Common Errors on Form 990

Posted on Wednesday, May 02, 2018

Most nonprofit organizations are required to complete Form 990, Return of Organization Exempt From Income Tax each year.  Although this form is not an income tax return, rather an informational return, it is important to make sure it is completed accurately.  The following items tend to cause issues for preparers so be sure your organization has properly addressed these.

Incomplete form. 

Make sure all questions have been answered and all required schedules have been completed and filed.  The IRS treats an incomplete form the same as a form filed late.  The same penalties that apply to a late filed form apply to an incomplete return.  Furthermore, failure to file a return for three consecutive years may lead to the loss of an organization’s exempt status. 

Voting members of the governing body.

Line 3 of Part I asks for the number of voting members of the governing body.  This should be the number as of the end of the organization’s year end.  For a calendar year organization, this is the number of voting board members at December 31.  This number should never be more than the number of board members listed in Part VII.  Part VII should include the name of any individual that served on the organization’s board at any time during the fiscal year.  There may be individuals listed in Part VII that were not board members as of the last day of the organization’s year but served earlier in the year.

Independent voting members of the governing body.

Line 4 of Part I asks for the number of independent voting members of the governing board.  An individual is not independent if they are compensated by the organization for services other than their board role.  For example, an executive director that has voting rights and receives a salary from the organization is not independent.  A lawyer that serves as a board member and was paid during the year for legal services provided to the organization is also not independent.  However, a board member that receives a stipend from the organization for serving as a board member is considered independent. 

New significant programs.

Line 2 of Part III asks if the organization took on any significant program services during the year which were not listed on the prior form.  Nonprofits need to check this box yes and provide a description for any new programs that began during the year.  When an organization applies for tax-exempt status, it must describe its program services in its application for exemption.  It is important the nonprofit notify the IRS of any new programs so that the IRS can ensure that these new programs coincide with the organization’s exempt purpose.  The IRS may be able to challenge any new programs as unrelated which could result in unrelated business income taxes.

Policies.

Part VI asks if the organization has various policies in place.  Nonprofits will not lose their exempt status simply because they do not have these policies in place; however, it is best practices to have them.  Two of the questions address provisions of the 2002 Sarbanes-Oxley Act.  Although most provisions of the Sarbanes-Oxley Act apply to public companies, two provisions apply to nonprofit organizations – a whistle-blower policy and document retention and destruction policy.  In addition, if a nonprofit is required to file Schedule L, Transactions with Interested Persons which reports financial transactions or arrangements between the organization and disqualified persons, there should be a conflict of interest policy in place.

In-kind.

Donated services and facilities should not be recorded in Part VIII as revenue or in Part IX as expenses.  Items such as donated advertising or the use of materials, equipment or facilities are recorded in the organization’s financial statements prepared using generally accepted accounting principles but they are excluded from Form 990.

Public support test.

Publicly supported organizations must describe the sources of their revenue on Schedule A, Public Charity Status and Public Support of Form 990 to determine if they meet the applicable public support test.  The test is computed using a five-year period, the current year and previous four years.  Schedule A is complicated and is often completed incorrectly.  Make sure to read the IRS instructions so that you understand how to complete Schedule A.

Anonymous donors.

Nonprofits are required to provide information about contributions received during the year on Schedule B, Schedule of Contributors.  This information includes the donor’s name, address and contribution amount.  Organization’s should include a donor’s name regardless if the donor wishes to remain anonymous.  The IRS requires organizations to list donors’ names if they know the donor’s identity.  It would be extremely rare that an organization would not know a donor’s identity.  It is important to note that contributors’ names and addresses listed on Schedule B are not open for public inspection.  Therefore if someone requests a copy of your organization’s Form 990, other than the IRS, Schedule B should only include dollar amounts, not names and addresses.

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

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