Form 990 is an annual information return required to be filed with the IRS by most organizations that are exempt from income tax under Section 501(a) of the Internal Revenue Code. Although most tax-exempt organizations do not pay federal taxes, the majority must still file annually with the IRS. Form 990 not only includes financial information such as gross income, receipts, and disbursements, but also nonfinancial information such as mission, programs, and key governance information.
What to File and When
Based on the gross receipts and assets table below, an organization can determine which form satisfies its annual reporting requirement.
If a nonprofit fails to file its Form 990 on a timely basis, penalties of up to $20 a day are imposed for each day the return is late, with a maximum penalty of the lesser of $10,000 or 5% of gross receipts. For organizations with gross receipts exceeding $1 million, the penalty increases to $100 per day with a maximum penalty of $50,000. Failure to file for three consecutive years can lead to revocation of an entity’s tax-exempt status.
An organization does not have a filing requirement – even if they meet the thresholds in the chart – if it falls within certain categories. These categories most notably include certain religious organizations and state institutions, but a complete list of exceptions can be found on the IRS website.
A Form that Tells a Story
Per IRC Section 6104, Form 990 is a public document that is easily available for review. GuideStar and Charity Navigator are two charity ratings services that rate and provide access to the form online for public inspection. Many donors read and examine the form during their due-diligence process of selecting an organization to which they will contribute. Organizations should take advantage of this annual compliance requirement by using Form 990 to educate the public about its programs that benefit the community through its mission. The information presented on the form demonstrates how efficiently and effectively resources are being utilized. Part III of the form provides an opportunity to both provide financial information and appeal to potential and current donors through detailed descriptions of program service accomplishments for each of its three largest program services measured by expenses. There should be a great deal of emphasis placed on providing an elaborate description of program accomplishments, and should include specific achievements and metrics to highlight the impact of the organization’s programs. Providing such information may better persuade a potential contributor.
Governance and Form Review
Form 990 was redesigned in 2008 to provide greater accountability, transparency, and governance of tax-exempt organizations. The revision includes inquiries about the organization’s governing body and management, as well as the process of Form 990 review prior to its filing with the IRS. There is no requirement for the governing body to review the form, but Part VI, Section B, line 11 specifically asks whether the form was provided to be reviewed by the organization’s governing body prior to filing and the process of review. Since the board oversees the organization’s policies and finances, such a review is considered a best practice in the area of good governance because the board can further validate the accuracy of the information that is being conveyed. When organizations do not have a board review and approval process, it could indicate a weakness in oversight that may expose it to greater scrutiny during review by the IRS.
Form 990 is an important document that can be adopted as a marketing tool and included on an organization’s website, on brochures, and in public relations materials. During the annual preparation of the form, a nonprofit should provide the necessary qualitative information to its tax preparer so it is presented in such a way that best tells its story to the public.
Harrison A. Pereira, CPA, is a tax manager with Tait Weller in Philadelphia. He can be reached at firstname.lastname@example.org.