The Form 990 is a comprehensive filing required of nonprofit organizations that provides valuable information to the IRS, donors, and the public. It helps readers assess whether an organization is operating responsibly and in a trustworthy manner to further its mission.
Beyond financial data, the Form 990 also discloses details about the organization’s Board of Directors, key staff, and governance practices. In addition, several narrative sections offer opportunities to highlight your mission, accomplishments, and impact. However, there are a few key areas that deserve careful attention to help avoid IRS audits or unwanted public scrutiny.
Incomplete or Inconsistent Information
One common issue on Form 990 filings is incomplete or missing information. Blank narrative sections, unchecked boxes, or unsigned forms can signal that the return is not fully completed. Incomplete filings may lead to costly IRS penalties and can create confusion for donors or the public reviewing the form.
It’s also important to check for consistency across sections. For instance, reported revenues and expenses should align between the financial statements, Part VIII (Statement of Revenue), and other public disclosures such as your website or annual report. If information doesn’t match internally or publicly, the IRS—and your readers—will notice.
Unreasonable or Excessive Compensation
Another area that draws IRS attention is executive compensation. The IRS reviews whether officer, director, and key employee compensation is reasonable based on your organization’s size, budget, and comparable nonprofits.
In March 2007, the IRS assessed over $21 million in excise taxes due to excessive nonprofit executive compensation—spread across just 40 individuals at 25 organizations. I recall working in the nonprofit sector during the 2008 controversy surrounding the United Way of Central Carolinas’ $2 million pension package, which brought significant public criticism. Even though unrelated organizations were not involved, the public scrutiny affected the broader nonprofit community.
The IRS continues to closely monitor this area to protect donors and ensure organizations are not providing excess benefits that could jeopardize their tax-exempt status.
Reporting of Diverted Assets
The Form 990 also requires nonprofits to disclose significant diversions of assets, such as theft, embezzlement, or unauthorized use of funds. A diversion must be reported if it exceeds the lesser of:
- 5% of gross receipts for the year,
- 5% of total assets at year-end, or
- $250,000.
Transparent disclosure is essential to demonstrate sound financial stewardship. Schedule O allows organizations to describe the nature of the diversion, the amounts involved, and corrective actions taken. Use this space thoughtfully to provide sufficient explanation while maintaining confidentiality. The IRS will evaluate whether the diversion affects the organization’s exempt status, whether corrective steps were adequate, and whether responsible parties must report related income for tax purposes.
Proceeding with Care
The Form 990 is complex and highly visible. Completing it accurately and thoughtfully is critical to maintaining your organization’s reputation and compliance. Careful attention to detail, along with professional guidance, can help your nonprofit avoid IRS audits and reinforce public trust in your mission.
Please contact the Not-for-Profit Niche team at Gilliam Bell Moser LLP for further guidance.
