Form 990 Question

[JohnH]

I'm helping a PTA prepare their form 990 and have an unusual situation (well, unusual for me).

A couple of years back a former treasurer "diverted" about $4K of PTA funds to personal use rather than depositing the money into the PTA accounts. Subsequently, the school and the individual agreed to a restitution plan rather than legal action. In the past year about $400 was received by the PTA as a part of this plan, and there are expected to be similar payments in the future. Where on the 990 should this payment be recorded? My first thought would be line 20 or maybe line 11, but since I've never encountered this before I'd like to hear from others more experienced with preparing Form 990. Thanks for any suggestions.

[jainen]

>>Where on the 990 should this payment be recorded?<<

How was the loss reported?

[JohnH]

The loss was not reported on a tax filing.

I'm told (although I haven't verified this yet) that the total receipts for the year of the loss were less than $18K, so no Form 990 was filed since there would not be a filing requirement even if the $4K is added into gross income of the PTA for the year in which the act occurred. Of course, this also assumes that the $4K is actually the correct amount diverted.

This situation is already validating my refusal over the years to get involved with 990's, but this time around I can't side-step it.

[TAXBILLY]

Sorry I can't contribute any useful info. The last 990 I did was a pro bono one in 2003 and have turned down all since.

taxbilly

[jainen]

>>validating my refusal over the years to get involved with 990's<<

I'm with you on that.

How 'bout you add that 4K to the year it was received and don't report a loss on the grounds that restitution is expected. Then ignore the current payments because it is the same revenue already included in the prior year.

[JohnH]

Thanks for the idea. I had considered doing something similar by just counting it as a "Contribution" in the current year & going forward. However, the PTA guidelines for their financial statements are very specific, with essentially every movement of cash thoroughly reconciled, including beginning & ending cash balances, so the whole issue of a book-tax-difference comes to mind. Not so hard to handle on a simple corporate return, but then I started reading all those warnings about the penatlies for minor deficiencies in a 990 and had second thoughts.

I've done some more reading on this since my first post, and I found one 990 published on-line which showed it on Line 11 and attached an explanatory note defining it as "restitution", so I'm leaning in that direction. But then I don't know for sure that the on-line 990 is prepared properly - I'd feel much better getting some validation on this forum.

[jainen]

>>Is it possible that the hokey pokey REALLY IS what it's all about?<<

No, I don't think so. You also have to turn yourself around.

[Lynn EA USTCP in Louisiana]

Have you considered inserting a balance sheet, asset category item, "Due from XXXX" ? So the payments are posted to that account, incrementally reducing it over time.

Lynn Jacobs, EA

Kenner, LA

[JohnH]

Thanks for the recommendation. That goes back to jainen's original suggestion in a sense, but the process of justifying the entry to the balance sheet creates a bit of a dilemma. I've now learned that when someone "diverts" money from a tax-exempt, it is supposed to be disclosed on the 990 as an "Excess Benefit Transaction" to a "Disqualified Person". (I don't like to use the "E" word because it's such a loaded term.) Since the organization was not required to file the 990 in the year this occurred, that may give them an out and allow me to just create a balance sheet as of the beginning of the year, but I don't want to jump to that conclusion. Also, there's the question of where exactly to show it on the balance sheet, because there are very specific Asset categories, including an ominous-sounding "Receivables from other disqualified persons". The plot thickens.

My other problem is that the 990 is very strict on accounting for all receipts & expenditures on page 1 and I just sense that bypassing page 1 with an entry directly to the balance sheet might not be kosher. Page 1, Part I is not just a P&L, it's much more. It seems to force you to account for all movements of money into & out of the organization. Line 11 on the 990 (line 8 on the 990-EZ) forces you to account for any Revenue items which don't fall into the other categories, and line 20 on either form is a catch-all which demands an explanation for any other changes in net assets or fund balances. So the front of the 990 requires you to account for revenues, expenses, and asset changes in a fairly comprehensive manner.

Maybe I'm over-analyzing this thing & complicating it way beyond reason, but I'm sure glad I have until Nov 15 to work through it. I appreciate the continued comments.

[TAXBILLY]

I think you're on the right track.

taxbilly

[Gail in Virginia]

Thanks for the recommendation. That goes back to jainen's original suggestion in a sense, but the process of justifying the entry to the balance sheet creates a bit of a dilemma. I've now learned that when someone "diverts" money from a tax-exempt, it is supposed to be disclosed on the 990 as an "Excess Benefit Transaction" to a "Disqualified Person". (I don't like to use the "E" word because it's such a loaded term.) Since the organization was not required to file the 990 in the year this occurred, that may give them an out and allow me to just create a balance sheet as of the beginning of the year, but I don't want to jump to that conclusion. Also, there's the question of where exactly to show it on the balance sheet, because there are very specific Asset categories, including an ominous-sounding "Receivables from other disqualified persons". The plot thickens.

I am wondering what year the restitution agreement was reached? Would that be the year in which an entry would be made on line 11 (or line 8 for an EZ) for the entire amount receivable and then in future years as the receivable is reduced, it would not be necessary to revisit this. I am also wondering, with a $4000 deficit, and only $400 received this year, if any part of the restitution is to be counted as interest on the money diverted. I am rather glad that this is not one that I have to do. B)

[JohnH]

Would you like to have it?

I'm waiting for a copy of the restitution agreement. I'm also waiting for the copies of the bank statements for the year of the "diversion". I've been told their receipts were under $25K but you know how what we are told tends to escalate once we start getting the actual data. All we need now is to find out that there was a requirement to file in a year when there was an "Excess Benefit Transaction". After the penalty notices come rolling in, it will be a constant stream of apologies to try and get them waived. And don't even talk to me about interest - I certainly hope that isn't in the agreement.

As I understand it, even thought his becomes a balance sheet item once the receivable is booked, the repayments still have to be dragged through line 11 (or line 8 of the EZ), each year. It can't just be posted to the balance sheet account in the same manner as a principal payment in a corporate return. Given the amount of the payments and other issues involved, this thing is going to dog them for years to come, which also means I need to get it right from the outset since I'm guessing someone will just copy my work each year once I get disentangled from this (or IF I get disentangled).