IRS Form 990 is a tax return for organizations that are exempt from Income Tax.  Tax-exempt organizations, nonexempt charitable trusts, and section 527 political organizations file this form to provide the IRS with the information required by section 6033. The first thing you need to remember is that your non-profit MUST submit this form. I am aware of a center that failed to submit it for several years — and was in jeopardy of losing its non-profit status as a result.

Most non-profits, and very likely your Center or SILC, have their accountant complete the IRS form  990 as they finish the review of the financial statements of the organization, sometimes as a part of the financial statement audit or sometimes as a separate function. Did you know you can see the 990s of every non-profit in the country at Guidestar?  The database can be searched for red flags by any whistle-blower, donor, regulator or reporter, you want to make sure your 990 is accurate, and you especially want to assure that you are aware if you are raising any red flags in your submission of this form. Executive directors and board members shouldn’t rubber stamp the 990, but should read the very revealing information included on the form before signing and submitting it. Here are some key areas to consider.

  • Mission and Program Service Accomplishment. This is where you tell your story. Take advantage of the opportunity to show you are serious about your non-profit status and can show that you are a legitimate non-profit. You may want to take some of the highlights from your Program Performance Report, including statistics on numbers served and outcomes from your grants or plans. (Read the instructions to see what the IRS expects to see here.)
  • Part IV questions help you determine which schedules you need to complete and attach. Especially notice Schedule L, the transactions with interested persons. A “disqualified person” is someone who is in a position to exert control over the organization, and therefore financial transactions with them or their relatives raise a red flag related to conflicts of interest. If you say yes, provide the explanation in Part V. If you say yes, bend over backwards to prove that the amount spent is reasonable, at a fair market cost or below market cost, and you should explain in Part V.
  • Part V asks if you are telling donors if any part of the donation is not tax deductible, typically related to reducing the value of the donation by the value of a thank you gift.
  • Did the organization become aware during the year of a significant diversion of the organization’s assets? This would be marked yes if there is embezzlement, theft, or misuse of equipment or other assets. Regulators are very interested in this information. Guidestar actually provides a report to the FBI of any non-profits who mark this question “yes”. Be sure to explain on Schedule O, including how much money was involved, whether there was an insurance claim, how you reported it to authorities, and what new procedures you put in place to keep it from happening again. Do not include the name of the embezzler in the explanation.
  • Was the Form 990 presented to and reviewed by the Board of Directors before filing? A “no” answer is a red flag.
  • Do you have written policies around conflict of interest, whistleblower, document retention and document destruction policies? A “no” is a red flag. (They can’t require these policies, but they will use the answers as one element to determine who might be audited.)
  • Do you use best practices to determine employee salaries? A “no” is a red flag.

Thank you to Guidestar for much of this information. Join their conversation at #990redflags on Twitter.

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Seven Red Flags on IRS Form 990

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