IRS Releases Draft 2022 Form 990 Instructions and Reminds Tax-Exempt Organizations of Changes to Reporting Management Company Compensation

The Internal Revenue Service recently released an early draft of the
2022 Instructions for Form 990, Return of Organization Exempt from Income Tax.  The “What’s New” section reminds filing organizations about IRS Announcement 2021-18, which was released in 2021 and in which the IRS announced that it had revoked Announcement 2001-33, effective for annual information returns required to be filed for taxable years beginning on or after January 1, 2022.  

Announcement 2001-33 provided that tax-exempt organizations that pay other persons, such as management services companies, for the services of officers, directors, trustees, key employees, or foundation managers, would have reasonable cause for purposes of the penalty under I.R.C. Section 6652(c)(1)(a)(ii) for failing to provide the information required by the annual information return if they reported compensation on such returns in the manner described in Announcement 2001-33 instead of in accordance with the Form 990 series instructions.   

Specifically, Announcement 2001-33 allowed tax-exempt organizations that pay a management company for services provided by officers, directors, trustees, key employees, or foundation managers to report in the compensation section of the Form 990 series the aggregate amount paid to the management company, rather than directly reporting the compensation paid to each person who performed the services for the tax-exempt organization.  

Announcement 2021-18 revokes Announcement 2001-33 and requires that organizations instead follow the specific instructions of the Form 990, Form 990-EZ, or Form 990-PF.  For Form 990 and Form 990-EZ filers, this means that a filing organization must report on its return the compensation paid by a related management company to the filing organization’s personnel.  This presumably includes all of the compensation paid by the management company to the filing organization’s personnel and not just the portion attributable to services provide to the filing organization.  The Form 990-PF instructions appear to extend this requirement to unrelated management companies, though those instructions also appear to limit the Form 990-PF reporting to only the amount of compensation indirectly paid by the private foundation rather than the total compensation paid by the management company to the relevant individuals.   

This development could mark a significant change in the manner in which many organizations report compensation paid through management companies. 

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