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Articles on Compliance Strategies
New IRS Form 990 for Nonprofits Brings Heightened Scrutiny of Pay, Governance and Charitable Activity Reprinted from REPORT ON MEDICARE COMPLIANCE, the nation's leading source of news and strategic information on false claims, overpayments, compliance programs, billing errors and other Medicare compliance issues. Nonprofits — particularly hospitals — will have to cough up more detailed information about compensation on the new Form 990, which the IRS unveiled Dec. 20 for tax year 2008. IRS also is poking its nose into governance and hospital operations in an unprecedented manner, requiring disclosure, for example, of whether board members saw the 990 before submission and reporting of the number of employees who earn $100,000 or more, experts say. For the first time, there's a Medicare and Medicaid element to the 990 tax form — a sort of intersection that requires greater vigilance on the part of nonprofit hospitals. IRS wants to know whether your hospital has written policies for whistle-blowers and conflicts of interest, and the nature of its joint ventures (e.g., with for-profits), says Manhattan attorney Beth Essig, who is with the law firm Epstein, Becker & Green. "This is information that can be used by other regulators," she says, such as CMS, OIG and state Medicaid auditors. But hospitals will have much more of an opportunity to put their charitable activities in context. Unlike the current 990, the new 990 allows hospitals to use narrative form in multiple locations to explain the various ways they assess the needs of the community and provide community benefit, says Houston attorney Todd Greenwalt, who is with the law firm Vinson & Elkins. The 990 is the form used by nonprofits to report information to the IRS on their charitable and other activities. It's the IRS's primary tax compliance tool for nonprofits. Greenwalt notes that 990 serves both a transparency purpose for the public because nonprofits must make the form publicly available and as an enforcement tool for the IRS. Completed forms are available free to anyone at www.guidestar.org. "The new 990 is more comprehensive and more intrusive because it asks for considerably more information than was requested about the old form," he says. Completing the form should not be left to the finance department, Essig says. It calls for a team effort involving compliance, public relations, senior executives and others, because the information inside is potential dynamite. Once reported in the public domain, the 990 can affect operations and public relations, such as fundraising (for example, how many donors will open their wallets for hospitals that pay 100 employees more than $100,000?) and patient perception (what will be the effect on the public when the local newspaper reports that the CEO of the local charity hospital earns $1 million?), she says. "Hospitals must think about how they will gather and disclose this information." The hospital schedule will be phased in, Essig notes. "There is a one-year breather for them to go back and look at their charitable care and community benefit activities so when they must be disclosed in 2009, they are ready to disclose information they are comfortable with," she says. Detailed Questions About Compensation All nonprofits must fill out the "core" Form 990 (Parts I through XI), and hospitals must also complete Schedule H. Essig and Greenwalt agree that hospitals should focus on three areas in particular (whether on the core form or Schedule H): questions on compensation, governance and charitable activities. Executive compensation: The area that perhaps has nonprofits shaking most in their boots is executive compensation, which can look bad splashed across a newspaper. The Form 990 for the first time asks how many people earn more than $100,000 in reportable compensation, Essig says. It also tries to pick up severance payments by asking for information on former executives and officers. And there are some nitty-gritty details about indirect compensation. For example, did the tax-exempt organization provide first-class travel to any of the five highest-paid executives or their companions? "The IRS didn't ask this level of detail before," Greenwalt notes. Moreover, the same executive compensation questions remain from the existing 990. Nonprofits must reveal the compensation of all current and former officers and directors, including the CEO, as well as a list of the compensation of the five highest-paid non-officers who make more than $100,000. Beyond sheer numbers, the Form 990 requires details on how hospitals set compensation, and this is a significant development because a hospital's answers can make or break it audit-wise, Greenwalt says. Do they use compensation surveys and consultants? Two hospitals may each pay their CEOs $1 million, but it's "a red flag" if one didn't consult with any experts while the other convened a committee that hired a consultant and used survey data to set compensation, and the $1 million is at the 80th percentile for executive compensation, Greenwalt says. The IRS may say, "These guys are putting in a lot of effort to ensure compensation is reasonable, so that hospital is not an audit target," he says. IRS flirted with putting a quickie summary of executive compensation on the first or second page so readers could immediately grasp how much the top dogs made without having to wade through the 990. But after negative comments from the industry, IRS backed off, Greenwalt says. Now the first two pages are a summary of financial data. Governance: Things may get sticky when executives have to face board members who may not have seen the 990 before. "Board members who don't see the 990 will be asking to see it," says Essig, who was in-house counsel for a hospital for 27 years. The Form 990 asks about five governance-type policies, Essig says. For example, IRS requires the hospital to state whether it has a conflict-of-interest policy, to describe the substance and to explain how it's monitored. Information must also be provided about whistle-blower policies and written document retention and destruction policies, she says. Greenwalt and Essig say the IRS wants details about the board. For example, do you have an independent board representative of the community? How many voting members are there? Of them, how many are independent? How were they elected? Are there any non-insiders represented? Does the board receive input from the community? Which officers and board members have business relationships with the hospital? "It's the same as the old 990, but with much more specificity," Greenwalt says. "You can't just answer yes or no. You have to prove it — explain who is on the board and why you are doing it the correct way, how and why they are independent, [etc]." The bottom line: IRS is aiming its audit gun at nonprofit boards stacked with executives and physicians giving themselves juicy compensation packages without bothering to hire a consultant. Charitable activities: Greenwalt says 990s will be looked at with a more critical eye to "determine whether nonprofit hospitals are benefiting their communities sufficiently to justify their tax exemptions." The form asks for a lot of information about charitable activities, but also gives the hospital an opportunity to describe the range of activities it engages in to benefit the community. For example, Schedule H seeks information like this:
The 990's overhaul brings nonprofits more in line with the oversight of for-profits a la the Sarbanes-Oxley Act, Greenwalt says. "The IRS is saying, 'We are going to be for nonprofits what the SEC is for publicly traded companies. We want a lot of information, and we are going to shine a light on everything, and we are going to make everything public." Essig recommends that hospitals prepare for the inevitable disclosure of all this information. Gather relevant policies (e.g., debt collection, compensation-setting) and call a high-level committee meeting — perhaps with counsel — to discuss plans to prepare the new Form 990. "Ensure it's consistent with the law and how the institution wants things done, that it's ethical and monitored," Essig advises. "Educate the board, donors and medical staff in advance. I would make sure the board is not surprised by any information in these forms and that they have a year to do this." View the new form at www.irs.gov/eo. |
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