Most nonprofit organizations would have to provide the Internal Revenue Service with detailed information about their use of munis if the agency moves forward with a proposal to add a tax-exempt bond schedule to its Form 990, the annual information return filed by such organizations. The new schedule, which the IRS unveiled yesterday, would require public charities and other exempt groups to report data about private use of their bond-financed facilities and fees paid to third party advisers and, as a result, would heighten their need for detailed compliance policies and procedures, according to sources.IRS officials said yesterday they hope the public will weigh in on the proposed new schedule during the 90-day comment period.“Over the years, the sector has grown and changed, but the form has not,” IRS exempt organizations director Lois G. Lerner said in a teleconference with reporters.The new “core” 10-page form asks exempt organizations if they had any outstanding tax-exempt bonds in the previous tax year, as well as whether proceeds were invested beyond a temporary period exception, any escrows were maintained, or they acted as an “on behalf of” issuer during the year.If adopted as is, nonprofits with outstanding bonds in excess of $100,000 would also have to fill out the new Schedule K, which requires a detailed listing of each bond issue, the uses of proceeds, and elements of private use of bond-financed facilities, such as management contracts and research arrangements.It also would require a list of third parties, their roles, fees paid and whether the fees came out of bond proceeds, and whether the parties were selected through formal processes.Despite the IRS’ assertion that most organizations would not need to do more filing work, the new Schedule K “would impose a huge compliance burden on many organizations with tax-exempt financing,” especially the proposed requirement to provide “extremely specific information about private use,” according to Michael Bailey, an attorney with Foley & Lardner LLP in Chicago. “In large part, these proposed changes, together with the compliance check letters expected to be sent out by the IRS later this summer, appear to be part of a concerted effort by the service to motivate users of tax-exempt financing to adopt formal compliance procedures,” said Bailey, a former IRS official and the chair of the American Bar Association’s tax-exempt financing committee.Charles Samuels, an attorney who represents the National Council of Health Facilities Finance Authorities and the National Association of Higher Educational Facilities, said the IRS’ estimate that only 5% of exempt groups will need to file a Schedule K is misleading.“This will affect a very high percentage of [exempt organizations] in the bond world,” said Samuels, a partner with Mintz Levin Cohn Ferris Glovsky and Popeo PC here. “But this is not unexpected. There is a sense that there’s been a lack of disclosure by charities. How we’re going to feel about this depends on an evaluation of the details.”The Senate Finance Committee has been investigating numerous aspects of charitable finance, including tax-exempt bonding and executive compensation. Chairman Max Baucus, D-Mont., and ranking Republican Charles Grassley of Iowa yesterday praised the revised form.“This new form will help the public and the IRS assess whether tax-exempt organizations are staying true to the reasons they were granted exempt status in the first place,” Baucus said in a press release. “We must be assured that the public’s donations are used appropriately.”“The 990 filing is often the public’s only look at a nonprofit’s finances,” Grassley commented. “They deserve accountability for the generous tax breaks the federal government offers to tax-exempt groups. The IRS’ revisions are on the right track.”Ronald J. Schultz, a senior technical advisor in the IRS’s tax-exempt and government entities division, said during the teleconference that the agency needs “to do a better job of understanding what issues are out there, what the proceeds are being used for, [and] what the facilities are being used for. There hasn’t been much information along those lines required under the current form.”“This is one area that we know — because we haven’t asked for it before — may take some transition time,” Lerner added.The IRS hopes to have the form ready for the 2008 tax year, meaning the new forms would be filed in 2009. The draft form and instructions are available on the IRS’ Web site, IRS.gov/eo. Comments, due by Sept. 14, should be e-mailed to
