Every year, nonprofits are required to file an informational tax return with the IRS called Form 990, the Return of Organization Exempt from Income Tax. This informational return serves as a window into your nonprofit's governance, operations, and programs since it is open to public inspection.

Donors, potential investors, and grant agencies often review a nonprofit's Form 990 to assess its financial health, transparency, and alignment with its philanthropic goals. Therefore, it is vital to approach the preparation and review of this form with diligence and attention to detail. This blog will explore the key mistakes nonprofits often make when completing Form 990 and provide practical strategies to ensure accuracy and compliance.

10 Common Mistakes

1. Inadequate Articulation of Mission and Program Accomplishments

The mission statement and program accomplishments section of Form 990 is an opportunity to showcase your organization's purpose and impact. Unfortunately, many nonprofits fail to clearly articulate their mission and program accomplishments, leaving potential donors confused or unimpressed.

To avoid this mistake, take the time to craft a compelling mission statement that succinctly communicates your organization's goals and values. In the program accomplishments section, provide specific objectives and measurable outcomes for your top three services or programs. Highlight the tangible impact your organization has made on the community to engage and inspire donors.

2. Excessive or Questionable Executive Compensation

Nonprofits must report executive compensation on Form 990, including the process used to determine it. Excessive compensation can raise concerns among donors, especially if it appears disproportionate to the organization's size or mission. To address this issue, your board of directors should ensure that executive compensation is fair and reasonable by using comparability data and following a documented process. Implementing a transparent compensation policy and regularly reviewing executive salaries will help build trust and demonstrate responsible stewardship of donor funds.

3. Lack of Conflict-of-Interest Policy

A conflict-of-interest policy is a critical governance tool that promotes transparency and ensures that the interests of the nonprofit take precedence over personal interests. Donors often review Form 990 to assess whether an organization has a conflict-of-interest policy in place and how it manages potential conflicts. By adopting and enforcing a conflict-of-interest policy, your nonprofit can demonstrate its commitment to ethical practices and sound decision-making. The policy should require board members and key employees to disclose any real or potential conflicts annually and establish a clear process for handling them when they arise.

4. Inadequate Oversight and Governance Practices

Donors value nonprofits with strong oversight and governance practices. Form 990 provides an opportunity to showcase your organization’s commitment to these principles. Donors often look for indicators such as the size and independence of your board of directors, the presence of whistleblower and document retention policies, and whether your board or a designated committee reviews Form 990 before filing. Implementing these practices not only enhances transparency but also helps protect your nonprofit’s reputation and ensures compliance with IRS regulations.

5. Budgetary Misalignment and Lack of Expense Categorization

The breakdown of expenses in your nonprofit’s budget can significantly impact donor perception. Donors may interpret management and general expenses differently, either as necessary for effective operations or as an indication of inefficiency. To address this, it is crucial to develop a clear expense allocation policy that accurately categorizes expenses between program, management and general, and fundraising areas. Transparently communicate how costs are allocated and emphasize the importance of strong internal controls and risk management in your organization.

6. Neglecting Required Schedules

Accurately completing Form 990 goes beyond filling out the core form. Nonprofits often forget to attach required schedules, leading to incomplete filings and potential penalties. To avoid this mistake, thoroughly review Part IV of Form 990, titled “Checklist of Required Schedules.” Create a comprehensive list of all required schedules (there are 16 total) specific to your organization and ensure that they are completed and attached as needed. Common schedules include:

• Schedule A for public support and public charity classification.
• Schedule B for contributor details.
• Schedule D for supplemental financial statements.
• Schedule O for supplemental information required.

7. Late or Incomplete Filing

Missing the filing deadline or submitting an incomplete Form 990 can have serious consequences for your nonprofit. The IRS may reject or return late or incomplete filings, exposing your organization to penalties and jeopardizing its tax-exempt status. It is essential to familiarize yourself with the filing deadline for your tax year, typically on the 15th day of the fifth month after the tax year ends. Consider utilizing Form 8868 to request a six-month extension if needed.

Ensure that you have thought about all necessary filings, including Form 451 for property tax exemption in Nebraska, sales tax returns, or use tax returns. Have all information and documentation ready before submitting your Form 990 to avoid errors and delays.

8. Unclear or Inaccurate Descriptions of Activities and Financial Information

Form 990 requires nonprofits to provide detailed information about their activities, finances, and governance. Failure to accurately describe these aspects can lead to misunderstandings or misinterpretations by donors. Take the time to carefully review and update the descriptions of your organization's programs, fundraising activities, and grants. Ensure that your financial information, including income and expenses, assets, and liabilities, is accurately reported. Use clear and concise language to provide a comprehensive overview of your nonprofit's operations and financial health.

9. Failing to Report Unrelated Business Income

Even tax-exempt organizations are required to report unrelated business income (UBI) on Form 990. Failure to correctly identify and report UBI can result in penalties and potential IRS scrutiny. Identify potential sources of UBI, such as advertising revenue or unrelated commercial activities, and consult with tax and accounting experts to ensure accurate reporting.

It is important to note that nonprofits will need to file an accompanying state tax return to report the UBIT. The specific forms required for Nebraska corporations are the 1120N or the 1041N for nonprofit trusts. Understanding the rules and regulations surrounding UBI can be complex, so seeking professional guidance is essential to maintain compliance and avoid potential issues.

10. Lack of Review and Consultation with Tax Advisors

Preparing and reviewing Form 990 can be a complex process. Engaging the services of a tax advisor who specializes in nonprofit tax can help ensure the accuracy and compliance of your filings. A knowledgeable tax advisor can assist with identifying potential errors, reviewing schedules and attachments, and providing guidance on best practices for completing Form 990. Their expertise can help your organization avoid costly mistakes, maintain compliance, and build trust with donors.

Lutz's Nonprofit Accounting Services Can Help

Filing Form 990 is a critical responsibility for nonprofit organizations. By avoiding common mistakes and taking a proactive approach to accuracy and transparency, you can enhance your organization's reputation, maintain donor trust, and demonstrate your commitment to good governance and financial stewardship. If you have any questions, please contact us or learn more about our nonprofit accounting services.