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What the Board of Directors Should Know About IRS Form 990

IRS Form 990 is an informational tax form that the majority of tax-exempt organizations must file annually. The Form’s main purpose is to give the IRS an overview of the organization’s activities, governance, and detailed financial information. Additionally, Form 990 includes a section to describe its accomplishments in the previous year to justify maintaining its tax-exempt status. The IRS uses the information reported in Form 990 to ensure that organizations continue to qualify for their tax exempt status.

Federal tax law does not define that it is the Board’s duty to receive or review a Form 990, but organizations who do not have a Board review policy in place may be considered to have a significant weakness and lack of oversight. There has been a substantial increase in the demand for transparency and accountability within the nonprofit sector, further cementing the importance in the Board’s involvement in the organization’s review of the final Form 990.

The following “Board Member Review Checklist for Form 990” highlights some key areas that Board members should examine as a part of their review of Form 990.

BOARD MEMBER REVIEW CHECKLIST FOR FORM 990

PART I – SUMMARY

  • Is the brief description of the organization’s mission truthful and clearly defined?
  • Will the mission description positively influence a potential donor?
  • Does the current year summary of financial information compare favorably or unfavorably with the prior year?

PART III – STATEMENT OF PROGRAM SERVICE ACCOMPLISHMENTS

  • Does the information in Part III explain to the user of Form 990 why the organization exists, who it serves, and the information about activities it will undertake to accomplish its mission?
  • Are the program services described in enough detail to present an accurate depiction of the organization?

PART V – STATEMENTS REGARDING OTHER IRS FILINGS AND TAX COMPLIANCE

  • Have paid individuals been properly classified as employees rather than independent contractors to avoid payroll tax issues?
  • If the organization is a charitable organization and received more than $250 from a single donor, was a receipt provided to enable the donor to corroborate his or her charitable contribution deduction?

PART VI – GOVERNANCE, MANAGEMENT, AND DISCLOSURE

  • If the organization does not have the Board-adopted written policies indicated, should the Board consider adopting any?
  • Should the Board consider a change in the procedures for setting compensation to minimize the future risk of investigation by the IRS? An organization that over-compensates its management may open themselves to personal liability.
  • If the organization is conducting activities in multiple states, is it properly registered in those states and completing each states filing requirements?

PART VII – COMPENSATION OF OFFICERS, DIRECTORS, TRUSTEES, KEY EMPLOYEES, HIGHEST COMPENSATED EMPLOYEES, AND INDEPENDENT CONTRACTORS

  • Does the compensation of those listed in Part VII appear justifiable in view of the organization’s activities, size, and their responsibilities?

PART VIII – STATEMENT OF REVENUE

  • Does the revenue data indicate too much reliance on one source that could be threatened by a poor economy or other external factors? Should alternate revenue streams be considered?
  • Too much reliance on unrelated business income [as reported in column (C)] could risk an organization’s exempt status. Is column (C) insignificant as compared to totals in column (A)?

PART IX – STATEMENT OF FUNCTIONAL EXPENSES

  • Are compensation and benefits (lines 5 through 9) consuming too much of the organization’s revenue?
  • Are expenses justifiable and in line with the organization’s mission?
  • If completed, do the totals of column (C) management and general expenses and column (D) fundraising expenses appear disproportionate relative to total program service expenses in column (B)?

PART X – BALANCE SHEET

  • Is a large amount of cash (line 1) being kept in non-interest bearing accounts?
  • Are resources being averted from program service activities to related party loans (lines 5 and 6)?
  • Is oversight being exercised over related party loans to ensure adequate collateral, interest, timely repayment, etc.?
  • Are notes and loans receivable (line 7) sufficiently collateralized and monitored for timely repayment?
  • Does an increase, if any, in accounts payable or accrued expenses (line 17) during the year suggest potential cash flow problems?

PART XII – FINANCIAL STATEMENTS AND REPORTING

  • Where the organization’s financial statements appropriately audited or reviewed by an independent accountant (if applicable)?
  • If audited, do the auditors’ report to the group responsible for overseeing the financial reporting process (an audit or finance committee or the governing Board)?

SCHEDULE A – PUBLIC CHARITY STATUS AND PUBLIC SUPPORT

  • Does the data (Part II Section C or Part III Sections C and D) indicate that the organization is in danger of becoming classified as a private foundation rather than remaining a public charity?

SCHEDULE C – POLITICAL CAMPAIGN AND LOBBYING ACTIVITIES

  • If exempt under Section 501(c)(3), are policies followed to prevent participation in a political campaign that could jeopardize tax-exempt status?
  • If the organization is a Section 501(c)(3) entity that is eligible to make the lobbying expenditure election but has not, should it do so to minimize the likelihood that exempt status will be lost because of excessive lobbying (see Part II-A)?

SCHEDULE J – COMPENSATION INFORMATION

  • If any box on line 1a is checked, is the economic benefit warranted or should it be re- examined?
  • Does the organization require strict accountability for expense reimbursements to prevent abuse (lines 1b and 2)?
  • Is the organization setting compensation based on one or more methods indicated by the box descriptions for line 3?

SCHEDULE L – TRANSACTIONS WITH INTERESTED PERSONS

  • Did the organization consider all direct or indirect transactions or relationships that may require disclosure? (See Part IV questions 25 through 28.)
  • Are business transactions with interested persons fully disclosed, including the amount, nature of the transaction, and relationship with the organization, management, and Board?

SCHEDULE O – SUPPLEMENTAL INFORMATION

  • Is the 990 review process fully described?
  • Does the organization describe how public documents (Forms 990, 990-T, if applicable, and 1023) are made available for public inspection (website, office, Guidestar, etc.)?

SCHEDULE R – RELATED ORGANIZATIONS AND UNRELATED PARTNERSHIPS

  • Did the organization receive any payment from, or engage in any transaction with, a controlled entity within the meaning of section 512(b)(13)? Organizations fall under section 512(b)(13) if a parent/subsidy relationship exists, or if the same persons constitute a majority of the members of the governing body of both organizations, or the same entity/ persons controls both organizations.
  • If the answer to the above question is yes, did the information on schedule R include appropriate current year related transactions?

Board members should be aware that Form 990 is made available to the public and can be inspected by third parties, so a thorough review remains an important duty of the Board. Board members and organizations that are educated about the Form 990 will benefit from accurately reported information that best reflects the organization and its values which could result in increased public support.

Download the full guide for Nonprofit Board Members

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