Looking beyond the surface of charities is of tremendous and growing interest to the IRS, state attorneys general, watchdog and ratings agencies, legislative and regulatory bodies, current and potential service recipients, grantors and donors, trustees, the general public, the press and competing organizations.
Fortunately, the federal government has given nonprofits a valuable tool to significantly increase their transparency and leverage communications with stakeholders.
A fundamental requirement for transparency is reporting to regulatory bodies — most often via federal Form 990, Return of Organization Exempt from Income Tax.
The Form 990, and/or other related forms, must be submitted annually to the IRS by most tax-exempt organizations. It is not a tax return, but rather an information return, and it is frequently an organization’s main channel for disclosure; making the document available to the public is required for maintaining tax-exempt status. In fact, many organizations make their Form 990 available right on their website. Through Form 990 reporting, the IRS requires the release of a significant amount of data — some not necessary to obtain or maintain tax exemption — such as compensation, governance policies, finances, conflicts of interest and fundraising efforts.
The IRS imposes stipulations on Form 990 reporting that is different from those for most other tax reporting — detailed, written descriptions of activities in supplemental schedules. Though many organizations were initially uncomfortable with the Form 990 disclosures when they were added in 2008, they now see it as an opportunity to use a sought-after document to speak publicly about themselves. An organization can go into thorough detail about its goals, accomplishments and service to the community. It can take advantage of the chance to clarify a potentially negative situation, casting it in a more favorable light than in a simple statement of figures. Organizations can boost their image and brand while satisfying regulatory and other reporting requirements.
An example of a good use of voluntary disclosure: When an organization must describe its accomplishments in Part III of the Form 990, it can also write about program elements that didn’t perform as well as expected or as usual. It can detail improvements in the works or anomalies eliminated and take the opportunity to tell how it successfully handled a challenge.
Avoid overdisclosure by understanding exclusions
As wise as it is to adopt transparency as a strategy through Form 990 disclosures, this can be a double-edged sword. On the one hand, an organization can show that it is accountable and operating within a strong governance framework. It can tell the world about its worthy mission and positive impacts. But an important question should be contemplated: Are there areas where the organization needs to be sensitive about what it is disclosing — can voluntarily reporting more information than necessary leave the organization open to competitive vulnerabilities or excess scrutiny? This is an important question that, if left unaddressed, could lead to unintended consequences of making a disclosure.
It’s best to strike a balance of disclosure and discretion. Take care in language about both positive and negative situations, and in avoiding legal and ethical issues, such as violating a contractual obligation not to disclose. It is important to understand what has to be disclosed at a minimum to satisfy IRS guidelines, including schedules and forms not specifically part of the Form 990 or Form 990-T, Exempt Organization Business Income Tax Return.
If, for example, an organization has multiple investments in partnerships participating in offshore investments, the participation in the partnerships may require filing additional forms, such as Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation.
In order to avoid overdisclosure, and possibly violating confidentiality requirements, the organization must exclude such a form when providing a public disclosure copy of the Form 990-T.
Build credibility through consistency
Your messaging in seeking transparency should be the same in all communications. Make sure the story in your Form 990 disclosures is the one being presented on your organization’s website and in social media. This will mean collaboration across your organization and among individuals and departments — finance, tax, HR, business development and in-house counsel. An organization can lose hard-earned credibility due to inconsistent releases of data and statistics.
In getting transparency right, your organization positions itself for a positive reputation, reflecting truthfulness and a willingness to be forthright with all stakeholders.
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The State of the Not-for-Profit Sector in 2016