IRS releases new draft instructions to Form 990.

• Author: Leggiero, Heather
• Position: Tax exempt organizations

The new Form 990, Return of Organization Exempt from Income Tax, was released in December 2007, and the first draft release of the instructions was issued in April 2008. The IRS has now released a second draft of these instructions. According to the IRS, the instructions will not significantly differ in content when they become final later in 2008. Because of the extensive overhaul of the form and consequently the instructions, the IRS wanted an accurate draft released early so exempt organizations and practitioners could prepare for the changes.

The new Form 990 will be required for the 2008 tax year, although some transitional relief is allowed for organizations with gross receipts under $1 million and total assets less than $2.5 million (for tax year 2009, relief is granted to those with gross receipts under $500,000 and total assets less than $1.25 million). These organizations can choose to file Form 990EZ instead. The filing thresholds will be permanently set at less than $200,000 of gross receipts and less than $500,000 of total assets beginning with tax year 2010.

The revised instructions provide clarity in many aspects of the form, but especially in the definition of "key employee." The instructions state that for purposes of reporting on Form 990, a key employee is an employee (other than an officer, director, or trustee) who meets all of the following requirements:

1. $150,000 test: The employee receives reportable compensation from the organization and all related organizations in excess of $150,000 for the calendar year ending with or within the organization's tax year;

2. Responsibility test: The employee

   1. Has responsibilities, powers, or influence over the organization as a whole that are similar to those of officers, directors, or trustees;

   2. Manages a discrete segment or activity of the organization that represents 10% or more of the activities, assets, income, or expenses of the organization as compared with the organization as a whole; or

   3. Has or shares authority to control or determine 10% or more of the organization's capital expenditures, operating budget, or compensation for employees.

3. Top 20 test: The employee is one of the 20 employees (that satisfy the $150,000 test and the responsibility test) with the highest reportable compensation from the organization and related organizations for the calendar year ending with or within the organization's tax year.

   In addition, an individual who is not an employee of the...