18 May 2018 AICPA provides detailed recommendations for updating Form 990 and its instructions The American Institute of CPAs (AICPA) has submitted written comments to the IRS, recommending changes to an updated 2018 Form 990, Return of Organization Exempt from Income Tax, and its instructions. The comments include specific recommendations and indicate the level of importance and urgency that AICPA assigns to each recommendation. The following is a summary of those recommendations assigned "high" importance and "high" urgency. The AICPA points out that Form 990 and its instructions "use terms that have changed under the tax law" and recommends deleting six terms and their definitions from the glossary in the instructions to the Form 990, the Form 990, and related schedules: — Endowment The AICPA advises updating the glossary to define certain terms used in Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, recommending these terms be updated: — ASC 740 (i.e., Accounting Standards Codification 740) Part IV, Line 10: The AICPA recommends updating the trigger question for Schedule D to reflect changed classification of net assets under FASB ASC 958, "while still recognizing that the focus of the question is on reporting for donor restricted and board designated or quasi-endowments." Part IV, Line 10, Instructions: If the recommendation above, regarding Part IV, Line 10, is adopted and Form 990 is updated accordingly, the AICPA recommends that the IRS update the corresponding instructions to reflect FASB ASC 958. Part IV, Lines 27, 28a, 28b and 28c: The AICPA points out that although, as of 2014, the definition of "interested persons" has been changed in the instructions for Schedule L (Transactions with Interested Persons), the "trigger questions in Form 990, Part IV were not aligned to agree with the new definition." Therefore, some Form 990 filers do not realize that they need to make a Schedule L disclosure, the AICPA states. The comment letter provides sample language to amend the trigger questions. Part VI, Line 1b: Pointing out that Example 1 in the instructions to Part VI, Line 1b regarding the independent voting board has not been relevant since 2014, when changes were made to Schedule L, the AICPA recommends deleting the example or modifying it to match the Schedule L disclosure example. Part VII, Section A Instructions: The AICPA notes that although "reportable compensation" in this section of the instructions includes amounts paid to officers, directors, individual trustees and others for independent contractor services reported on Form 1099-MISC, box 7, if a physician serves on the board of an organization in addition to being paid for his or her services as an independent contractor, that compensation is reported on Form 1099-MISC box 6 — not box 7. Therefore, the AICPA recommends amending the instructions to make clear that "payments received from the filing organization, reported on Form 1099-MISC, box 6, are also reportable compensation." Part VII, Section B Instructions:Similar to its comments on the instructions to Section A, the AICPA recommends modifying the instructions to Section B to clarify that "payments received from the filing organization, reported on Form 1099-MISC, box 6, are also reportable compensation." Part X, Lines 5, 6 and 22:For the same reasons enunciated above regarding Part IV, Lines 27, 28a, 28b and 28c, regarding the 2014 change to the definition of "interested persons," the AICPA notes that "the trigger questions in Form 990, Part X, were not aligned to agree with the new definition," which means some Form 990 filers do not realize they must make a Schedule L disclosure. The AICPA recommends language to update the Form 990 trigger questions and relevant instructions. Part X, Lines 27-34: The AICPA notes that the net assets or fund balances portion of the balance sheet needs to be updated to reflect ASU 2016-24. Specifically, the "checkbox items for net assets and fund balance reporting should refer to organizations that do or do not follow FASB ASC 958," the AICPA states. Part X, Lines 27-34, Instructions: The AICPA provides two versions of recommended language for these instructions, one to be used if the IRS updates Part X, Lines 27-34, as the AICPA recommends, and the other to use if the IRS chooses not to follow the AICPA's update recommendation. Part XII, Line 3: The AICPA recommends updating this line and its instructions in keeping with changes made to the OMB/Uniform Guidance rules. Schedule D, Part V: The AICPA recommends updating this portion of Schedule D, where endowment fund activity is reported, to reflect the terminology for endowments in the FASB ASC Master Glossary. Schedule D, Part V, Instructions: The AICPA comment letter provides two versions of recommended language for these instructions. If the IRS follows the AICPA's update recommendations, the corresponding instructions should reflect FASB ASC 958. If the IRS chooses not to follow the AICPA's update recommendations, the comment letter suggests adding a specific paragraph to Part V, Line 2 of the instructions for organizations that follow FASB ASC 958. Schedule I, Part II, Line I, Instructions: The AICPA notes that this portion of the instructions contradicts the trigger question in Form 990, Part IV, Line 21. Specifically, the Part II instructions state that an organization that answers "Yes" in Line 1 is attesting that it reported more than $5,000 on Form 990, Part IX, Line 1, column (A). But the instructions for the trigger question state that an organization should answer "Yes" if it reported more than $5,000 of grants or other assistance to any domestic organization or any to domestic government, and to "answer 'No' if the organization made a $4,000 grant to each of two domestic organizations and no other grants." These two instructions need to be consistent, the AICPA asserts. Schedule K and Form 990, Part X, Line 20: Although the Schedule K instructions state that related organizations should report liability for a bond issuance only once on Form 990 and on Schedule K, the instructions do not explain where to report the liability on Form 990. The AICPA provides two alternative modifications: (1) the instructions should be amended to explain that either the parent or subsidiaries may report the tax-exempt bond liability on Part X, Line 20; and if the parent reports on Part X, Line 20, the subsidiaries may report their allocable portion on Line 25 as an "Other Liability" or (2) the instructions should be modified to indicate that the tax-exempt bond liability may only be reported on either the parent or subsidiary returns, regardless of whether such liability is reported on Part X, Line 20 or Part X, Line 25; and an organization that does report the liability may increase its net assets listed on Part X to allow total assets to equal total liabilities plus total capital. The AICPA has offered the IRS guidance on Form 990 and its accompanying instructions that, if adopted, would provide welcome clarification for tax-exempt organizations. Form 990 and its accompanying schedules and instructions are detailed and reference many, but not all, sections of the Internal Revenue Code, Treasury Regulations and FASB standards that may be relevant for filing organizations. Many of the AICPA's recommendations of "high" importance and urgency reflect changes, updates and interpretations in these different areas of law and accounting. The remaining changes provide thoughtful insight and practical suggestions to make Form 990 accurately reflect the books, records, and activities of tax-exempt organizations. Since the major overhaul of Form 990 in 2008, the IRS has fine-tuned Form 990 and its instructions over the years. However, the number of such changes has decreased in recent years as the IRS turned its focus from perfecting the forms, schedules and instructions to monitoring compliance through increased examinations. The AICPA's thorough set of comments, if considered, would help fill some of the gaps created by the IRS's change in focus. In past years, the IRS has been receptive of and has welcomed comments and proposals related to tax-exempt organizations. Therefore, it would not be surprising if some of the AICPA's recommendations are eventually incorporated into official IRS guidance. However, it should be noted that the IRS has not yet adopted any of the AICPA's recommendations. Furthermore, the AICPA's suggested clarifications to Form 990 and its instructions do not address recent changes in the tax law as a result of the Tax Cuts and Jobs Act of 2017. Thus, tax-exempt organizations should continue to monitor announcements made by the IRS regarding changes to the 2018 Form 990 and accompanying instructions. — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg
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