A Detailed Breakdown Of The Nonprofit Tax Form 990

Nonprofit organizations play a huge role in our communities, but how they report their finances and activities can seem like a mystery. That's where the IRS Form 990 comes in. It's a public document that nonprofits file each year, giving us a peek into their world.

Today, we're exploring every little detail of Form 990. 

We'll break down what it is, why it's important, and what you should look for if you're curious about a nonprofit's impact and how it manages its money. Stay tuned to become a Form 990 expert!

What Is Form 990?

Form 990 is a special tax form that nonprofit organizations use to give information to the IRS. It is an important form because it ensures that these organizations are open about their finances and use their money properly. 

Organizations that don't have to pay taxes, like charities and some political groups, need to fill out this form. Different types of Form 990 are used based on how much money the organization makes and what it owns. 

Form 990 helps everyone know if nonprofits are sticking to the rules for being tax-exempt, meaning they don't have to pay taxes because of the good work they do. 

If these groups don't fill out Form 990 or don't do it right, they can get in trouble and might have to pay penalties​​​​.

The Importance of Filing Form 990

Filing Form 990 is important for nonprofit organizations to maintain their tax-exempt status and ensure transparency to donors and the public. 

Here's why it's important and what happens if you don't file on time:

1. Consequences of Not Filing or Late Filing

Nonprofits that fail to file their Form 990 by the due date face significant penalties. Small organizations (with gross receipts less than $1,129,000) are penalized $20 per day, up to a maximum of $11,000 or 5% of their gross receipts. 

Larger organizations (with gross receipts over $1,129,000) face a daily penalty of $110, up to a maximum of $56,000 or 5% of gross receipts. 

In addition, individuals responsible for filing can face penalties of up to $5,000 if the IRS deems the return inaccurate or incomplete and it's not corrected in a timely manner. Worst case, filing a fraudulent return could result in hefty fines and imprisonment​.

Another consequence of not filing for three consecutive years is the automatic loss of tax-exempt status, making the organization liable for taxes​​​​.

2. Increased Donor Trust and Public Transparency

Filing Form 990 accurately and on time not only helps avoid penalties but also significantly increases donor trust and improves the public's perception of a nonprofit. 

This form provides a transparent look into a nonprofit's financial health, its activities, and how it manages its funds. By detailing the organization's programs, sources of revenue, and sustainability measures, Form 990 serves as a valuable tool for accountability. 

It presents the organization in a positive light, potentially attracting more support by reassuring donors and the public about the legitimacy and effectiveness of its operations. 

Who Needs to File Form 990 and When?

Nonprofits, like charities, schools, and other groups that operate without the goal of making a profit, have to fill out Form 990 for the IRS. 

But not all nonprofits have to fill it out. For example, churches and some religious organizations don't need to fill out this form.

When to file Form 990 is based on the nonprofit's tax year. The form is due on the 15th day of the 5th month after the tax year ends. So, if the tax year ends on December 31, the form is due on May 15 of the next year. 

If nonprofits need more time, they can ask for an extension with Form 8868.

Types of Form 990

There are different kinds of Form 990, depending on the size and financial activity of the nonprofit.

• Form 990-N (e-Postcard): Designed for the smallest nonprofits with annual gross receipts of $50,000 or less. It's a simple online form that asks for basic information about the organization.
• Form 990-EZ: This is a shorter version of Form 990 for small to medium-sized organizations. Nonprofits with annual gross receipts less than $200,000 and total assets less than $500,000 at the end of the year qualify to file this version.
• Form 990: The standard form for larger nonprofits. Organizations with annual gross receipts of $200,000 or more or total assets of $500,000 or more at the year-end must file this form. It's more detailed and requires comprehensive financial information.
• Form 990-PF: Specifically for private foundations, regardless of their financial size. All private foundations must file this form annually, providing detailed information about their financial activities, including grants given, income received, and expenses.
• Form 990-T: Form 990-T, officially known as the Exempt Organization Business Income Tax Return, is for tax-exempt organizations that generate income from activities unrelated to their tax-exempt purpose. 

If your organization's gross income from these activities is $1,000 or more during the tax year, you're required to file Form 990-T alongside your standard Form 990, 990-EZ, or 990-PF.

