By Aubrey Clegg, CPA, Senior Audit/Tax Manager, Financial Institutions Group

Evolving into a 12-page form with over 100 questions, multiple supplemental schedules and a required narrative schedule, Form 990 has become much more complex for its preparers – leaving it vulnerable to errors.

Leveraging its own experience preparing hundreds of 990s annually, Doeren Mayhew’s tax advisors count down the top 10 common errors or omissions to avoid when filing your next Form 990.

1.    Incomplete or omitted narratives

The narrative schedule, Schedule O, is not optional. It is actually one of the most significant schedules within the return. Beyond the basic requirements, Schedule O provides credit unions with an opportunity to highlight the organization’s processes and controls, communicate useful information to the credit union’s members and elaborate on any significant event that occurred during the tax year (e.g., a merger, a change in a top official position, etc.).

2.    Five highest-compensated independent contractors are omitted

Part VII (Section B, Line 1) requires credit unions to disclose its five highest-compensated independent contractors/vendors (received more than $100,000 during the year) including their name and address, the amount of compensation paid and description of the service provided. Typical independent contractors of credit unions are law firms, accounting firms and investment management companies. The Form 990 instructions exclude public utility and insurance providers, such as the National Credit Union Association (NCUA), Credit Union National Association (CUNA) and health insurance companies.

Also, don’t forget to include the total number of independent contractors that received more than $100,000, including the five highest compensated, reported on Line 1 of this section.

 3.   Reporting of too many or misclassifying employees

Total compensation earned by the organization’s current officers during the tax year is required to be reported in Part VII, Section A.  Most credit unions make the mistake of reporting the entire management team because internally they are classified as “officers.” However, the IRS’s definition of an officer is very specific.  Regardless of titles, at a minimum, the top management official (president, chief executive officer or executive director) and the top financial official (chief financial officer or treasurer) must be reported.

It’s also not uncommon for credit unions to misclassify employees as one of the five highest compensated or as a key employee. Many 990s identify employees in the five highest-compensated category, yet they don’t meet the minimum compensation threshold (greater than $100,000).

Only employees meeting all three of the following criteria need to be reported on Form 990 as key employees:

1.)    Receives reportable compensation of greater than $150,000 during the calendar year

2.)    Meets one of the three criteria of the “Responsibility Test”

3.)    Meets the “Top 20” test

Due to its public nature and sensitive compensation information, report only the minimum number of employees required.

4.    Lack of compensation reporting

Defined as other compensation, benefit information is commonly omitted in Part VII (Section A, Column F). Reportable benefits include the employer-paid portion of health insurance premiums, 401(k) matching/discretionary contributions, the annual increase/decrease in the actuarial value of a qualified defined benefit plan and amounts deferred (plus earnings) under a section 457(b) or 457(f) plan, among others.

5.    Missing or inaccurate compensation information of officers, directors, key and
       highly compensated employees

Often disregarded by preparers as not applicable to credit unions, questions found on Lines 1a – 4b of Schedule J do require answers and may even necessitate written narrative explanations depending on how they are answered. For instance a “no” response to Line 1b and a “yes” response to Lines 4a, 4b or 4c should result in additional reporting in Part III of the schedule.

Reserved for those employees reported in Part VII with total compensation greater than $150,000, Part II of Schedule J is often miscalculated. Reported W-2 compensation should be equal to the sum of columns B (i, ii and iii), while the sum of columns C and D should equal the amount reported in column F of Part VII.

6.    Reportable life insurance arrangements are excluded

Purchasing life insurance policies for key executives has grown in popularity over recent years within the credit union industry. Depending on the type of life insurance policies in place, you may need to complete additional forms and schedules when filing your 990. Familiarize yourself with reporting requirements related to the purchase of certain policies.

7.    Overlook disclosure requirements related to accounting for uncertainty in income taxes

Organizations are required to report the text disclosed in its financial statement footnotes describing its liability for uncertain tax positions in Part X of Schedule D.  Mandated by the Income Tax Topic of the Accounting Standards Codification, every credit union should have this narrative present in its 990 filing.

8.    Misinterpretation of “branches” occurs

When asked “Did the organization have local chapters, branches or affiliates?” in Part VI (Section B, Line 10a), many credit unions assume the question is referring to branch locations. That’s not the case. It is referring to other lines of business, not the same line of business being conducted in multiple buildings. The answer to this question is usually “no.”

9.    Understatement of informational returns filed

The total number of U.S. Informational Returns (Forms 1099, 1098 and 5498) the organization filed must be disclosed. However, the question (Part V, Line 1a) on the return only refers to the total number of forms reported in Box 3 of the summary Form 1096. This is misleading to most preparers since Form 1096 only sums all paper-filed information returns, not electronically filed returns. Frequently, preparers unintentionally omit the number of electronically filed returns. For most credit unions, the number of paper-filed informational returns is a mere handful compared to the many issued to the members and submitted electronically to the IRS.

Also, be careful not to report the aggregate dollar amount reported on information returns, but the number of returns issued.

10. Lack of unrelated business income analyses detail on Form 990-T

Unlike Form 990, Form 990-T is less complex, but still poses its own uncertainty surrounding reporting unrelated business income (UBI). Like it or not, unrelated business income tax (UBIT) is a reality for the credit union industry. While most cringe at the thought of preparing an unrelated business income analysis potentially resulting in significant tax liability, in actuality, most credit unions can completely offset UBI through the deduction of appropriate direct and indirect expenses.

A well organized, thorough analysis offers better chances of eliminating a scenario where UBIT is due. Determining the amount of UBI earned during the year is the easy part. Ascertaining a complete and thorough list of deductions is the challenge. A good analysis should include generating, sorting and analyzing data; conducting employee interviews, observing processes used in generating UBI and examining the UBI/cost relationships of these processes. Although initially, it is a timely process, the core research can be rolled forward and updated for future filings with the subsequent years’ data. It also can help safeguard the credit union in the event of an IRS audit.

To gain assistance in preparing your 990 or 990-T, contact Doeren Mayhew’s credit union tax advisors today.