IRS Form 990 Regulations – Compliance Schmompliance

Earlier this week, we hosted our first session explaining the new IRS Form 990 to nonprofits.  Have you ever seen a group of deer in headlights? 

Not a pretty sight. Nor is it going to be a pretty sight to get your board ready to answer all of its pages of questions with the “right” answer, and answered honestly.  After all, it is one thing to answer a question “yes” with a yes that means, “Yes, we have a policy.  We think we know where it is.” And quite another to answer a question, “Yes, we have a policy, we actually not only use that policy on a regular basis, we review and update it as needed.” 

To complete the new Form 990, you could get away, to a very great extent with the first yes; but to do your organization true justice, you should be answering with the second yes. Which brings me to the real point of my rambling.  The IRS does not know nonprofit best practices for management and governance, but it drafted, got lots of feedback, and finalized this new Form 990. 

Most accountants and auditors don’t know nonprofit best practices, but they do know accounting and how to conduct audits, and are ardently attending IRS-sponsored seminars on understanding the changes to the Form 990.  Lawyers are in the same boat:  their job is to know the law, but not the best practices of nonprofits, so they are doing the same as their accounting colleagues:  working to understand the implications of the new Form 990. Thus, while accountants and lawyers—and I mean absolutely no disrespect here– are interested in seeing their clients be in IRS and legal compliance, mere compliance does not necessarily equate with even good, let alone best practices of management and governance. 

For example, not all conflict of interest policies are alike, with some moving you further along the good, better, best continuum than others.  Legal compliance ensures that you have the mandatory minimum allowed by law, but not necessarily the number considered to be a best practice. 

Schedule J of the new 990 asks which of six options you might have used in determining the executive director’s compensation, but it doesn’t help you understand which, if any—or all—would be the best guides and process for making that determination.   Please understand that being in compliance means simply that:  you are in compliance.  But compliance with accounting rules and legal expectations does not mean that you are a good, strong healthy organization fulfilling your mission promises with a proven record of impact.  Might there be a relationship between the two?  Absolutely.  But does the former lead to, cause or equate to the latter?  Absolutely not.  So, please listen to your auditor, your accountant and your lawyer and be in compliance.  But when you want to know what are the best practices you could use to be in compliance, ask someone who knows what those best practices are.      

Finally, please learn – and as soon as possible – what is expected of you under the new Form 990.  Right now there doesn’t appear to be an IRS imposed penalty if you give the “wrong” answer.  But don’t be fooled by the statement that there isn’t a right or wrong answer.  If you are given the option of yes or no, there is clearly a best or right answer.