Tax season can be stressful for any organization, and nonprofits who want to maintain their status need to ensure they file all of the required documents correctly. One particularly important document is Form 990, which serves as the reporting form for nonprofit organizations. Because nonprofits are generally exempt from federal taxes, their filing process is different from other organizations that need to calculate a tax burden each year. Instead, the majority of nonprofits need to turn in Form 990 and associated schedules that relate to their specific situation. It’s critical that organizations required to complete this form do so correctly and in a timely manner each year.
Who needs to complete this form?
The majority of organizations that are exempt from federal taxes need to turn in Form 990, but that doesn’t mean every nonprofit uses this document. Churches and state institutions will not use this form, but private 501(c)(3) organizations must submit this information. The specific form that an organization needs to complete is determined by the organization’s size. If you are unsure what form your organization will need to turn in, you can view a chart on the IRS website that breaks down the forms required by organizations of various sizes.
“The specific forms required are determined by an organization’s size.”
The importance of completing the correct version of the form cannot be overstated. If an organization does not file Form 990 three years in a row, it will have its tax-exempt status revoked. It’s not difficult to avoid that situation by completing the form, but there are certain details that an organization should keep in mind as they finish and submit Form 990. The information provided on Form 990 has implications outside of taxation, as the form must be viewable by the public during normal business hours. This document serves as a picture of an organization’s financial status, and must be complete and accurate.
What does this form include?
The information required for Form 990 encompasses every part of an organization’s financial situation. That includes a basic overview of the group’s revenue for the current year and previous years as well as an enumeration of the organization’s governance and management structure. The discussion of revenue, expenses and management is all couched in a section that explains the organization’s purpose and activities during the past year and throughout the organization’s existence. This section will ideally serve to emphasize an organization’s eligibility for continued nonprofit status, so the individuals completing the form should strive to cast their organization positively and highlight accomplishments. Multiple individuals should review this section to ensure it provides a consistent and accurate picture of the group’s activities.
What is the purpose of this form?
Form 990 will be reviewed by a number of different parties after the organization completes it. While the Form is distributed by the IRS, they are just one of the many groups that will review the information an organization provides.
It’s critically important to remember that the public can access this document at any time. Donors are necessary for the success of any nonprofit, and many will review the information provided on Form 990 when deciding which organizations are most deserving of their support. Ideally, an organization can use the reporting required by Form 990 to demonstrate financial efficiency and the smart use of donor funds.
“Form 990 information is available to the public.”
Additionally, state representatives will look at the information reported by nonprofits when organizations seek state funding for certain projects. States will use this information to ensure that nonprofits operating within their borders are adhering to all financial regulations, so Form 990 is essential for continued operation within a specific geographical area.
Every organization that completes Form 990 should remember that the information it supplies will be used by other nonprofit organizations to assess industry norms regarding compensation. The information on this form will also be used by the media to glean information about specific organization practices. On the whole, Form 990 provides a picture of an organization’s fiscal and organizational health.
Common issues with compliance
There are some parts of the Form 990 process that are consistently difficult for nonprofits. Reporting functional expenses is a particularly troublesome area for many organizations. This section of the form requires extensive preparation and benefits from careful recordkeeping throughout the reporting period. Many organizations may not be adequately prepared to report this information, which can make guidance from a tax professional very useful. Several other areas that involve the reporting of net assets and revenue are confusing to many filers, so these sections require increased attention and review during the filing process.
What triggers an examination?
The IRS will examine some percentage of the Form 990s that are filed each year. The vast majority of these investigations are triggered by IRS research into employment and the compensation practices that exist within the nonprofit space. This research and data analytics addressing specific elements of the information reported on Form 990 prompts most of the examinations conducted by the IRS, but the group also examines organizations that seem to have errors on their forms. Accuracy should be the number one goal for any organization completing Form 990.
Working with an experienced tax professional may help nonprofit organizations provide an accurate picture of their financial situation to potential donors and other sources of funding. Form 990 is a critical piece of financial reporting and provides a helpful record of an organization’s annual performance.