Most board members know- or should know- that the nonprofit organization they serve files an annual Form 990 information return with the IRS. But not every board member knows that they can, and should, review the form before it’s submitted. Read on to learn why such board reviews are important and how to make them effective.
IRS Makes Its Case
Although the IRS doesn’t require nonprofit boards of directors to review their respective Forms 990, it does encourage boards to review the return. The agency believes that a correlation may exist between board review of the return and “the accu-racy and effectiveness of the form in conveying the organization’s mission, activities, accomplishments, finances, compensation, and business relationships and transactions.” The IRS also has noted that board review of Form 990 may reflect good governance. Of course, it’s not just the IRS that might scrutinize the information in your Form 990. Potential financial supporters, from individual donors to private foundations, may examine this readily available information. In addition, the media increasingly have taken an interest.
Start a Successful Review
If your board doesn’t already review Form 990, start now. Your board should receive the draft Form 990 to review before the IRS due date (the 15th day of the 5th month following the end of your organization’s taxable year or up to six months with an extension). The board needs enough time to assign review responsibilities, conduct the review and come back with any concerns. Your staff (and possibly the CPA firm that assisted in preparing the return) then needs to respond to board inquiries and make any necessary adjustments to the initial draft before submitting the final form to the IRS. Be sure to assign responsibilities appropriately. In nonprofits that have a formal review process for Form 990 in place, the task is often assigned to the audit or audit/finance committee. The better approach may be to assign particular sections of the form to those individuals with the most relevant expertise. Your professional CPA, legal and financial advisers can provide vital assistance, especially on compliance- related matters.
The excess benefit transaction risk
Certain nonprofits must report whether they engaged in any excess benefit transactions (EBTs) in the current or past tax years on their Forms 990. An EBT generally is a transaction where the nonprofit pro-vides an economic benefit to a “disqualified person” that exceeds the value of what the organization received in exchange for the benefit — for example, excessive executive compensation. Disqualified persons typically are in a position to exercise substantial influence over a nonprofit’s affairs. Disqualified persons who engage in EBTs are liable for an excise tax equal to 25% of the excess benefit. If the transaction isn’t timely corrected after the tax is imposed, an additional excise tax of 200% of the excess benefit is imposed. Disqualified persons aren’t the only ones at risk. “Organization managers,” including officers and directors, who are found to have knowingly participated in an EBT could incur an excise tax equal to 10% of the excess benefit, up to $20,000.
Pay Attention to Critical Areas
The core section of Form 990 is 12 pages long and there are up to 16 additional schedules. Form 990 reveals a wide range of information about an organization, but certain areas are more likely to draw the attention of the IRS and other stakeholders- for example:
Governance. Form 990 includes a section that requests information on organizational policies — including those regarding conflicts of interest, whistleblowers, document retention, compensation and joint ventures. It also asks questions concerning the governing body and management, such as documentation of meetings and actions and whether the governing documents have undergone any significant changes. Your board should ensure that such information is properly reported to demonstrate your organization’s transparency and accountability.
Compensation. Another section is devoted to compensation of officers, directors, trustees, key employees, highly compensated employees and independent contractors. Many organizations have made it into the headlines over the years because the media got wind of excessive compensation. Excessive compensation also can lead to costly excise taxes for excess benefit transactions (see “The excess benefit transaction risk,” above). If an individual’s position and average hours per week don’t correspond with their compensation, your board needs to address the issue by, for example, ensuring adequate documentation exists to support the compensation level.
Cost allocation. Form 990 of 501(c)(3) or (4) organizations allows users to compare earned revenues with expenses, including for the organization’s three largest program services. It also provides a breakdown of functional expenses among pro-gram services expenses, management and general expenses, and fundraising expenses.
According to the IRS, a board’s review of Form 990 is a sign that the board is “proactive, informed and engaged” to ensure their nonprofit is organized and operated solely for exempt purposes. That stance- combined with the intensified interest of donors, funders and the media- make formal board review essential.