The Return of Organization Exempt From Income Tax, Form 990, is the annual information return that tax-exempt organizations file on an annual basis with the Internal Revenue Service (“IRS”). Given the relative ease and availability of this information for public inspection, donors, third parties, and funding agencies often rely on Form 990 as a source of information regarding tax-exempt organizations. As such, public perception of a nonprofit may be directly, or indirectly, impacted in part by the data source and responses presented within Form 990, thus, completion of the Form 990 should be viewed as more than a simple exercise of inputting a few numbers and checking a few boxes.
The following are some considerations, and common pitfalls, that nonprofit entities should contemplate when compiling their annual Form 990:
- Review of Mission: An organization’s reported “mission statement” should establish “why the organization exists, what it hopes to accomplish, whom it intends to serve, and what activities it will undertake and where.” Organizations should continuously review this response and ensure that it appropriately reflects any changes that may have occurred throughout the lifecycle of the nonprofit.
- Avoid Contradictions: Ensure that information provided on the organization’s Form 990 does not contradict information supplied in other places on the return. For example:
- The mission or significant activities indicated in Part I, Line 1, should agree to the information included in Part III, Lines 1 and 4a-d
- The number of voting members of the governing body at the end of the tax year indicated in Part VI, Line 1a, should not be less than the total number of members of the governing body listed in Part VII, Section A, Line 1a
- Required Schedules: Part IV of Form 990 is a checklist of schedules that are required to be attached. If your organization’s response to any of these questions is “yes,” ensure your organization also prepares the corresponding schedule. Remember, Schedule O is required for all organizations filing a Form 990.
- Describe, Describe, Describe: There are many parts within Form 990 and its related schedules that require descriptions. It is important to stress again that Form 990 is a public document, and as such, your nonprofit should focus on its descriptive responses to ensure that it is truly reflective of the organization.
- State of Domicile: Form 990 seeks information regarding the organization's legal domicile. For a corporation, this is the state of incorporation and not necessarily the state in which the organization has its offices. For example:
- Your organization was incorporated in Delaware
- Your organization's offices are located in New York
- Your organization's Form 990 (Heading - Item M) should indicate Delaware
- Directors and Officers - Part I: An individual can be a director of your organization, an officer of your organization, or a director and officer of your organization. Once an individual is correctly reflected as either a director or officer (or both), that individual should not be reported as a key employee or highest compensated employee.
- Directors and Officers - Part II: All directors and officers who serve at any point in time, during the year, are required to be included in Form 990, regardless of whether or not they are compensated.
- Key Employees and Highest Compensated Employee: Once an individual is correctly reflected as a key employee, that individual may not be shown as a highest compensated employee, (even if this individual is the highest compensated person within the organization).
- Complete All Applicable Parts: There are various forms of 501(c) organizations and each form may or may not require additional information within Form 990.
HOW WE CAN HELP
While there are no one-size-fits-all approaches, nonprofits should take the sufficient time to analyze and respond to their Form 990 in order to best portray their organization. Citrin Cooperman's Not-for-Profit Practice professionals can assist you in preparing, or reviewing, your nonprofit’s compliance risks matters associated with the Form 990.