File a clean 990: 11 things to know about the IRS’ return for nonprofits

Jeremy J. Scheibelhut, CPA

The IRS may be overwhelmed, but that doesn’t mean it’s not issuing notices. It simply means the agency lacks the manpower to follow up, putting nonprofits at risk of hanging in limbo while the agency investigates.

In this climate, it’s imperative that nonprofits prevent undue attention by filing their 990s with all the i’s dotted and t’s crossed. Avoiding IRS “hot points” helps prevent notices.

Plus, in a challenging fundraising environment, the 990 remains the go-to document for potential donors deciding where to devote their charitable donations. Those donors could take their dollars elsewhere if your 990 is skimpy or sloppy.

The 990 is the IRS’ Return of Organization Exempt from Income Tax and a bedrock document for nonprofits expressing their fiscal health and dedication to mission.

Nonprofits can avoid IRS issues by keeping in mind the following 990 compliance tips:

1. Correct, timely filings: There are 3 types of filings-the 990-N post card, the 990EZ and the 990.  To determine which is the correct form to file, you will need to know your gross receipts. The 990-N is required when gross receipts fall under $50,000.  The 990EZ is required when gross receipts are less than $200,000 AND total assets are less than $500,000.  The 990 is required when gross receipts are greater than $200,000 OR total assets are greater than $500,000.  Regardless of which form is required, the filing deadline is the 15th day of the 5th month after your year end.  For the 990EZ and 990, you can apply for an automatic 6-month extension of time to file.  The 990-N does not allow for an extension.
2. Unrelated business income: Avoid unintentionally triggering a taxable event. It’s best to consult with an accountant. In general, nonprofits need to determine if an activity is competing with a for-profit business or, perhaps, going outside of their charitable purpose.
3. Count all volunteers: Some nonprofits don’t cast the net wide enough when counting volunteers. There are those that neglect to count board members, who are key volunteers. Avoid putting “zero” in that field. Nonprofits need to show the importance of volunteers in accomplishing the organization’s charitable purpose.
4. Mirror images: Make sure total program revenues match the Statement of Revenue and do the same for expenses. If financial statements are attached, they should, for the most part, match the 990s. For instance, if you break out depreciation between program management and general fundraising on the 990, it should be the same on the financial statements.  
5. 1099 compliance: Some nonprofits report zero 1099s issued, but they might be overlooking fees paid to an accountant providing services for the 990. Tread carefully with worker classification as well. Ask three questions: Do you give this person the equipment and tools needed to do their job? Do you give them orders and sequences they're supposed to follow? Do you make sure that they follow your handbooks? If you answer yes to all three, that person could, technically, be an employee.  
6. Report cash correctly: As the IRS requests, break cash reporting down by interest-bearing and non-interest bearing.
7. Don’t count donated services as contributions: Financial statements will show the donated services, but for the 990, they are broken out separately and shown on Schedule D.
8. Detail expenses: Nonprofits often lump all their costs into one place, such as the miscellaneous expenses field, but it is better to detail them while being as concise as possible.
9. Schedule G compliance: When filing Schedule G, required for fundraising over $5,000, be careful not to jumble contributions with expenses. For instance, half of that $100 ticket for a golf outing covered food and golf, so the actual contribution was only $50. 
10. Polish the Statement of Accomplishments: Donors read the 990 Page 2 statement, so this is your chance to shine and to explain any anomalies in the 990. You may have done so well financially that potential donors might wonder why you need their money? Explain the difference: perhaps that a one-time gift inflated your revenue and use data to show that the need continues.
11. Sharpen the functional expenses: This is the spot donors check to see how much of every dollar raised goes to programming. Oversee expenses carefully and make sure you’re allocating as much as possible to programming. To calculate expenses, consider conducting cyclical reviews of how employees spend their time. If you had a rough year, where less revenue went toward the mission than usual, use the Statement of Accomplishments again. Put the decline in context, explaining where rising expenses came from and noting previous years of above-average showings.

Nonprofit filings can be complex, and the rules change from year to year. For expert help staying on the right side of compliance, work with a skilled nonprofit CPA familiar with the tax implications of nonprofit operations. Contact Boyer & Ritter for more information.