. They stay in the black, simply taking any excess revenue (called "net income") and, rather than sharing that among investors or owners, plowing the money back into growing their agencies: more staff, bigger buildings, more services offered and the like.

"There is a difference in some states between a non-profit and a not-for-profit," says Smith. "A non-profit means an organization without shareholders which could be subject to federal and state tax.

"Normally, the term 'not-for-profit' is used for organizations that have received tax-exempt status from the Internal Revenue Service and its state of incorporation."

Not all not-for-profits are created equal, and not all earn the same tax exemptions. The most desired status is 501 (c) (3), which allows an agency to solicit public donations. But there are some accounting hoops to jump through to determine if your group more accurately falls into an alphabet soup of alternatives, ranging from 501 (c) (1) to 501 (c) (25k). Moreover, there are different supplemental statements and questions to be answered in the Form 990, depending on where you fall in the 501 class.

FAIR WARNING TO TRUSTEES

All this might seem to interest only accountants and the agency executives they serve. Not so.  If you are an executive at a Tristate company and you merely have agreed to sit on a not-for-profit's board of directors or trustees, you have incurred some responsibility for the annual IRS tax filing and its accuracy.

"Many of us who serve on non-profit boards do so out of a sense of giving back to the community and helping others," cautions BKD's Wilson. "We must always remember however, that the role of a board member carries with it certain obligations to act in the best interest of the organization and to be in compliance with the laws and regulations to which the organization is subject.  One of the regulations exempt organizations face is compliance with the IRS Form 990 requirements."

"Every board should have a designated member with the financial expertise to review the Form 990," agrees Grant Thornton's Smith. "Not-for-profit organizations are being scrutinized more and more by the Internal Revenue Service, the public, state charity officials, and various watchdog groups that provide ratings of charitable organizations based primarily on information provided in the Form 990. Donors are particularly interested in making sure that claims such as 90 cents of every $1 of your donation goes to support our programs are true."

"It would probably be a good thing because there is donor information and salary information contained," adds certified public accountant Appleton on the urgency for board members to sign off on the tax form before it is submitted. "It's the salaries. That's what the IRS is looking at these days."

Additionally, says Smith and other local accountants, a board member may want to review the document to ensure that officer and board member compensation"”and average hours worked"”are correct. "Specifically, in terms of officer compensation, the board will want to verify that the compensation reported on the Form 990 is the same as the amount approved by the board at the commencement of the tax year. 

"Therefore, as a board member, it's always advisable to make sure the form accurately reflects the financial statements of the organization, discloses key related party transactions, and contains a fair allocation of functional expenses."

More and more, everyone involved in the management of a not-for-profit has a lot to account for.

"Board governance is one of the three or four most important issues facing the non-profit sector," says Bob Ottenhoff, president and CEO of GuideStar, the Web-based organization that monitors the charitable industry. "Business leaders have a critical role to play. ...Running these groups is more difficult. [Agency heads] need a board that can offer wisdom and advice. All of this puts more pressure on the executive who volunteers to sit on a board."