Best Practice Micro Learning Module – What to look for when reviewing the IRS Form 990 before filing

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There are many reasons why your entire board of directors should review your organization’s draft IRS Form 990 before it is filed. Of course, the most important reason is to ensure its accuracy. Most board members don’t have photographic memories and can’t recall each precise financial detail of the last year, but when you review it, look for the “story” in the numbers – Is the draft form consistent with your recollection about the prior year? You’ll spot discrepancies, such as categories on the draft Form reporting “zero” when you know there were expenditures, or vice versa. Equally important, you may catch other mistakes, such as an incorrect address or outdated board member names, that those preparing the Form from an accounting or financial perspective might miss. Misspellings signal lack of attention to detail and can erode trust in the nonprofit.

Another reason for the full board to review the Form before it’s filed with the IRS is to help ensure that the nonprofit’s story will emerge clearly for others accessing and reading the Form once it is filed. For instance, when reviewing your nonprofit’s draft Form 990, one board member may immediately look at the numbers on the first page showing revenue, expenses, contributions, assets, and liabilities. Someone else may flip first to Section III to read about how your nonprofit accomplishes its mission, and another may be curious about what the form reveals about board members. If you, and each board member of your nonprofit, takes the time to review the organization’s Form 990 with fresh eyes, each of you is likely to see different things emerge from the form - just as reporters, potential donors, and even charity regulators, who may review the form in the future - will also look for different things. A review by multiple eyes who are familiar with the nonprofit’s activities will help this document (that is publicly available 24/7) tell your nonprofit’s best story every minute of every day.  

When reviewing the form, make sure the mission is described in plain language. The mission description and Section III, “Program Service Accomplishments,” are opportunities to educate potential donors about your nonprofit’s work. Take these parts of the Form very seriously. Because the IRS archives these Forms digitally once they are submitted, people looking for certain types of charitable nonprofits can find your nonprofit more easily by cause, or mission, or by those served. Section III is also where your nonprofit should describe new directions it’s taking (see questions 2, and 3 of Section III). Another important section to tell your nonprofit’s story is Section VI, which offers the chance to demonstrate that the nonprofit follows sound governance practices. Can the nonprofit answer “yes” to the questions in Section VI about good governance? If not, that’s a red flag for those reviewing the form, and signals the need to refocus the nonprofit’s energy on building good governance best practices to ensure that answers in the future will be, “Yes.”

Ideally, just by reading the IRS Form 990, the public or a state charity official will see an accountable, transparent, and trustworthy organization that is making a positive impact as it advances its mission. However, those characteristics may not be evident when you review your nonprofit’s Form 990, which simply doesn’t offer adequate ways to explain all the ways a nonprofit is accountable to its various stakeholders. It does, however, offer a vehicle for being transparent about the practices described on the Form, as well as disclosing information about the composition and compensation of board members and staff. Board members reviewing the Form will want to pay special attention to responses about themselves, since they have a personal interest in the Form’s accuracy and clarity. For those signing the Form: Remember that your signature attests to the accuracy of all information submitted.  

Listen to our micro-learning module highlighting 3 common problems with the IRS Form 990

Resources

  • Highlights of the IRS Form 990 offers an annotated snapshot of the IRS Form 990 with commentary provided by GuideStar. Here’s a video tutorial that breaks down various parts of the IRS Form 990 and addresses frequently asked questions, also from GuideStar.  
  • How to read the 990 (Nonprofit Coordinating Committee of New York) The chapter, “What did the filer spend its money on?” offers a roadmap for reading the Form 990’s questions about a nonprofit's expenses - a topic that is commonly subject to scrutiny.
  • One of the areas of the 990 that people fixate on most often is the section of the Form where nonprofits report compensation to employees. Common mistakes nonprofits make on that part of the Form are discussed in this IRS video, Reporting Compensation on Form 990 or 990-EZ (May 12, 2016), and this four minute tutorial by GuideStar, Compensation and Contractor Payments.
  • Making the most of your Form 990: A red flag guide for nonprofits is a recording of a webinar hosted by Nonprofit Quarterly with Chuck McLean, GuideStar.
  • Consider the audiences who will be looking at your nonprofit's IRS Form 990: When you review your draft Form 990 before it gets filed, look through the eyes of various perspectives, from donor to potential board member. This articles addresses what readers look for on Form 990 (source: Journal of Accountancy).
  • Beyond the Form 990, consider other ways your nonprofit can highlight its trustworthiness, financial accountability practices, and impact, such as through posting a value statement, your financial transparency practices, and an annual report or an impact report  on its website, that may include testimonials from donors or those receiving services. 
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