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Common Form 990 errors for Nonprofit Organizations

Many Forms 990 are prepared incorrectly or incompletely.

Because the Form 990 is a public document — nearly all are posted on GuideStar.com and many organizations post them on their websites — it is important that the Form 990 be prepared completely, correctly and consistently.

An incorrect Form 990 could reflect negatively on the organization when reviewed by possible donors, the community or even the media. More importantly, an incorrect Form 990 might be viewed as an incomplete filing by the IRS, subjecting the organization to late filing and other penalties even though a Form 990 was filed.

Here are some of the most common errors we have encountered.

Missing the deadline. The 990 is due on the 15th day of the 5th month after the organization’s year-end.  That means May 15th for calendar year organizations and November 15th for organizations with a June 30th year-end.  There is a 6-month extensions available but this has to be filed by the deadline.  Final deadline after all extensions is November 15th for calendar year-end organizations and May 15th for June 30th organizations.  Late filing fees can be as high as $50,000.  Failure to file for 3 consecutive years results in loss of exempt status.  If the organization has unrelated business income, it must file an extension for the 990 and a separate extension for the 990-T.

Filing an incomplete return.  The IRS can consider an incomplete return as never filed in which case late filing penalties up to $50,000 can apply.  Missing schedules is one of the most common reasons for incomplete returns.  Listed below are some of the most common schedules.  Keep in mind that some schedules only apply to organizations filing a 990 and some schedules apply to both the 990 and the 990-EZ.

  • Schedule A – Required of all public charities
  • Schedule B – Required of organizations that received donations of $5,000 or more from a donor
  • Schedule C – Lobbying activities are reported in this schedule
  • Schedule D – Most common reasons for filing this schedule are fixed assets, endowment funds, escrow funds, and/or audited financial statements.  Endowment funds includes those administered by someone else such as a community foundation.  An example of escrow funds is security deposits from building tenants.
  • Schedule G – Required if the organization had over $15,000 in expenses for professional fundraisers (not employees) or if it had over $15,000 in gross income from either fundraising events or gaming activities.
  • Schedule I – Required if the organization gave more than $5,000 in grants and contributions to other organizations or individuals in the United States.  Schedule F is completed if the grants were given to organizations or individuals located outside of the United States.
  • Schedule M – Required if the organization received over $25,000 in donated non-cash contributions.  Common mistake is not realizing that donated stock is considered a non-cash contribution.
  • Schedule R – Required if the organization was related to any other organizations or if it owns 100% of a disregarded entity.

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.

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.

FORM 990, PAGE 1, PART I

Page 1 of Form 990 includes summary information relating to the organization and creates a first impression for the reader.

Organizations should consider a concise description that fits in the allotted space on the first page, so the reader can gain a clear idea of the organization’s most significant activity without searching through the voluminous disclosures in Schedule O.

Part I of Page 1 also includes summary information regarding the number of voting board members, employees and volunteers. Unpaid board members are considered volunteers for purposes of reporting the number of volunteers on Page 1.

Organizations with unpaid board members often fail to count them as volunteers on Form 990.

FORM 990, PART VI

Total members of the governing body and total independent members of the governing body are often counted incorrectly on Form 990.

The IRS instructions ask for the total number of voting members of the governing body, which may not be the same number listed in Part VII of Form 990.

In addition, the concept of independent members of the governing body is defined differently for purposes of Form 990 completion. Often, members of the governing body who are compensated for services performed outside their service as a board member, as well as members of the governing body who have interested person transactions reported on Schedule L, are counted as independent board members in error.

Business and family relationships often are not disclosed as required in question 2. Exempt organizations that have large numbers of board members — more than 20 — or are located in rural areas are likely to have a business or family relationship with fellow board members. This question is often answered “no” in error.

FORM 990 PARTS VIII & IX

While reporting revenue and expenses of an exempt organization should be routine, many times items of revenue or expense are not properly reported. Common reporting issues include:

  • Reporting fees paid for services rendered (contract services) incorrectly.
  • Contributions and revenue reported in the incorrect column.
  • Security sales, fundraising and/or gaming events not reported properly.
  • Incorrect or lacking allocations of a reasonable amount of expense to either management G&A or fundraising expense.

SCHEDULE A PUBLIC CHARITY STATUS

Schedule A reports the public charity status of an organization. Many times, organizations select the wrong public charity type in Part I. For organizations classified as publicly supported, one of the public support tests included in Part I or Part II must be completed.

These computations often are completed inaccurately with incorrect amounts reported throughout. A common error is the omission or incorrect computation of excluded support on Line 5 of Part II or Line 7 of Part III.

SCHEDULE L TRANSACTIONS WITH INTERESTED PERSONS

Schedule L reports a variety of transactions with interested persons. Many organizations define interested persons too narrowly and only inquire as to possible transactions with board members.

Interested persons are defined differently depending on the type of transaction reported on Schedule L, and inquiries regarding these transactions should include not only officers, directors and trustees but also key employees, highest-paid employees and, in some cases, certain donors.

Organizations should take care to inquire about interested-person transactions regarding all interested persons.

Once a transaction with an interested person is identified, the organization reports certain information in Schedule L. Business transactions tend to be the most often reported transaction on Schedule L. Part IV requests the name of the interested person (and not the ODTKE), the relationship and amount of the transaction. In many cases, the ODTKE of the organization is reported in error as the interested person.

SCHEDULE O MISCELLANEOUS DISCLOSURES

Schedule O is used to provide required disclosures based on the answers to certain questions contained in the core form of Form 990. The disclosures range from expanded program service descriptions and internal Form 990 review processes to availability of certain documents for public access and compensation-setting processes.

Often the disclosures are incomplete, not updated for current reporting information or so lengthy the purpose of the disclosure is lost to the reader.

Care should be taken to read each disclosure to ensure it answers the question or describes the issue completely, correctly and concisely.

Please contact us to review your current Form 990 for any errors or let us prepare your Form 990 and we will make sure you comply with the IRS requirements.  Also, we work with our clients on a daily basis so we typically know the organization very well which also contributes to a better prepared return with little effort from our busy clients.