By Susan Johnson

Larson Newspapers

With financial scandals affecting not just banks and large publicly-traded corporations, but also nonprofits, the U.S. government has turned its spotlight on billions of potential tax dollars lost due to ineptitude or fraud by executives and management of tax-exempt entities.

As a result there are now new and revised forms required by the Internal Revenue Service.

To learn more about these forms, executives and staff from 20 nonprofit organizations attended a seminar hosted by the Sedona Community Foundation on May 20.

Laura A. Lo Bianco, an attorney with the firm Fennemore Craig in Phoenix, presented the information.

An expert on corporate law and an advisor to public charities and private foundations, Lo Bianco holds an undergraduate degree in finance from Arizona State University as well as a juris doctorate from Santa Clara University.

The new 990 form comes in several variations and must be used for tax years beginning in 2008 by nonprofit organizations required to file a return as an “organization exempt from income tax.”

Lo Bianco credited the redesign of the form to a hostile regulatory environment and a legislature shell-shocked by corporate financial failures, particularly Enron, which triggered an ongoing campaign for better corporate governance.

Media attention to abuses within the nonprofit sector was also a factor, she said, driven by www.guidestar.org.

“This Web site has given the media access to a lot of information on nonprofit salaries and expenditures,” she said.

In its new iteration, Form 990 has 11 pages and 16 separate schedules, some of them requiring financial information and others containing questions that can provoke an IRS audit.

Those organizations found defective are subject to punitive action against the entity itself as well as its board members and management, including large fines and prison terms.

However, for fiscal years ended in 2008 only relatively large charities need to concern themselves with the full 990, those with gross receipts of $1 million or more and total assets of $2.5 million or more.

Beginning in 2009, thresholds will drop to $500,000 and $1.25 million, respectively, and again in 2010 when they drop to $200,000 in gross receipts and total assets of $500,000.

Organizations failing to file a 990 in three consecutive years will have their tax-exempt status terminated.

For tax-exempt organizations with gross receipts greater than $25,000, but less than $1 million, and total assets less than $2.5 million, the four-page Form 990-EZ can be used instead.

In tax year 2009, it can be used if the organization has gross receipts greater than $25,000 and less than $500,000, and total assets less than $1.25 million. For tax year 2010, it can be used if the organization has gross receipts greater than $50,000 and less than $200,000, and total assets less than $500,000.

In terms of management, Lo Bianco advised that nonprofits take a good look at their governing body, its composition, size and policies.

In particular, boards need to consist of people who are knowledgeable in accounting, finance and program objectives.

Those dominated by family members and/or those with close external business relationships are subject to scrutiny in terms of conflict of interest and independence.

That consideration extends to outside management as well if the nonprofit has hired out its business functions.

While no written policies are required by Form 990, she advised all boards to have a minimum of three policies, the most important being an Executive Compensation Policy, a Conflict of Interest Policy and an Investment Policy.

Others should be added as appropriate, including a Fundraising Policy, a Document Retention and Destruction Policy and a Whistleblower Policy.

With the IRS digging into executive pay and severance payments, boards need to compare their own expenditures with other similar organizations or market practices.

In addition, she said the IRS cross-checks individual tax returns, monitoring payments reported by nonprofits to taxes paid by the individual and by independent contractors.

While the IRS doesn’t require a Conflict of Interest Policy, Lo Bianco said that answering no to the question of whether or not one exists is “Exhibit A,” in an audit.

She also advised that Arizona state law does require that form of policy for organizations with assets in excess of $10 million or revenues in excess of $2 million.

In addition to its own efforts to crack down on nonprofits, the IRS is encouraging individuals to report inappropriate activities by a charity.

Complaints can be filed with the EO Examination Division through Form 13909 available at IRS.org or by calling (800) 829-3676.

More information on Form 990 is available from the Journal of Accountancy at http://www.journalofaccountancy.com/Issues

/2009/Mar/RedesignedForm990.htm.

The Sedona Community Foundation will hold a grant-writing workshop on Tuesday, June 2, from 9 a.m. to noon at the Sedona Public Library.

The workshop is free, but advance reservations are required by calling Judy Talley at 282-2042 or e-mail jtalley@azfoundation.org.