Tax-exempt organizations play a vital role in society, providing essential services and contributing to the well-being of communities worldwide. To maintain their tax-exempt status and ensure transparency, these organizations are required to file Form 990 annually with the Internal Revenue Service (IRS). However, completing Form 990 can be a complex and intricate process, and even minor errors can lead to penalties and potential reputational damage.
This comprehensive guide delves into the intricacies of Form 990, highlighting 20 common filing errors to avoid. By understanding these pitfalls and implementing effective strategies, tax-exempt organizations can streamline the filing process, ensure accuracy, and maintain compliance with IRS regulations.
To help you avoid common filing errors, here are 20 important points to keep in mind when preparing or reviewing Form 990:
- Failing to File the Proper Form 990 Variant: Ensure you meet the appropriate thresholds to file a Form 990-EZ. Private foundations must file a Form 990-PF.
- Inaccurate Identifying Information: Double-check the accuracy of your Employer Identification Number (EIN), tax period, and group exemption number (if applicable). Verify that the Internal Revenue Code (IRC) subsection for your organization aligns with your determination letter.
- Improper Signatures: Ensure the Form 990 is signed by the authorized individual as defined in Part II. Note that the definition of officer for completion of the signature block in Part II is different from the definition of officer used elsewhere on the form and schedules, and from the definition of principal officer for completion of the Heading on Page 1, Line F.
- Undisclosed Program Service Activities: Clearly disclose any new program service activities on Part III, Line 2. Provide a detailed description of these activities to enhance transparency.
- Inaccurate Grant Expense and Program Service Revenue Reporting: Accurately report grant expenses and program service revenue on Part III, Lines 4a-4d. Ensure these amounts correspond with totals on Parts VIII and IX.
- Misinterpretation of “Terms of Art” in Part IV: Carefully review and understand the definitions of all “terms of art” used in Part IV, which consists of a two-page, 38-question checklist. Refer to the Form 990 instructions and glossary for clarification.
- Improper Reporting of Foreign Bank Accounts: Maintain accurate and compliant records of foreign bank accounts. Correctly report these accounts on Part V, Line 4, adhering to the Report of Foreign Bank and Financial Accounts (FBAR) requirements.
- Inaccurate Reporting of Voting Board Members: Accurately report the number of voting board members on Part VI, Line 1a.
- Misunderstanding of “Independent” in Part VI: Thoroughly understand the definition of “independent” for proper completion of Part VI, Line 1b.
- Incorrect Affirmation Regarding Form 990 Review: Exercise caution when answering Part VI, Line 11a that the board received a comprehensive copy of the Form 990 before the filing.
- Compensation Table Errors in Part VII, Section A: Dedicate sufficient time and attention to completing the compensation table in Part VII, Section A. Accurately report compensation for current and former officers, directors, trustees, key employees, and highest compensated employees.
- Misunderstanding of Column Usage in Part VIII: Fully comprehend the purpose and usage of the four different columns in Part VIII and when and where to appropriately report amounts in each designated column.
- Improper Definition of Program Service Revenue: Grasp the definition of “program service revenue” for accurate reporting on Part VIII, Line 2.
- Inaccurate Reporting of Special Event Income and Expenses: Exercise caution when reporting special event income and expenses on Part VIII, Line 8. Adhere to the requirements for completing Schedule G, Part II as determined on Form 990, Part IV, Line 18.
- Improper Allocation of Expenses in Part IX: Allocate expenses both functionally (horizontally) and naturally (vertically) in Part IX with precision.
- Inaccurate Reporting of Insider Compensation in Part IX, Line 6: Transparently report insider compensation on Part IX, Line 6. Disclose compensation paid to relatives of the CEO or other insiders employed by the organization.
- Improper Reporting of Insider Receivables and Payables in Part X: Maintain accurate records of insider receivables and payables. Correctly report these amounts on Part X, Lines 5, 6, and 22 to ensure compliance with IRS regulations.
- Inclusion of Excluded Revenue in Part XI: Exercise caution when reporting revenue on Part XI. Avoid including certain types of revenue, such as donated services revenue and unrealized gains. Refer to Schedule D, Parts XI and XII and the related instructions for guidance.
- Inconsistent Accounting Method in Part XII: Adhere to the chosen method of accounting selected on Part XII, Line 1 when completing Form 990 and the required schedules. Maintain consistency in accounting methods throughout the form and related documents.
- Inadequate Pre-Filing Review: Objectively review the draft Form 990 before filing. Share the draft with key management team members and board members to solicit feedback and ensure accuracy.
In safeguarding the tax-exempt status of organizations and promoting public transparency, Form 990 assumes a pivotal role. While tackling the intricacies of Form 990 may pose challenges, a comprehensive understanding of the filing process, coupled with the insights into common errors provided in this guide, empowers organizations to streamline their submissions, reduce errors, and bolster compliance with IRS regulations.
It’s essential to recognize the value of seeking professional guidance, and in this regard, considering our expertise as tax advisors can prove invaluable for ensuring the precision and completeness of Form 990 filings. Experienced tax advisors play a crucial role in steering organizations away from common pitfalls, navigating intricate tax matters, and safeguarding their tax-exempt status.
By proactively embracing the Form 990 preparation process, tax-exempt organizations demonstrate their commitment to transparency, financial accountability, and ethical governance, reinforcing their positive standing in the regulatory landscape.