E-filing Software Options 

E-filing Form 990 is a must for most nonprofits, and using e-filing software can make this process much easier. 

Here’s a breakdown of what you need to know about e-filing Form 990, including the benefits, possible costs, and popular platform choices.

Benefits of E-filing Software for Form 990

1. Security

Your organization's sensitive information stays protected with IRS-certified e-filers. It also ensures safe processing when submitting your forms to the IRS​​.

2. On-time Filing

E-filing software can help you meet your deadlines, avoid late fees, or, worse, lose your tax-exempt status.

3. Ease of Use and Accessibility

These platforms are designed for ease, often asking simple questions to fill out the form on your behalf, which saves time and reduces errors​​.

Charges for Filing Form 990 and Its Variants

The costs can vary depending on the platform and the specific form you're filing. For example:

• File 990 offers 990-N filings for $49.99 and 990-EZ filings for $69.99​​.
• TaxAct charges $109.95 for its software download​​.
• Tax 990 does not list specific prices but highlights features like free schedules, error checks, and secure data handling​​.

Popular E-filing Software Choices

• File 990: Known for its simplicity and security, it is ideal for filing 990-N or 990-EZ forms​​.
• TaxAct: Offers a broad range of forms, suitable for organizations with various affiliations. It features error alerts and bookmark capabilities​​.
• Aplos: Provides a comprehensive suite of financial management tools, including e-filing capabilities, receipt confirmations, and status checks​​.
• Tax 990: Highlights include data import/validation, form preparation help, security certifications like SOC 2, and live customer support​​.

Common Mistakes To Avoid While Filing Form 990

Nonprofits must be cautious to avoid common mistakes that could lead to penalties, damage their reputation, or even risk their tax-exempt status. 

Here's an overview of common errors and tips on how to prevent the

1. Not Filing on Time

Make sure you file Form 990 by the 15th day of the fifth month after your fiscal year ends. Late filings can incur penalties, and failing to file for three consecutive years can result in losing your tax-exempt status​​​​.

2. Incorrect or Incomplete Narratives

Narrative sections should accurately describe your organization's mission, activities, and governance. Vague or outdated narratives can confuse both the IRS and potential donors​​​​.

3. Misreporting Executive Compensation

Excessive or poorly explained compensation can raise red flags. Use data to ensure salaries are reasonable and document the process for determining compensation​​.

4. Neglecting Required Schedules

Many organizations overlook attaching all necessary schedules, leading to incomplete filings. Thoroughly review Part IV of Form 990 to identify all required schedules for your organization​​.

5. Filing the Wrong Form

Your organization's financial activity determines which version of Form 990 to file. Filing an incorrect form can result in your submission being rejected​​.

6. Inadequate Documentation and Recordkeeping

Maintain proper documentation for all financial transactions, board minutes, and important decisions to support the information reported on Form 990​​.

7. Failing to Report Unrelated Business Income (UBI)

Identify and accurately report all UBI to avoid potential penalties and follow IRS regulations​​.

8. Inaccurate Categorization of Expenses

Properly categorizing expenses is crucial for an accurate representation of your financial situation to the IRS and potential donors​​.

To avoid these mistakes, plan ahead, maintain detailed records, and consider consulting with a tax advisor or nonprofit expert familiar with Form 990 requirements.

After Filing Form 990: What to Expect from the IRS?

After you submit Form 990 to the IRS, here's what comes next.

The Review Process

Once submitted, the IRS reviews your Form 990. This review is to make sure that your organization continues to meet the tax-exempt criteria. 

Possible Outcomes

• Approval: 

If everything is in order, the IRS will accept your filing, and your organization will maintain its tax-exempt status for another year.

• Request for More Information

If the IRS needs more details, they might send a letter asking for additional information. It's important to respond promptly to avoid delays or penalties.

• Audits

While not common, the IRS can audit your Form 990. This is more likely if there are discrepancies, significant changes from the previous year, or if your form is randomly selected for a closer look.

Bottom Line

Remember, Form 990 is a powerful tool for your nonprofit. It's a chance to demonstrate your commitment to your cause, show how responsibly you handle funds, and make your case to potential funders and supporters. 

Taking the time to fill it out carefully and correctly can pay off in more ways than just staying on the right side of IRS regulations. It could help paint a picture of a thriving, impactful organization that's worth donating to.