WASHINGTON - The Internal Revenue Service yesterday unveiled the final instructions to its redesigned Form 990 for nonprofit organizations and Schedule K on tax-exempt bonds.
The final instructions come after the IRS received comment letters from the National Association of Bond Lawyers and the American Bar Association.
In a key change from the proposed instructions, the IRS agreed to clarify the reporting requirements for what refunding bonds 501(c)(3) organizations would have to provide information on, a high priority for NABL in its June letter. The IRS clarified that issuers will not have to provide information about the private business use of bonds issued before 2003 that were refunded after 2002.
The draft instructions to Schedule K, which were issued in April, stated that nonprofit organizations would only have to provide information on bonds issued after 2001. However, IRS officials had told bond lawyers in January that Schedule K would apply to refundings, which bond attorneys said would have forced charities to provide information on the underlying bonds possibly dating back several years, a potential problem for some organizations.
"I think that was an issue that was pretty important to 501(c)(3) organizations and without that change, they potentially would have been required to go back many years to determine private business use, well before they were put on notice that they would need to report that information," said Scott Lilienthal, a partner at Hogan & Hartson LLP.
He noted that the change was "probably our most important comment ... So overall, I think we've got to be pretty pleased."
Some other substantial changes made from the April draft version of the instructions to the final version involve how 501(c)(3) organizations will have to report potential private business use.
In its June letter, NABL had expressed concern that since the draft instructions required the reporting of any management or service contracts that "may" result in private business use, the wording could have forced organizations who were confident no private use occurred, perhaps through an IRS-sanctioned safe harbor, to still respond affirmatively to the question.
The final instructions still require organizations to indicate if they have contracts, even under the safe harbor, that may result in private business use. But, they are not required to account for safe harbor contracts in calculating their average private business use for the fiscal year.
"The [final] instructions make very clear that if a management, service, or research agreement may result in private business use, then the responder has to answer 'yes,' even if the contract or agreement qualifies under the IRS safe harbor," said Jeremy Spector, a partner at Mintz Levin Cohn Ferris Glovsky & Popeo PC. "However, on the instructions regarding the amount of private use during the year, the IRS says that any contracts meeting the safe harbor ... don't have to be reported as private use."
But Linda Schakel, a partner at Ballard Spahr Andrews & Ingersoll LLP, noted that requiring organizations to report contracts even if they fall under the safe harbor could present a substantial burden to some large organizations.
"Some of these hospitals have hundreds of [contracts] ... you're going to probably have to have full-time people for filing out 990's," she said. "This is definitely a lot of information, that would allow the IRS to be able to go back to organizations and do a lot more intensive questions and audits, which is very expensive and time-consuming for organizations."
Additionally, the IRS changed its instructions to require charities to report their average private business use for the fiscal year. Previously, they had been required to report the highest percentage of private business use occurring in the fiscal year.
However, the IRS did not include a provision that tells organizations to provide information to their "best ability," a request made by some bond attorneys. The draft and final instructions both state that the penalty for reporting inaccurate information on the form is perjury, but some had called for more leeway from the agency for organizations lacking the necessary documents from older transactions.
Under the new form and schedule, charitable and other nonprofit tax-exempt organizations with more than $100,000 of bonds outstanding are required to list any bonds issued after 2002 that are still outstanding for the 2008 tax year in forms to be filed in 2009. The agency is giving borrowers a one-year delay in responding to detailed questions about the bond issues in Part II-Part IV of Schedule K. Those questions must be answered for the 2009 tax year in forms to be filed in 2010.