Don’t Make These Common Mistakes When Filing Your Form 990
Your tax-exempt status may keep you from having to file traditional tax returns, but maintaining the designation comes with its own labyrinth of forms, requirements, and deadlines.
The form 990 series is designed to provide the IRS—and the public—information about your organization’s programs and activities as well as your revenue, expenses, and assets. And if used appropriately, it can help you build trust with your community and your donors.
In our webinar, A Checklist for Meeting Your IRS 990 Series Deadline (and Maintaining Compliance), Nikita Sullivant walked the audience through key considerations when filing a 990. Here are nine common mistakes Nikita and her team at Tax990 see nonprofits make when filing their form 990s.
Mistake #1: Not Filing
Active nonprofits need to file their 990 every year. This includes years when you don’t have any activity. If your organization is still claiming tax-exempt status, you need to file your 990. In addition to the penalties for filing late, the IRS will automatically revoke your exempt status after failing to file for three consecutive years.
Mistake #2: Filing the Wrong Form
The form you file will depend on your organization’s financial activity during each year. As your financial situation changes, so could the form you need to file. The most common forms are:
- 990-N: The e-postcard version can be filed if your gross receipts were $50,000 or less.
- 990-EZ: The short-form version is for organizations whose gross receipts were less than $200,000 and the total assets at the end of the year were less than $500,000.
- 990: The long-form version is for organizations that have gross receipts of at least $200,000 or total assets of at least $500,000 at the end of the tax year.
You can always move up in your tax form, but you can’t go backwards. You can provide more detail if you want to, but you can’t provide less detail that you are required based on your gross receipts. For example, a small organization that qualifies for a 990-N can file a 990-EZ. But an organization that fits the requirements for the 990-EZ can’t file the 990-N.
Mistake #3: Missing Your Deadlines
Your annual 990 series return must be filed by the 15th day of the fifth month following the close of your organization’s tax year. If your organization closes their books on December 31, your deadline to file your form 990 is May 15. When the deadline falls on a weekend or legal holiday, the deadline is the next business day.
If you need to file an extension, that extension must be filed by your initial deadline (the 15th day of the fifth month following the close of your tax year).
Mistake #4: Marking “Initial” or “Final” When It Doesn’t Apply
There is a box on the form that confuses a lot of organizations. Only check the “initial” box if this is your organization’s first year claiming tax exempt status. And only check the “final” box when this is the last year your organization will be claiming tax exempt status. If this is your final year, remember that you need to file a Schedule N along with your form 990.
Mistake #5: Not Taking Advantage of Schedule O
Schedule O is where you report supplemental information from your 990 or 990-EZ instead of separate attachments. This is your opportunity to provide a clear narrative on your organization’s operations. Remember, these forms are for the IRS, but because they will be public, Schedule O allows you to clarify details that may otherwise be open to interpretation.
Mistake #6: Skimping Program Service Accomplishments
The Program Service Accomplishments section of your 990 explains to the IRS—and potential funders—how you are operating your organization and adhering to your mission. Instead of providing general or vague explanations of your three largest activities, highlight them as you would if you were communicating them to a donor. Not only can you re-use this explanation for future grants, but you should assume that funders will be reading your 990s. Take advantage of Schedule O if you need more space.
Mistake #7: Losing Track of Important Documentation
Like tax documentation you would save for your personal tax filing, your tax-exempt organization should have a process for managing the documentation for your 990 filing. You’ll want to keep records that substantiate any income, deduction, or credit for three years from the data the return is filed. Your fund accounting system is a centralized location to house important grant documentation, invoices, and other program expenses.
Keep your letter of determination, articles of incorporation, by-laws, and board minutes permanently. The process for managing these documents should be included in your internal controls.
Mistake #8: Not Filing Electronically
Since July 1, 2019, the IRS requires tax-exempt organizations to file their 990s electronically. Filing electronically makes the process more efficient and, if you choose the right provider, simplifies the filing process. Plus, if you don’t file electronically, the IRS will reject your submission, possibly incurring late fees.
Mistake #9: Not Consulting Your Tax Advisor
Filing your form 990 can be complicated if you are new to the process or if your organization had a significant change in gross receipts in the past year. It’s worth having a tax advisor who works with nonprofit organizations available to address any specific questions you have so you can avoid having your 990 rejected.
Choose Partners That Understand Nonprofit Organizations
Tax-exempt organizations have different needs than commercial businesses. You need partners that understand what it means to be a nonprofit, from managing restricted funds to filing their 990 series. Whether you are looking for an e-file provider for your 990 or a fund accounting system, look for partners that focus on organizations like you. You deserve solutions that are built for you—not workarounds from a commercial system.
To learn more about how nonprofit accounting software can help your tax-exempt organization save time and improve compliance, check out our white paper, Why Nonprofits Need Nonprofit Accounting Software.
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