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2022 Form 990 contains updates affecting compensation reporting and short period return filers
August 2023
In brief
Comparing the 2022 Form 990, Return of Organization Exempt From Income Tax, to the 2021 Form 990 shows relatively few modifications other than minor stylistic changes and updated references to IRS guidance. Notable changes include:
- Updated instructions for reporting compensation to individuals paid through management companies with the revocation of Announcement 2001-33.
- Updates to the requirements for filers of short period returns due to accounting period changes.
PwC is pleased to make available our annotated versions of the 2022 Form 990, accompanying schedules, and instructions. The documents include PwC’s highlights of and comments on key changes for 2022. The documents are searchable and include bookmarks to assist with navigation.
Action item: Failure to timely file a complete and accurate Form 990 can have adverse impacts, including penalties and loss of tax-exempt status. As a result, organizations should take steps designed to avoid nonconforming or incomplete responses on Form 990 that could result in additional IRS scrutiny.
In detail
Part VII - individuals reporting compensation through management services company
The 2022 Form 990 instructions note that IRS Announcement 2001-33 has been revoked by IRS Announcement 2021-18. Announcement 2001-33 had provided taxpayers with reasonable cause for purposes of relief from penalties if they reported compensation in accordance with the Announcement rather than the Form 990 instructions. Specifically, the 2001 Announcement had provided that organizations that pay third parties, such as management services companies, for the services of officers, directors, trustees, or key employees will be deemed to have reasonable cause for penalty purposes if they report the amount paid to the management company, rather than the compensation paid to the individual who provided services.
The IRS determined that it no longer is appropriate for a taxpayer to rely on Announcement 2001-33 rather than follow the Form 990 instructions. The current instructions provide detailed guidance for reporting compensation paid through a management company, employee leasing company, professional employer organization, common paymaster, or other related or unrelated organization. In some situations, the filing organization must report such third-party payments as compensation from the filing organization.
The 2022 Form 990 instructions also provide clarity in determining whether an individual compensated through a management company should be considered an employee of the taxpayer. Whereas previously that determination had been made based on applicable state law of the taxpayer, the instructions now require that determinations of employee status be made based on “usual common law rules applicable in determining the employer-employee relationship or who are treated as employees of the filing organization for federal employment tax purposes under section 3121(d).” This change was made, in part, due to difficulties faced by taxpayers in determining applicable state law for these designations.
Accounting period changes
The 2022 instructions provide new guidance for taxpayers that, because of a change in accounting period, are filing a short period return. The instructions now provide that a taxpayer filing such a return should “use software with a change of accounting period field to file.” The taxpayer should also include a reason for the change, either “Form 1128 was approved” or “Revenue Procedure 85-58 rules apply.”
This change reflects the fact that all Form 990 series returns must be electronically filed. Previous instructions had required that the taxpayer enter “Change of accounting period” at the top of the return and did not require a reason for the change. Requiring that changes in accounting periods be noted through the filing software is intended to introduce greater uniformity in reporting among taxpayers, as will the additional requirement that the taxpayer provide a reason for the change.
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