10 Form 990 Mistakes Nonprofits Should Avoid | Lutz Insights

Yearly, nonprofits are required to file an informational tax return with the IRS known as Type 990, the Return of Group Exempt from Revenue Tax. This informational return serves as a window into your nonprofit’s governance, operations, and applications since it’s open to public inspection.

Donors, potential buyers, and grant businesses typically assessment a nonprofit’s Type 990 to evaluate its monetary well being, transparency, and alignment with its philanthropic objectives. Due to this fact, it’s important to strategy the preparation and assessment of this kind with diligence and a focus to element. This weblog will discover the important thing errors nonprofits typically make when finishing Type 990 and supply sensible methods to make sure accuracy and compliance.


10 Widespread Errors

1. Insufficient Articulation of Mission and Program Accomplishments

The mission assertion and program accomplishments part of Type 990 is a chance to showcase your group’s objective and impression. Sadly, many nonprofits fail to obviously articulate their mission and program accomplishments, leaving potential donors confused or unimpressed.

To keep away from this error, take the time to craft a compelling mission assertion that succinctly communicates your group’s objectives and values. In this system accomplishments part, present particular targets and measurable outcomes in your prime three companies or applications. Spotlight the tangible impression your group has made on the group to interact and encourage donors.

2. Extreme or Questionable Govt Compensation

Nonprofits should report govt compensation on Type 990, together with the method used to find out it. Extreme compensation can elevate considerations amongst donors, particularly if it seems disproportionate to the group’s measurement or mission. To handle this challenge, your board of administrators ought to be sure that govt compensation is truthful and affordable through the use of comparability knowledge and following a documented course of. Implementing a clear compensation coverage and repeatedly reviewing govt salaries will assist construct belief and exhibit accountable stewardship of donor funds.

3. Lack of Battle-of-Curiosity Coverage

A conflict-of-interest coverage is a important governance instrument that promotes transparency and ensures that the pursuits of the nonprofit take priority over private pursuits. Donors typically assessment Type 990 to evaluate whether or not a company has a conflict-of-interest coverage in place and the way it manages potential conflicts. By adopting and imposing a conflict-of-interest coverage, your nonprofit can exhibit its dedication to moral practices and sound decision-making. The coverage ought to require board members and key workers to reveal any actual or potential conflicts yearly and set up a transparent course of for dealing with them once they come up.

4. Insufficient Oversight and Governance Practices

Donors worth nonprofits with sturdy oversight and governance practices. Type 990 gives a chance to showcase your group’s dedication to those ideas. Donors typically search for indicators similar to the scale and independence of your board of administrators, the presence of whistleblower and doc retention insurance policies, and whether or not your board or a chosen committee critiques Type 990 earlier than submitting. Implementing these practices not solely enhances transparency but in addition helps shield your nonprofit’s fame and ensures compliance with IRS rules.

5. Budgetary Misalignment and Lack of Expense Categorization

The breakdown of bills in your nonprofit’s funds can considerably impression donor notion. Donors might interpret administration and normal bills in another way, both as obligatory for efficient operations or as a sign of inefficiency. To handle this, it’s essential to develop a transparent expense allocation coverage that precisely categorizes bills between program, administration and normal, and fundraising areas. Transparently talk how prices are allotted and emphasize the significance of sturdy inner controls and danger administration in your group.

6. Neglecting Required Schedules

Precisely finishing Type 990 goes past filling out the core type. Nonprofits typically overlook to connect required schedules, resulting in incomplete filings and potential penalties. To keep away from this error, totally assessment Half IV of Type 990, titled “Guidelines of Required Schedules.” Create a complete record of all required schedules (there are 16 complete) particular to your group and be sure that they’re accomplished and hooked up as wanted. Widespread schedules embrace:

  • Schedule A for public help and public charity classification.
  • Schedule B for contributor particulars.
  • Schedule D for supplemental monetary statements.
  • Schedule O for supplemental info required.

7. Late or Incomplete Submitting

Lacking the submitting deadline or submitting an incomplete Type 990 can have severe penalties in your nonprofit. The IRS might reject or return late or incomplete filings, exposing your group to penalties and jeopardizing its tax-exempt standing. It’s important to familiarize your self with the submitting deadline in your tax yr, usually on the fifteenth day of the fifth month after the tax yr ends. Think about using Type 8868 to request a six-month extension if wanted. Guarantee that you’ve all the required info and documentation prepared earlier than submitting your Type 990 to keep away from errors and delays.

8. Unclear or Inaccurate Descriptions of Actions and Monetary Data

Type 990 requires nonprofits to supply detailed details about their actions, funds, and governance. Failure to precisely describe these points can result in misunderstandings or misinterpretations by donors. Take the time to fastidiously assessment and replace the descriptions of your group’s applications, fundraising actions, and grants. Be certain that your monetary info, together with earnings and bills, property, and liabilities, is precisely reported. Use clear and concise language to supply a complete overview of your nonprofit’s operations and monetary well being.

9. Failing to Report Unrelated Enterprise Revenue

Even tax-exempt organizations are required to report unrelated enterprise earnings (UBI) on Type 990. Failure to appropriately establish and report UBI can lead to penalties and potential IRS scrutiny. Establish potential sources of UBI, similar to promoting income or unrelated business actions, and seek the advice of with tax and accounting specialists to make sure correct reporting. Understanding the foundations and rules surrounding UBI may be advanced, so searching for skilled steerage is important to take care of compliance and keep away from potential points.

10. Lack of Overview and Session with Tax Advisors

Getting ready and reviewing Type 990 could be a advanced course of. Participating the companies of a tax advisor who focuses on nonprofit tax might help make sure the accuracy and compliance of your filings. A educated tax advisor can help with figuring out potential errors, reviewing schedules and attachments, and offering steerage on greatest practices for finishing Type 990. Their experience might help your group keep away from expensive errors, preserve compliance, and construct belief with donors.


Lutz’s Nonprofit Accounting Providers Can Assist

Submitting Type 990 is a important accountability for nonprofit organizations. By avoiding frequent errors and taking a proactive strategy to accuracy and transparency, you possibly can improve your group’s fame, preserve donor belief, and exhibit your dedication to good governance and monetary stewardship. When you’ve got any questions, please contact us or study extra about our nonprofit accounting companies.

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