To combat abuse and alleviate public concerns, the Internal Revenue Service is weighing significant changes to disclosure requirements of its 990 not-for-profit reporting form.
Earlier this month, the IRS unveiled new rules for not-for-profits that for the first time would open to public scrutiny loans or payouts to former executives and require not-for-profits to outline family or business relationships among key leadership.
That's not all. The IRS wants not-for-profits to tally how many officers or directors may vote during board meetings and disclose whether or not the organization has a written conflict-of-interest policy.
And it's not the last change not-for-profits should expect as regulators respond to demands from lawyers, legislators and organized labor that tax-exempt organizations -- particularly hospitals and health systems -- must be more open and accountable to the public.
"I think (the changes) are a step, but it's only a step," said Thomas Flannery, head of Buck Consultants' national tax-exempt practice. "What can you predict in the next five years?" he said. "It's going to get tighter and tighter and tighter." Flannery said not-for-profit health systems and hospitals should expect further public disclosure. "The quid pro quo of not paying taxes is reporting," he said.
The latest requirements for the Form 990 appear in the new draft of the IRS' form. The agency posted the draft on its Web site for public comment through Nov. 7.
The proposed changes came one month after the IRS introduced a plan to revoke tax breaks for not-for-profits that award excessive compensation or bonuses to executives, key employees or influential former employees (Sept. 19, p. 6). Sen. Chuck Grassley (R-Iowa) is expected to introduce legislation this year in the wake of congressional hearings that were held on not-for-profit oversight and a June report to Congress from a coalition of industry experts and executives that offered 120 proposals to better govern tax-exempt businesses (June 27, p. 6).
"I think this is an evolution, not a fad," said Barry Arbuckle, president and chief executive officer of Long Beach, Calif.-based MemorialCare Medical Centers. "We're going to see more of this," he said. "It's not a flash in the pan."
States, too, have gotten more aggressive about holding not-for-profits accountable, Standard & Poor's analysts said in a report released last week. The Sarbanes-Oxley Act of 2002 heightened corporate accountability of public companies and intensified scrutiny of not-for-profits as well, S&P said.
Forty-six bills in 28 states sought heightened oversight of not-for-profits in 2004 and 2005. Lawmakers enacted 12, which were influenced by such Sarbanes-Oxley provisions as independent financial audits, improved governing board composition and conflict-of-interest policies, codes of ethics and whistle-blower protections, the report said.
Many health systems have already adopted such measures, said Arbuckle, who contributed to a June Governance Institute white paper which reported that 86% of tax-exempt health systems surveyed in July 2004-52 not-for-profit systems had adopted relevant Sarbanes-Oxley provisions. Systems saw such oversight as inevitable, Arbuckle said.
"We all want transparency and good compliance," said Joel Allison, president and CEO of Baylor Health Care System, Dallas, who also contributed to the Governance Institute's white paper. Baylor did a side-by-side comparison of Sarbanes-Oxley standards and its own practices and found the system largely in compliance, Allison said.
MemorialCare's governing board included a banker on its audit committee. Arbuckle consulted with advisers and concluded that wasn't enough: the board needed an accountant as well, he said.
The IRS' move to boost reporting requirements and public disclosure doesn't faze Arbuckle. "This is basic stuff," he said of the conditions. "None of it troubled me." However, he is concerned that mounting regulations and recent inquiries have burdened not-for-profit health systems with answering repetitive requests for information. "It's a sign of the times," he said. "It will become more rational over time." Arbuckle also fears heightened regulation will make it difficult to recruit directors or officers, particularly since most not-for-profits, unlike for-profits, do not compensate governing board members.
So what's next? Buck's Flannery said not-for-profits should seriously consider streamlining complex compensation packages, which includes converting perks to cash. That shouldn't be a problem if perks are reasonable, clearly in an organization's business interest, and have received board approval. "Get out of the business of trying to satisfy the status needs of executives," he said. "It isn't worth the hassle of trying to justify a car or a country club."
Expect to see not-for-profit reporting more closely mirror U.S. Securities and Exchange Commission filings for investor-owned companies, said Robert Valletta, PriceWaterhouseCoopers' healthcare assurance leader. Taxpayers expect to see charities justify their tax-exemption by a full accounting of community benefit and spending. The IRS' proposed reforms don't fully open up not-for-profits, but "It starts to open up the doors," he said.