Form 990 Errors

Most nonprofit organizations, with a few exceptions, are required to file an annual Form 990 with the IRS.  Form 990 is not only an IRS requirement; it is an opportunity for your organization to tell your story and show that it is an effectively run organization.  A poorly prepared form not only could result in IRS penalties but can diminish the public’s image of your organization. 

As you review your 990, make sure all questions are answered correctly.  Below are some actual instances of questions that were answered incorrectly.  If your 990 has the following answers, then they are probably wrong. 

1. Total number of volunteers is zero.  Although some organizations may not have volunteers engaging in programs, all board members are considered volunteers (unless they are paid).  Anyone that served on the board of directors (in a non compensated capacity) at any time during the year should be considered a volunteer. 
2. Program service accomplishments are the same as the organization’s mission.  Part III, line 1 asks for the organization’s mission that has been approved by the board of directors.  The mission statement addresses why the organization exists.  Program service accomplishments in Part III are used to describe the organization’s major accomplishments during the year toward fulfilling its exempt purpose.  This is your opportunity to brag on what your organization has accomplished during the year.  Take advantage of this question and don’t just repeat your mission statement.
3. Average hours per week for board members is zero.  The amount of time each board member devotes to the organization is required to be reported in Part VII.  If your organization has an active, engaged board, there should be a number reported to show their dedication to your organization, even it if it is an average of .5 hours per week.
4. Officers’ compensation in Part VII equals officers’ compensation in Part IX.  The amount of reportable compensation for each officer listed in Part VII should be the amount reported on Form W-2 (larger of box 1 or box 5) or Form 1099 for the calendar year ending with or within the organization’s tax year.  The amount of officers’ compensation reported in Part IX is for the tax year being reported.  The amount in Part VII will always be on the cash basis for a calendar year as it comes from a W-2 or 1099.  The amount in Part IX will follow the organization’s method of accounting so it may be cash or accrual and will follow the tax year, which may be a calendar or fiscal year.  Only when the organization follows the cash basis and a calendar year, could these two amounts be the same.
5. No fundraising expenses reported.  If the organization has contributions reported, then the IRS feels that there should be some related expenses in getting these contributions reported in Part IX.  Fundraising expenses are those cots relating to activities that involve inducing potential donors to contribute to the organization.  Most often these expenses include salaries of employees spending time working on fundraising.  If the organization relies completely on volunteers for fundraising and feels it does not have any fundraising expenses, it should include an explanation on Schedule O. 
6. Accounting fees reported as program expenses.  Nonprofits are required to allocate expenses between 3 functions – program, management and general, and fundraising.  Program expenses are the costs related to providing program services; the activities in fulfilling an organization’s mission or purpose.  Management and general expenses relate to the overall operations of the organization.  The functional allocation of expenses for Form 990 is not the same as the allocation of expenses for grants.  Many times accounting or auditing fees are allocated across all 3 functions; however, these costs are not related to providing the organization’s mission.  These expenses are most often required but are part of the overall operations of the organization, they would be required no matter the program being provided.
7. Significant amount of “other expenses” in Part IX.  Part IX of Form 990 includes 23 lines for various types of expenses.  These categories have been defined by the IRS so that it is easier to compare the expenses of one nonprofit to another.  When reporting expenses, organizations should use these lines to report the proper expenses for each line.  For example, the office expenses line includes telephone, postage, shipping, and equipment rental.  Organizations should include these expenses on the office expenses line as opposed to listing each of these out separately as other expenses on line 24.  In addition, the total amount of other expenses on line 24 should not exceed 10% of total expenses. 
8. Total assets do not equal total liabilities and net assets.  Part X is used to report the organization’s balance sheet (statement of financial position) items similar to the financial statements.  As on the financial statements, the total assets reported must equal the total liabilities and net assets.  
9. Capital stock or paid in capital reported.  There may be some unique situations where an organization will have capital stock or paid in capital; however, most of the time, there should be no amounts reported as capital stock or paid in capital on the balance sheet in Part X.
10. Accounting method listed as cash, but Part X shows receivables and payables.  Part XII asks the organization to indicate the method of accounting used in preparing Form 990.  If the cash basis of accounting is selected, then there should be no accrual balances (i.e. receivables, prepaid, fixed assets, payables, accruals) in Part X.  A cash basis balance sheet should show only cash and net assets.  All cash receipts are recorded as revenue and all cash payments are recorded as expenses.  For an organization following the accrual basis of accounting, there should most likely be accrual balances reported in Part X and not just cash. 
11. Unanswered/blank questions.  All questions of Form 990 should be answered, and all applicable schedules should be completed to ensure that a proper Form 990 has been prepared.  The IRS considers incomplete forms that same as a form that was filed late.  The same penalties that apply to a late filed form apply to an incomplete form.

Posted by: Carrie Minnich, CPA