Reviewing the IRS Form 990: Five Tips and Best Practices

With filing season upon us, nonprofits are now busily diving into the process of preparing and reviewing their Form 990s. Thankfully, BDO has written extensively about Form 990 best practices in our Executive Review Guidelines for the IRS Form 990 guide. Still, with so many considerations to account for, as well as the critical opportunity for nonprofits to review their operations and communicate their stories, it never hurts to brush up on best practices. With that in mind, here are five tips to assist nonprofits’ in their review of the document:

Tell your story, and tell it consistently: The Form 990 discloses an organization’s mission and program accomplishments for the year. This information should be crosschecked with other collateral materials published by the organization, including annual reports, brochures, solicitation mailing and content on the organization’s website. Just as importantly, it should be viewed as an opportunity to tout your organization’s accomplishments, as well as provide a detailed story about how the mission is accomplished.

Properly allocate revenue and expenses: Nonprofits must be especially careful to segregate the revenue reported on the Form 990 between program-related revenue, unrelated business revenue that is subject to tax, and related revenue that is excluded from tax.  They should also ensure that contribution revenue is properly reflected, since this will directly impact nonprofits’ public support tests. In order to ensure that their exempt statuses are not jeopardized, organizations should always take a step back to compare program revenue and unrelated business revenue to the total revenue.

Lastly, when organizations are segregating expenses between fundraising, program-related expenses, and management/general expenses, they should ensure that the allocation methodology is consistent and accurate. Functional expense ratios are one of the benchmarks used by charity watchdogs to determine ratings, and should therefore always be top of mind.

Complete compensation disclosures: The Form 990 requires that organizations disclose the total compensation for officers, directors, trustees, key employees and any other of the highest compensated individuals that were on the board or employed at any time during the tax year. Compensation includes not only an individual’s salary, but also his/her taxable and nontaxable fringe benefits, including insurance, allowances and deferred compensation. Deferred compensation includes any salary accrual, such as a bonus, which is not paid within two and a half months after an organization’s fiscal year end. Compensation disclosed for Part VII on the Form 990 is based on the calendar year, while compensation broken out for these individuals in Part IX is based on the organization’s fiscal year.

Ensure transparent governance, policies, procedures and transactions with interested persons: The Form 990 requires disclosure of an organization’s policies and procedures, including its conflict of interest policy and compensation policy. As such, nonprofits should take the time to make sure these policies are active and accomplish their intended goals, and the disclosure should accurately reflect the implementation of these policies.  Transactions with interested persons should be clearly disclosed on Schedule L and indicate whether the organization entered into the transactions in accordance with a conflict of interest policy and at fair market value.

Conduct a final review: Once the Form 990 is prepared, organizations should undergo a thorough review of the document prior to submission to the IRS.  The reviewers should include an internal team consisting not only of the finance department, but also human resources, legal, program directors and development groups.  Review may consist of comparing the Form 990 to that of another similar organization. This side-by-side comparison is helpful insofar as it offers a direct look into any major differences between documents, as well as potential insights into reporting practices and an organization’s charity rating.  A board member should also be designated as the detailed reviewer and provide a recommendation for approval to the board.  Last but not least, as is considered a best practice and is disclosed on the Form 990, the document should be made available to the organization’s board prior to submission to the IRS.

As your organization looks to prepare and submit its Form 990, what questions or issues are on the radar?