Why Board Members of Private Clubs Need to Review their Form 990
Learn Why Private Clubs That Are 501(c)7 Organizations Must Review IRS Form 990
Many private clubs are 501(c)7 organizations; a tax-exempt status for social and recreational clubs. In order to protect a club’s tax-exempt status, board members need to have a basic understanding of the requirements imposed by the tax laws. They also need to develop policies and procedures which address these requirements and reporting mandates including Internal Revenue Service (IRS) Form 990.
This blog reflects our respective backgrounds and experiences as board members of both our clubs as well as other tax-exempt organizations. For this reason, we do encourage the boards of private clubs to engage and consult with tax preparers with a solid background in servicing 501(c)7 organizations, particularly private clubs.
About The IRS Form 990
The IRS Form 990 contains information concerning a club’s activities, financial information, management compensation, governance practices and compliance with applicable tax laws. Understanding these requirements is an important element of a board member fulfilling his/her fiduciary duties. The IRS considers this understanding important and seeks affirmative confirmation the 990 was circulated to the board before filing and requires a description of the process the board uses to review the 990. Clubs that are 501(c)7 organizations failing to comply with these requirements risk losing their tax-exempt status. Lack of compliance could also trigger substantial fines.
- Among other topics, board members should give deliberate thought to the following:
- Has the Club’s mission changed? Specifically, is the Club focusing on non-member activities that might jeopardize its tax-exempt status?
- Does the Club engage, directly or indirectly, in any political campaign activities?
- With respect to the Club’s board:
- Is there any compensation, including complimentary or discounted dues or amenities, for board members?
- Does the Club conduct any business with current or former board members or their families?
- Has the Club delegated its day-to-day operations to a management company?
- Does the Club have both conflict of interest and whistleblower policies?
- Does the Club appropriately account for any unrelated business income?
- Did the Club make changes to their by-laws or other governing documents?
- What is the basis for determining the compensation of the general manager and other key employees?
- Does the Club conduct annual independent audits of its financial statements?
IRS Form 990 Review Process
While all board members should take the time to review the Form 990 (as well as other state and local tax filings), we recommend that boards have a process by which one of more of its members conduct a thorough review of the 990 prior to filing; gather comments from other board members; and meet with the club’s tax preparers to ensure the 990 properly reflects the club’s practices and any necessary updates are completed. We further recommend that a private club designate an Audit Committee of the board within its Finance Committee (consisting of at least one Certified Public Accountant or an individual with a financial background) to oversee the financial statement and tax return preparations of the club and to manage the club’s relationship with its outside CPA.
Board members should also know that filed Form 990’s are publicly available and unexpected questions about management compensation or the club’s financial condition could arise from inside or outside of the club. In the course of our professional and volunteer activities, we have reviewed hundreds of private club 990’s and have noted significant inconsistencies in account groupings and presentations among CPA preparers. It reinforces the need for clubs to engage CPA firms that work with a large number of private clubs. We consider it a best practice.