Why Your Nonprofit Needs to File Form 990—Before It’s Too Late
Nobody starts a nonprofit because they love paperwork and filing reports, but it’s a necessity for most organizations. And filing a Form 990 with the IRS is one of the most critical and sometimes most forgotten tasks for any nonprofit.
What is Form 990?
Form 990 is an IRS form that serves two purposes: it’s a tool for the public to know financial information about your nonprofit, and it’s a tool for the IRS to make sure you’re not abusing your tax-exempt status.
Form 990 is filed several months after the end of your fiscal year, and it comes in a few different versions. If you’re a private foundation, you’ll complete Form 990PS, but if you’re a public charity, there are a few different options depending on different financial criteria. Check out our quick list in this blog, but also talk to your CPA to confirm which one you need to file.
Why is Form 990 so important?
For one simple reason: it helps maintain your tax-exempt status.
A lot of tax-exempt organizations think they don’t have to file a tax return because they’re not paying taxes. It’s a common misconception, but if you don’t file your Form 990, or you fail to file your Form 990 correctly for a single year, the IRS could impose a penalty for failure to file or failure to properly file. If you don’t file your form 990 for three years in a row, the IRS will automatically revoke your tax-exempt status.
What mistakes are most common?
When filing a 990, some organizations check the box that says they don’t have to fill out Schedule B, but that’s usually incorrect. Schedule B is where you report bigger donors so the IRS can verify you’re meeting the public support test. That means one-third of your revenue has to come from the public at large rather than one individual or source, including private foundations or for-profit corporate donors.
If you have a donor that gives more than two percent of your gross revenue or more than $5,000 in the year, you have to file Schedule B. If you don’t include Schedule B, the IRS will say that you didn’t properly fill out Form 990. If you don’t correct it, it’s counted as a year you didn’t fill it out, and if you make that mistake three times in a row, you lose tax-exempt status.
Reinstating your tax exempt status is a complicated and costly process. You must send an appeal letter to the IRS explaining what happened with the missed or incorrect filings, fill out the appropriate form, and include all of the information you failed to file for the past three years.
If an organization has kept really good records, it can be a little bit smoother, but it’s still an extensive process. If there aren’t good records, you’re in trouble, because it will cost thousands of dollars and months of time to reinstate nonprofit status. Small organizations who lose their status and don’t have good records may end up being dissolved because it’s simply not worth the time and expense to resolve the issue.
What processes can help ensure accurate filings?
Being organized and having a process and procedure that everyone follows is the best way to ensure proper 990 filings each year. But if you fall into bad habits with record-keeping, it’s easy to get into a situation where you don’t know that form needs to get filed. Next thing you know, your 501(c)(3) status is revoked and you have to explain to your leadership why.
Boards and staff members can change frequently at nonprofits, which is why policy and procedure documents are so important. Those policy documents tell the new leadership what needs to be done and when for tracking donors and filing a form 990.
Form 990 is extremely important to your nonprofit. Stay on top of it and make sure your nonprofit is in good favor with the IRS.