For 501(c)(3) organizations that must file IRS Form 990 and currently benefit from tax-exempt financing, it is important to remember the additional information that must be filed with the IRS on Schedule K for all 990s filed beginning with fiscal year 2009. As you may be aware, in late 2007, the IRS released a newly created Schedule K which imposes many new stringent annual reporting requirements on 501(c)(3) organizations that benefit from tax-exempt bond financing.
The creation of the new Schedule K affirms the IRS’s increased efforts to monitor compliance by 501(c)(3) organizations, particularly in the tax-exempt bond arena. The new Schedule K requires detailed annual reporting on each outstanding tax-exempt bond issue, including, among other things, the following information:
Use of Bond Proceeds: Schedule K asks for information on: (1) unspent bond proceeds; (2) issuance costs financed with bond proceeds; (3) working capital financed with bond proceeds; and (4) allocations of bond proceeds to projects.
Private Business Use: Schedule K asks about: (1) joint ventures between the 501(c)(3) borrower and for-profit entities; (2) lease arrangements involving bond-financed property; (3) management agreements and research agreements involving the bond financed property; and (4) the specific percentage of private business use of bond-financed property.
Arbitrage Compliance: Schedule K asks about: (1) rebate payments made for the bond issue; (2) hedges identified with respect to the bond issue; (3) guaranteed investment contracts entered into with respect to the bond issue; (4) temporary periods applicable to the bond issue; and (5) exceptions to rebate applicable to the bond issue.
Reporting the above information on Schedule K was optional for fiscal year 2008, but is mandatory for fiscal year 2009. For entities in the process of completing their Form 990s for fiscal year 2009, it is imperative that you are aware of these new reporting requirements. In our experience, full and accurate reporting of the information required to be provided on Schedule K is more complicated and difficult than it may appear at first glance, and this new initiative almost certainly will be used by the IRS to identify potential audit targets.
Consequently, it is important to provide complete and correct information on Schedule K in the manner intended by the IRS to guard against the possibility that an organization could unintentionally bring IRS scrutiny to any particular bond issue or to the organization as a whole.
We strongly encourage each organization required to file a Schedule K to discuss some or all of the responses on Schedule K with its bond counsel or tax counsel before filing its Form 990. The public finance attorneys at McGuireWoods are available to discuss the responses to Schedule K with you in more detail.