Disclosure of Key Relationships
Part VI, Section A of the IRS Form 990 requires disclosures of governance composition. One question inquires into the nature of relationships between people involved with an organization in difference capacities.
It asks, “Did any officer, director, trustee, or key employee have a family relationship or a business relationship with any other officer, director, trustee, or key employee?”
Through this question, the IRS hopes to identify the potential for insider transactions that could result in conflict of interest situations or the misuse or charitable assets. It is simple enough, but breaking down the IRS definitions makes it easier for organizations to solicit the appropriate information from officers, directors, trustees and key employees.
Who is included in "Trustees, Directors, Officers, and Key Employees?"
- Trustees generally have powers that are exercisable solely in the fiduciary capacity consistent with and in furtherance of the charitable purposes of the trust. IRS Pub 557.
- Directors comprise the governing body of an organization, through a Board of Directors. A Board has the ultimate authority for the management or direction of the business and affairs of the organization. Directors owe a fiduciary duty to the organization.
- Officers are often elected or appointed to additional duties beyond other directors. Minnesota law requires all nonprofit Boards elect or appoint a “president” and “treasurer.” M.S.A. § 317A.301 (2009).
Key employees are defined by the IRS with the following three tests:
- Compensation Test:
- Employee is compensated (according to W2) in excess of $150,000 annually.
- Responsibility Test:
- The employee has responsibilities, power or influence over the organizations as a whole similar to the authority of trustees, directors or officers, or
- Manages a program or activity that represents 10% or more of the organization’s income or expenses, in comparison to the organization as a whole, or
- Has or shares authority to control 10% of organizational capital expenditures, operating budget, or compensation for employees.
- Top 20 Test:
- Employee is one of the 20 employees (in addition to satisfying the two above tests), with the highest reportable compensation from the organization and related organizations for the calendar year.
Family or Business Relationship
Only two relationships are relevant in question two, a family or a business relationship. Similar to the definitions above, the IRS definition is not necessarily the same as commonly understood.
- Family Relationships include certain hierarchical and lateral relationships. The family of a trustee, director, officer, or key employee includes a spouse, parents, grandparents, brothers and sisters (whole or half blood siblings), children (natural and adopted), grandchildren, great-grandchildren, spouses of siblings, children, grandchildren, and great-grandchildren.
- Business Relationships include an employment relationship, a business transaction outside of the ordinary course of business above $10,000 in the aggregate during the tax year, or common ownership greater than 10% in the same business or investment entity. See IRS Form 990 Instructions, for a full iteration of each indication of a business relationship.
- Privilege Exceptions do not need to be reported. These relationships include attorney/client, medical professional/patient, and priest/clergy/penitent/communicant.
Reasonable Effort
The Form 990 Instructions provide that an “organization is not required to provide information about a family or business relationship between two officers, directors, trustees, or key employees if it is unable to secure the information after making a reasonable effort to obtain it.” An example of a reasonable effort would be a questionnaire distributed to each trustee, director, officer and key employee related to their family or business connections with others involved with the organization.
Questionnaire
Some organizations may be small enough that the preparer may have actual knowledge of reportable relationships; other organizations would be well served by developing and distributing an annual relationship questionnaire. Most questionnaires cite the 990 changes as the purpose for distribution of the questionnaire and define the relationships therein concerned and ask trustees, directors, officers and key employees to disclose such relationships.