Form 990 Article Series: 02 How to Review the Form 990

This is the second article in a nine-part series on the Form 990. Read our first article: Nonprofit Compliance Checklist

While the Form 990 is a required tax return for non-profit organizations to maintain their tax exempt status, it is also an incredibly powerful tool that can be used to strengthen the public perception of the organization. The Form 990 is not solely a reflection of the financial activities of the organization, but also conveys program information and information on an organization’s governance practices. Boards should recognize that the form is an indication of how well they are doing their job. And part of a board member’s job – one that is strongly encouraged by the IRS – is to take the time to review and understand the Form 990.

To encourage board involvement in the Form 990 review process, and perhaps to build awareness of the importance of tax-exempt reporting compliance and related governance issues, the IRS specifically asks within the Form 990 whether the completed form is provided to all members of the board prior to being filed. In addition, organizations must disclose their process for reviewing the Form 990. This disclosure demonstrates the organization’s care in engaging appropriate review of the form and may be of interest to people outside the organizations (i.e. donors, banks, potential board members, state regulatory agencies, etc.)

While the IRS encourages the board to review Form 990, it provides little guidance on how it should be reviewed. Following is a brief explanation of the parts of the Form 990 and tips for reviewing the return:

• Summary Information: Part I on the first page of the return is meant to give a quick snapshot of the organization. Most of the information is provided in more detail elsewhere in the return, but Part I reflects areas of the greatest concern to the IRS.
• Organization Mission: Listed in both Part I and Part III of the return, the mission should accurately reflect the current operations and mission of the organization. The mission statement in Part III should be approved by the board of directors.
• Return Completion: Part IV of the return asks various questions to determine if additional schedules are required (the Form 990 has 16 separate schedules that may be required in addition to the core part of the Form 990). The questions and their responses should be reviewed for accuracy, and board members should verify that required schedules are included for any “Yes” answers. Failure to complete a required schedule results in an incomplete return.
• Overall Compliance: Part V of the return assists the IRS (and the board or other interested parties) in determining the overall compliance of the organization with a variety of tax laws and reporting requirements.
• Governance: Part VI is a review of the governance practices, policies, and disclosure practices of the organization. This section should be reviewed in great detail and care. The board should have a clear understanding of all of the inquiries in this section and understand the weaknesses that may be revealed through these questions.
• Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors: The board should gain an understanding of the reporting requirements in Part VII. This section must include all persons serving in these positions for the filing year as well as persons from the previous year, in some circumstances.
• Revenue: Part VIII details the various revenue sources for the organization. The board should be familiar with the sources of revenue and be able to identify the sources reflected on the return.
• Functional Expenses: Part IX reflects the expenses of the organization as well as the classification of expenses to program, management, and fundraising.
• Balance Sheet: Part X reflects the balance sheet of the organization and should accurately reflect the assets, liabilities, and net assets of the organization.

In addition to the explanations and tips above, directors should also consider the following during their review of the return:

• Does the return appear to be complete (i.e. are there sections that have been left blank)?
• Does the information contained in the return seem reasonable given the director’s knowledge of the organization?
• If the director is aware of any transactions conducted with an insider or an organization controlled by an insider, are these transactions disclosed?
• If the director is aware of organizations related to the filing organization, are the related organizations disclosed in the return?

Form 990 Review Checklist

Let’s be honest, the Form 990 is an incredibly lengthy and intricate return, and most directors are not tax professionals familiar with the form. To help board members review the return, we’ve included a Detailed Checklist that includes pertinent questions for each section of the return. Additionally, organizations may benefit from having its Form 990 prepared by a CPA or professional experienced in preparing these returns, and having the preparer review the return with the board.

As mentioned earlier, the form is an indication of how well the board members are doing their job. It also brings attention to the organization’s policies and practices and whether they are considered best governance practices. By creating a board member review process, utilizing tools available to assist board members with this review, and by considering using experienced professionals, board members can have greater confidence and assurance that the return has been prepared properly to accurately reflect the organization’s operations and is providing users of the return a favorable impression of the organization.