The charitable world is about to get a taste of the type of scrutiny over pay and governance that has become typical in corporate America -- courtesy of the Internal Revenue Service.
In the wake of numerous financial scandals at charities nationwide , the federal tax agency is introducing a new reporting form that would make it much harder for nonprofit organizations to conceal excessive salaries, lavish spending, and conflicts of interest.
A draft of the revised Form 990, which must be submitted annually by more than a million public charities and other tax-exempt groups, would require nonprofits to prominently disclose their total number of officers and employees, employee compensation, highest compensation, and total number of individuals being paid more than $100,000.
"This is going to have a major impact on the way nonprofit public charities operate," said Thomas A. McLaughlin, a senior manager in the nonprofit practice at the Boston office of Grant Thornton, a national accounting firm. "It's asking in great detail about governance and leadership, particularly about who runs the organization, including paid and volunteer leaders, as well as any consultants. It doesn't leave a lot of wiggle room in the reporting."
The draft 990 was issued last week by the IRS, which is letting the public weigh in on the changes before they are finalized. The changes were driven in part by a 2003 series by the Globe Spotlight Team, which found dozens of examples of extravagant pay, luxurious perks, and self-dealing buried in the tax forms filed by private foundations. Those findings spurred congressional hearings on nonprofits and prompted the nonprofit sector to set new standards for itself.
The 990 revisions would prevent, for example, the reporting done by the Pan-Massachusetts Challenge, the successful Needham-based charity bike ride whose founder, William Starr, is listed as an unpaid president/director on its 990. An asterisk, however, points to a separate statement that notes a $900,000 fee for "management services" paid by PMC to Starrting Events, Inc., a Wellesley firm owned by Starr. According to a PMC spokeswoman, Starr receives $300,000 of that fee in annual pay.
On the new form, Starr's compensation from all related organizations would have to be disclosed on the second page.
The new form also would not have permitted the Massachusetts Society for the Prevention of Cruelty to Animals to disclose on page 15 of its 17-page 2004 tax return that its then-president, Larry M. Hawk, made $54,000 from four related organizations in addition to his $285,278 salary; his total compensation would have to have been listed on the first page.
"This is going to strengthen the nonprofit sector, and it's going to be painful and uncomfortable for some organizations," McLaughlin said.
The new form asks direct questions about governance, including whether family or business ties exist among an organization's trustees and officers. It also asks whether the independent board members approved executive pay. The first page of the filing now asks for the group's mission statement and comprehensive compensation information, items that historically have been buried deep in these documents.
It also requires information about past officers and directors who were highly compensated. And it asks if nonprofits have whistleblower and document destruction policies.
William Josephson, former chief of the charities division in New York, said the intention of the form is clear: "We want to know what you're actually doing. Tell us what you're doing, up-front, every year."
Still, the revised form has potential loopholes.
A case in point: Because the new form does not flatly ask whether family members of a nonprofit's officers and employees are on its payroll, it may not have required the MSPCA to disclose that Hawk paid his wife $28,600 to serve as an interim director at its Nantucket hospital and his two children $4,200 each to edit its website. Hawk resigned last year.
The IRS acknowledges that the 990 has not kept pace with changes in the sector and the law. The agency is still working on revisions to the tax form for private foundations, the 990-PF, which has many of the same shortcomings as the 990. For instance, the Globe found that Paul C. Cabot Jr. of Needham had paid himself more than $5 million over five years from his family's small charitable foundation, compensation that had eluded the IRS. In 2004, Cabot agreed to repay $4 million, following an investigation by the state attorney general.
The new form 990 reflects many of the concepts of the Sarbanes-Oxley Act, the corporate accountability statute approved by Congress in 2002. The current 990 had not been revised since 1979, even as the nonprofit sector grew to more than $3 trillion in assets.
"We picked key issues that we knew were important to us from a compliance perspective and also to the public," said Theresa Pattara, project manager for the 990 redesign.
The IRS hopes to have the new form in use for tax returns filed in 2009. It is accepting public comment on the form through Sept. 14.
Sacha Pfeiffer can be reached at email@example.com.