Nearly all organizations that are recognized as tax exempt by the IRS must file Form 990 or another form in the same series annually. Organizations making less than $200,000 in revenue and having less than $500,000 in assets must file Form 990-EZ, and organizations making less than $50,000 must file a Form 990-N e-postcard.
Exceptions from the filing requirement include churches, most faith-based organizations, subsidiaries of other nonprofits that may be included in a group return filed by a parent group, and nonprofits that do not wish to apply to the IRS for tax-exempt status.
Returns are due on the 15th day of the fifth month after the close of the nonprofit’s fiscal year. An automatic six-month extension is available to nonprofits that file Form 8868. Nonprofits that file using Form 990-N are not eligible to file for an extension.
Purpose of Form 990
Among other things, Form 990 is intended to make an organization’s operations transparent to the public. By reviewing an organization’s Form 990, which is available online along with its supporting documents and the entity’s Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, donors and other supporters can determine which nonprofits they wish to support.
Failure to file has consequences
Failure to comply with these filing requirements comes with steep consequences:
- Late filing penalties can be as much as $100 per day, with a maximum penalty of $51,000.
- Failure to file a return for three consecutive years will automatically result in the loss of tax-exempt status. There is no appeal process. The only way an automatically revoked organization can regain tax-exempt status is to reapply. The IRS publishes a list of organizations whose tax-exempt status was automatically revoked because of failure to file.
- Organizations that lose their exempt status may be required to pay corporate taxes.
- Potential donors may decide not to support organizations that are not tax exempt.
Beware the pitfalls
As with other forms submitted to the IRS, certain responses on Form 990 may trigger an audit, and electronic filing has made it easier for the IRS to spot those red flags. Consequently, it is important for tax-exempt organizations to be sure their responses address the major issues relating to governance and accountability. Among the policies and procedures the IRS looks for are:
- Whistleblower policy. The organization’s formal whistleblower policy should encourage reporting unethical or illegal conduct. It should also state that there will be no retaliation for reporting pursuant to the policy.
- Compensation policy. The organization’s compensation policy should require the board to review comparable compensation data from similar organizations to determine reasonable compensation for its officers and key employees.
- Conflicts of interest. The organization should have a process in place to carefully monitor whether board members have any conflicts of interest in a related individual, entity or vendor. If such an interest exists, the individual should be recused from any decisions specific to that interest.
- Gift acceptance policy. There should be a written gift acceptance policy that ensures governance over gifts to individual board members, employees or the organization.
Effective management and governance policies go a long way toward ensuring that the organization meets the IRS’ goal of transparency and accountability. The rules are complicated, so be sure to work with a qualified tax professional.
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