The IRS considers the Form 990 to be an “information” return because it provides an overview of the organization’s financial activities, governance structure, and public benefit accomplishments over the past year. It is a way for the IRS to ensure that tax-exempt organizations are indeed operating under their tax-exempt purpose.
Whatever the size or purpose of your organization, reviewing the Form 990 is an essential part of your board duties to assure that your return presents a complete picture of your organization’s accomplishments.
The following checklist provides some useful tips and tricks to assist your board in limiting exposure to IRS audits and providing valuable information to your stakeholders.
Are You Filing the Correct Form 990?
Different types of Form 990 exist depending on the size of your organization. If the organization has limited revenue (i.e. under $50,000) it may file a Form 990-N (e-Postcard). Organizations with gross receipts greater than $50,000 and less than $200,000, and assets of less than $500,000, may file the Form 990-EZ, a simplified version of the Form 990. Organizations larger than this size must file the more complex Form 990. All organizations must electronically transmit their return to the IRS, including the Form 990-T.
The Form 990-T is required if your not-for-profit has $1,000 or more of revenue unrelated to the organization’s exempt purpose (such as income from advertising, parking lots, and leased space).
Do Pages 1 and 2 of Your Form 990 Present a Comprehensive and Accurate Picture of Your Organization, Its Mission, and Its Accomplishments?
In a world where donors are becoming increasingly savvy about evaluating nonprofits, the Form 990 can also be a powerful marketing tool. Pages 1 and 2 offer the opportunity to describe your mission in detail and highlight any notable program accomplishments. Try to review these pages from the perspective of a potential donor. Based on the information you see, would you be persuaded to make a donation? Are the accomplishments consistent with your other promotional materials? You may also want to seek additional perspectives on this issue from your fundraising team.
Does Your Organization Have $1,000 or More of Gross Revenue From a Business Activity That is Regularly Carried On and Not Related to Your Exempt Purpose?
If so, revenue from these business activities constitutes unrelated business income (“UBI”) and the taxes associated with these business activities are called unrelated business income taxes (“UBIT”). Any organization that engages in such activities is required to file an IRS Form 990-T and possibly make estimated tax payments like a for-profit business.
Organizations may often be engaging in activities that constitute UBI without knowing it, so it is important to at least have a basic understanding of what those activities entail. In general, the IRS has three tests for determining taxable income. The activity must (1) constitute a trade or business; (2) be regularly carried on; and (3) not be substantially related to your exempt purpose.
Have You Demonstrated Proper Governance and Included Any Relevant Disclosures?
The IRS believes that good governance is an indicator of proper tax compliance and uses the responses on page 6 of the Form 990 to evaluate a not-for-profit’s risk of non-compliance. When an organization indicates that it does not comply with the best practices then the board should clarify why, in case the IRS investigates. More significantly, these questions are receiving increasing scrutiny from knowledgeable donors and granting organizations that want more information about how an organization is governed. It is in your organization’s best interest to provide this information.
What Are Some Examples of Best Practices That Are Included in the IRS Form 990?
The IRS best practices include (1) providing the board with a draft of the FOrm 990 before it is signed; (2) having policies for conflicts of interest, whistleblower, and data retention; and (3) using salary comparability data and an independent committee to determine executive compensation.
Are All Employment, B&O, Sales, and Property Tax Reports Filed and Paid?
Receiving tax-exempt status from the federal government does not mean that an organization is exempt from state and local taxes, property taxes, payroll taxes, or other taxes. For example, while Washington State does not currently have a corporate income tax, it does have business and occupation (“B&O”), sales and use taxes. Nonprofits are subject to the same business tax rules or B&O tax for donations of money and assets, revenue from fundraising activities, and revenue from youth character-building activities.
(See www.jjco.com/resources for more information about the exceptions set forth by the Washington Department of Revenue)
Is Your Return Signed and Complete to Prevent Potential IRS Audits?
The fastest way to get unwanted attention from the IRS is to not sign the return or not provide the required schedules. To prevent unwanted attention from the IRS, conduct a quick review of the questions and responses on pages 3 and 4 of the Form 990 and make sure the required schedules have been submitted. A “yes” answer on these pages means an additional schedule is required.
Organizations should be aware of many more items relative to preparing and reviewing Form 990. To obtain a more comprehensive checklist, or to receive complimentary copies of the Jacobson Jarvis booklets What Not-for-Profits Need to Know About Tax Compliance and What Board Members Need to Know About Not-for-Profit Finance and Accounting, please contact Howard Donkin via email at howard@jjco.com or via phone at (206) 812-5484.
About the Author
Howard Donkin, CPA, Tax Partner at Jacobson Jarvis, has more than 20 years of experience serving the not-for-profit community and is nationally recognized for his work with not-for-profit organizations in the areas of tax, accounting, consulting, and software.
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