Commit to transparency and best practices when filling out your 990 form
If you're heading up a nonprofit in the U.S. or joining a board of directors, you're probably well aware that the IRS has specific expectations for nonprofits. Whether you've been involved with the organization since the beginning or walked into an already-established role, here's a primer on staying in the good graces of the IRS.
What the IRS expects from nonprofits
As a nonprofit leader or board member, you uphold the mission of the organization. You rally supporters and advocate for the well-being of the organization. You meet the needs of staff, donors and other stakeholders. But there's another stakeholder who also expects something from you: the IRS.
Public outcry about inflated salaries and questionable fundraising practices in some high-profile nonprofits has led the IRS to subject nonprofits to closer scrutiny. This means the bar for demonstrating accountability and transparency for your organization is set a lot higher than it may have been in the past — but there's plenty you can do to help your organization thrive in this era of heightened accountability.
Life cycle of a nonprofit
Meeting IRS expectations for nonprofits starts by understanding the life cycle of a nonprofit, which has four stages:
- Incorporation in the state where the organization is located (based on state-by-state requirements)
- Application for tax-exempt status (IRS Form 1023)
- Compliance with relevant tax laws throughout the life of the organization
- Dissolution of the nonprofit
Incorporation is a fairly straightforward process in most cases: file paperwork with the state where your organization is located and wait for a response.
Applying for tax-exempt status is a bit more complex. You must draft bylaws, elect board members and a director, and then package it in a way that persuades the IRS that your organization exists for charitable good and not personal profit. There's a reason the IRS doesn't require you to apply for tax-exempt status immediately after you incorporate. It takes time to build an organization's infrastructure!
If you were part of your organization during its early years, you probably helped pull the required information together for incorporation and tax-exempt status. Now, the focus shifts to ongoing compliance.
Living and breathing the 990 form
When the IRS grants a nonprofit tax-exempt status, they expect the organization to be able to show that they deserve it. That's why most tax-exempt organizations are required to file an annual report on their financial and service activities with the IRS (casually known as the 990).
The 990 comes in three sizes:
- Form 990-N (e-Postcard). This version is intended for nonprofits with annual gross receipts less than $50,000.
- Form 990-EZ. This version is intended for nonprofits with annual gross receipts less than $200,000 and total assets less than $500,000.
- Form 990. The classic form is intended for nonprofits with gross receipts of $200,00 or more and total assets of $500,000 or more, but any nonprofit may elect to file it. Filing requirements are onerous, but the benefits are appealing — such as a rating from Charity Navigator, eligibility for donations from a wider range of foundations and government agencies, a filing waiver in many states, and visibility in nonprofit directories (such as GuideStar).
Even if you don't personally file the 990, you'll be involved in preparing it. The IRS is looking for evidence of good governance. What does that mean for you? Depending on your role on the board or in the organization, it could mean:
- Staying active and engaged while working with the organization's best interests in mind
- Taking minutes that reflect active participation of the board
- Keeping financial and operational records
- Drafting clear organizational policies
- Protecting the organization's assets
Impact of the Sarbanes-Oxley Act
When Congress passed the Sarbanes-Oxley Act in 2002, they were concerned about public accountability for corporations. Although the law focuses closer attention on the financial operations of for-profit corporations, some provisions have an impact on nonprofit organizations, too, particularly:
- Document retention and destruction schedules. Compliance with document retention begins with good record keeping and storing files in a secure place where they can't be misplaced or altered. Files must be available in case of an audit or if needed in a legal dispute.
- Whistleblower protections. The whistleblower provision might seem like common sense, but it's essential to know one basic fact: retaliation against anyone who provides law enforcement with information about illegal practices in your organization is a federal crime.
Treatment of nonprofit employees
Nonprofits must comply with the same tax laws regarding employees as for-profit organizations. This includes proper remittance of employee tax deductions and filing of required employment tax returns (such as IRS Forms 940 and 941).
Putting best practices to work
Complying with IRS requirements might seem daunting, but some basic best practices can help. For example:
- Keep a calendar with all important tax dates
- Maintain detailed financial records
- File paperwork on time
- Ensure all board members are well-versed in the bylaws
- Designate a point person or committee for filing tax forms, even if you hire a tax accountant for assistance
Because your tax report is public information, think of it as a public relations document as you're crafting responses to specific questions. You might also set aside at least one board meeting a year (or whenever you have a new board member) to review the requirements of the 990. Your commitment to transparency and best practices can help keep the IRS — and your donors — happy.
This article draws on the expertise of Grace Davies, a Minneapolis-based attorney with special interest in product liability, medical malpractice and employment discrimination.
GuideStar: The door has opened: New Form 990 creates strategic opportunities and risks for nonprofit organizations by Joel R. Wilson, Francis J. Schweigert and Grover A. Cleveland (2009)
GuideStar: The IRS view of nonprofit governance (2009)
IRS: Life cycle of a public charity (2016)
IRS: Annual exempt organization return: Who must file (2016)