For many tax-exempt organizations with a calendar year-end, Form 990 filings are right around the corner. Form 990, Return of Organization Exempt from Income Tax, is a public document. It was redesigned in 2008 to increase transparency, improve compliance, and promote good governance practices.
The IRS requires organizations to make their three most recent annual returns (plus supporting documents) available for inspection so the public can see what organizations do and how their boards carry out their duties. Board members are expected to review their organization’s Form 990 before it is filed. Following is a section-by-section refresher course.
Part I — Summary: a snapshot of your organization. It includes a description of your mission plus key financial and operational information. Make sure your mission is clearly conveyed and written in plain English. Donors (and others) will be reading it.
Part III — Statement of Program Service Accomplishments: explains who your organization serves and describes how you accomplish your mission. The description should be accurate and comprehensive.
Part IV — Checklist of Required Schedules: determines which Form 990 schedules your organization must file. (The schedules gather more in-depth information about certain activities, which the IRS then uses to evaluate the likelihood of violations.) “Yes” answers in this section should be reviewed (particularly those that require you to file Schedule L) to determine if policy changes should be made.
Part V — Statements Regarding Other IRS Filings and Tax Compliance: a checklist of IRS compliance requirements other than those related to Form 990, such as employment issues, donor-related tax issues, etc.
Part VI — Governance, Management, and Disclosure: questions about how your organization is governed and managed. Board members should look at “No” answers in this section (specifically questions 12a, 13, 14, 15a, and 15b); they could highlight issues that require board action.
Part VII — Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors: demonstrates that your organization is not paying excessive compensation or misclassifying workers. Board members should review compensation in light of the individuals’ responsibilities and the organization’s resources and activities.
Part VIII — Statement of Revenue: allows board members to see whether the organization is relying too heavily on unpredictable revenue sources or unrelated business taxable income (UBTI). (Note: If gross income from a regularly conducted unrelated trade or business is $1,000 or more, it must be reported on IRS Form 990-T, Exempt Organization Business Income Tax Return.)
Part IX — Statement of Functional Expenses: an opportunity for board members to make sure compensation and benefit costs are reasonable and expenses are justified (specifically those related to services provided by nonemployees, advertising and promotion, and travel). Management and general expenses and expenses related to fundraising should be reasonable relative to program service expenses.
Part X — Balance Sheet: an indication of the organization’s financial stability. Board members should look for possible red flags, such as excessive cash in non-interest-bearing accounts, loans to “related parties,” and increases in accounts payable or accrued expenses, that could lead to cash flow problems.
Part XII — Financial Statements and Reporting: pertains to services provided by an independent accountant with respect to the organization’s financial statements (compilation, review, or audit) and the board’s involvement in overseeing the process.
Deadlines and Penalties
Board members should also generally be aware that the deadline for filing Form 990 (Form 990-EZ and the e-Postcard) is the 15th day of the fifth month after the end of the organization’s taxable year. So for organizations with calendar-based years, the deadline for filing the 2014 Form 990 (990-EZ or 990-N) is May 15. Two three-month extensions are available (one automatic, one not).
The penalty for filing late is steep: For organizations with annual gross receipts of $1 million or less, the penalty is $20 per day for each day the return is late up to a maximum of $10,000 or 5% of gross receipts for the year. For organizations with gross receipts of over $1 million, the penalty is $100 a day up to a maximum of $50,000. The same penalties apply if the information provided on the return is incomplete or incorrect.
“The penalty for filing late is steep . . . .”