By Amy Rybar Menefee, CPA, CFE, Business Assurance & Advisory Services Senior Manager | Not-for-Profit Team
Best Practices for Board Review of Form 990
Board review of Form 990, Return of Organizations Exempt from Income Tax, is not required by statute. However, it is a best practice. In addition to the Form 990 review procedures being reported on the 990, a public document, the Form 990 is an important tool for communication with stakeholders. The story of the organization that is told through the 990 is important to consider. The readers of the Form 990 may be potential contributors, potential future board members, potential grantors, or some other external users evaluating the effectiveness of the organization’s programs.
The following is a summary of some areas of the Form 990 that should undertake a focused review by the board of directors to avoid potential tax or administrative problems for the organization.
There is a significant advantage provided by electronic filing, even if the organization is not required to file electronically. When the Form 990 is filed electronically, the taxpayer is notified immediately of issues, which allows those issues to be addressed quickly. In January 2018, the IRS began rejecting incomplete Forms 990. In the first nine months of enforcement, approximately 10% of paper filed forms were rejected for incompleteness. If an organization files a paper return, and it is rejected, it is returned by mail…at a much later date, and if the corrected and completed return is not filed until after the due date, late filing penalties are assessed.
Governance, Management and Disclosure
Part VI, Section A of the Form 990 requires an organization to report the total members of the governing body with the power to vote on all matters. If there are different voting rights for different members of the governing body, that should be explained on Schedule O, Supplemental Information to Form 990. In this same Part VI, Section A, the number of independent voting members must be reported. The following conditions must not be present for a board member to be considered independent. The board member must not (1) be involved in a transaction directly or through a family member, with the organization, or a taxable or tax-exempt organization that would be reportable on Schedule L, Transactions with Interested Persons (2) receive total compensation, including as an independent contractor, exceeding $10,000 during the tax year from the organization or a related organization, other than as reasonable compensation for service provided in the capacity as a board member (3) be compensated as an officer or other employee of the organization or of a related organization.
Part VI, Section B, asks if the complete copy of the Form 990 has been provided to the governing body before filing the return. Seems simple, but per the Form 990 instructions, a complete copy includes all required schedules. The method of providing the return to the governing body may be in paper form or electronically, and is less important than making sure the copy provided is complete. However, simply informing the members of the governing body that the Form 990 is available upon request does not satisfy this requirement. Part VI, Section B, requires the organization to describe the review process by which the organization’s governing board and management reviewed the Form 990. The explanation should include details about who conducted the review, when they conducted it, and the extent of the review – or, if no review was conducted (not a best practice) the answer should state that no review was conducted. One last item that is wise to review carefully on Part VI, Section B, relates to whether an organization has a Conflict of Interest policy, which is a policy that defines conflicts of interest and details procedures to follow in managing conflicts of interest. Part VI, Section B asks if the organization regularly monitors and enforces compliance with the policy and asks that the process for doing so be described on Schedule O, Supplemental Information to Form 990. The description on Schedule O should include an explanation of who is covered under the policy, the level at which it is determined whether or not a conflict of interest exists, and the level at which actual conflicts are reviewed. In addition, the explanation should include the restrictions imposed on those with a conflict, such as not being allowed to vote on the particular item for which a conflict exists.
On the Statement of Activities, directors should review the organization’s revenue to determine if there is too much reliance on too few sources of revenue. In addition, the review should include the amount of unrelated business activities vs. total support, as this can potentially endanger exempt organizations exempt status or trigger unrelated business income taxes.
The Statement of Functional Expenses should be reviewed for overspending. Compensation and benefits should be reasonable based on the programs of the organization. Total management, and general and fundraising expenses should be reviewed to ensure their percentage are in line relative to total expenses. There are multiple factors that determine what the percentage administrative expenses “should” be including the size of the organization and the complexity of its programs. However, as long as the operations of the organization don’t change significantly, the percentage administrative vs. total expenses should not fluctuate significantly from one year to the next.
The Statement of Net Assets should be reviewed for related party receivables and, if these exist, the board should question the purpose, and the oversight being exercised over these receivables, and, for any note or loan receivable, collectability and repayment terms should be discussed. Any large increases in accounts payable or accrued expenses could indicate a potential cash flow problem and should be discussed.
The Form 990 is an important communication tool for non-profit organizations and review by the governing body is important. The above items are all things to keep in mind as part of a focused review by the governing body and will help organizations to communicate the story of the organization in a way that aligns with the organizations’ mission and purpose.
Additional Resources for Not-for-Profit Organizations
- IRS Leans on Technology for Discovering Non-Compliance
- Website 101: Public Information for Not-for-Profit Organizations
- Impact of ASC 606 on Not-for-Profit Organizations
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.