What is IRS Form 990?
IRS Form 990 is a tax form for informational purposes that most tax-exempt organizations must file annually. Generally, the form gives the IRS a breakdown of the organization's activities, governance, and detailed financial information.
Form 990 also includes a section that allows organizations to provide a narrative explaining their accomplishments in the previous year to convince the IRS that its tax-exempt status should be maintained. The IRS collects this information to ensure that organizations continue to qualify for tax exemptions after the tax-exempt status has been granted.
This article lays out who needs to submit IRS Form 990, the requirements of IRS Form 990, and how to maintain compliance.
Our experienced non-profit lawyers here at Newburn Law, PC understand each step you must take to ensure compliance. Contact us today so that we can help you and your non-profit organization.
Who has to Submit IRS Form 990?
Most charitable nonprofits with tax-exempt status must file a form of annual information return with the IRS. Organizations that normally have $50,000 or more in gross receipts must file either a Form 990 or Form 990-EZ.
Conversely, most small tax-exempt organizations that normally have $50,000 or less in gross receipts must file the IRS form 990-N, referred to as the ‘e-postcard.'
There are some narrow exceptions to the required annual filing of Form 990. Churches, their integrated auxiliaries, conventions of churches, and organizations that are included on a group return are not required to file a Form 990. Furthermore, if a nonprofit is incorporated in a state but the IRS has never recognized it as tax-exempt, it is not required to file annual information with the IRS.
You can find a complete list of the IRS's narrow exceptions here. However, organizations that fall into the mandatory filing exceptions may still be required to file forms annually. This will depend on which state the company is incorporated in or the state the company engages in fundraising activities.
Our legal team can help you determine whether or not you fall under one of these narrow exceptions. It is important to consult with experienced non-profit lawyers to ensure you understand your requirements.
Why is it Important to Submit Form 990 every year?
Not filing a Form 990 can result in the IRS assessing fines against the organization, income tax liability, and the organization automatically losing its tax-exempt status.
Filing Form 990 is also an important informational tool for third parties to access. Donors can figure out where the organization gets its revenue, a foundation can analyze how sustainable a charity might be, and potential employees can know how well the nonprofit pays its top personnel.
How to Stay Compliant
A charitable nonprofit's Form 990 must be filed with the IRS on the 15th day of the 5th month after the close of the nonprofit's fiscal year. If you cannot meet this deadline, your organization can apply for a six-month extension by filing Form 8868. Organizations must be sure to submit complete forms. Common errors include missing or incomplete Schedules and missing required responses to certain questions.
Key Sections of Form 990
Form 990 is a lengthy and complex document, but it can be broken down into several key parts:
Income. Part VIII asks the organization to list its revenue in three different categories:
(1) contributions, gifts, and grants, like membership dues, revenue from fundraising events, and government grants;
(2) program service revenue, or revenue from services that the organization offers as its reason for tax-exempt status; and
(3) other revenue such as investment income, rental income, and sales of inventory.
Expenses. Part IX details an organization's costs. Expenses must be segregated into three categories:
(1) Program Service,
(2) Management and General, and
An organization should set up its accounting system to allow it to segregate all of its expenses into these three categories easily.
Compensation. Part VII mandates that the organization list out compensation of officers, trustees, directors, key employees, high compensated, and independent contractors.
Balance Sheet. Part X requires organizations to list total assets, liabilities, and net assets. The net assets are divided into net assets without donor restrictions, the currently available assets for the organization to fulfill its tax-exempt purpose, and net assets with donor restrictions. This section requires organizations to procure proper accounting software to segregate net asset balances into the different net asset categories.
Schedule of Contributors. Organizations must include on Schedule B donor information of all entities or persons that contributed a certain dollar amount to the organization.
What not to File with Form 990
When nonprofits file extraneous materials with their Form 990s, it can slow down the IRS processing time and raise privacy issues that can backfire on the organization. Organizations should not include anything Form 990 does not explicitly request. These details can include:
- Staff rosters,
- Copies of web pages,
- Program brochures, and/or
- Annual reports.
The company should give the utmost care to remove personally-identifying information. Form 990 is publicly available on the IRS's website.
Therefore, the organization must remove certain personally-identifying information to minimize the risk of:
- Identity theft,
- Avoid violating confidentiality rules, and
- Avoid making the individual mad whose personal information was made public.
Organizations should also be wary of submitting information to the IRS that they might consider protected confidential information or subject to copyright protection. Making this information public could raise serious doubts about the nonprofit's ability to enforce agreements or copyright protections for the disclosed material confidently.
We can help you determine what information you must submit and what information you should leave out. Do not try to figure out these answers on your own. Contact experienced non-profit attorneys to ensure you are compliant.
Consequences of Non-Compliance
Filing late or not filing can result in serious consequences for a nonprofit entity. If a charitable nonprofit fails to file Form 990 on time, the IRS can levy fines. The IRS can impose a penalty of twenty dollars ($20) per day for every day the return is filed late against an organization whose gross receipts equate to less than $1,000,000 for the fiscal tax year.
The company can avoid this fine by providing reasonable cause for filing late. The maximum fine is up to 5% of the organizations gross receipts, or $10,000, whichever is less. An organization whose gross receipts are greater than $1,000,000 can face steeper fines. In these situations, the penalty increases to $100 per day, up to a maximum of $50,000.
Does the reasonable cause exception apply to you?
The reasonable cause exception to penalties is determined on a case-by-case basis taking into account the specific facts and circumstances. The organization can make a request for the abatement of penalties based on reasonable cause. However, they submit a written statement containing a declaration that the statement is made under the penalty of perjury and attached to Form 990.
The written statement must explain:
(1) why the organization did not request an extension,
(2) how the organization was not careless or neglectful, and
(3) what steps have been taken within the organization to prevent late filing from happening again.
Organizations that fail to file for three years in a row will automatically lose their tax-exempt status. This revocation will be effective on the original filing due date of the third annual return. The IRS then publishes the organization on a list of entities whose tax-exempt status was automatically revoked based on the failure to file the required Form 990.
Organizations on this list can suffer from substantial damage to the nonprofit's reputation amongst donors and the general public. The list gives:
- The name of the organization,
- The employer identification number (EIN),
- The organization type,
- The last known address the organization provided to the IRS,
- The effective date of revocation, and
- The date the organization was added to the list.
When the organization loses its tax-exempt status, it is no longer exempt from federal income tax, which can be a grave consequence for those running the organization. Consequently, the organization may be required to file a federal income tax return and pay applicable income taxes.
The organization becomes liable for all income, excise, or other taxes and penalties that are outstanding when tax-exempt status was automatically revoked. Furthermore, the automatically revoked organization is not eligible to receive tax-deductible contributions.
Reinstating Tax-Exempt Status
The IRS is legally prohibited from undoing a proper automatic revocation, and there is no appeal process. An automatically revoked organization must apply for reinstatement to have regained its tax-exempt status. This requirement applies to organizations that were not originally required to file an application for exemption.
There are four ways for an organization to be reinstated:
1) Streamlined Retroactive Reinstatement. In this reinstatement process, organizations can complete a form with the applicable fee within 15 months after either 1) the later of the date of the organization's Revocation or 2) the date the organization appeared on the IRS website's Revocation list.
This process is for organizations that were eligible to file Form 990-EZ or 990-N (ePostcard). This eligibility is only for organizations that have not previously had their tax-exempt status automatically revoked.
Retroactive Reinstatement (within 15 months). Organizations that are not eligible for the streamlined retroactive reinstatement process, like those required to file the standard Form 990, can have their tax-exempt status retroactively reinstated if they:
(1) Complete a form with the appropriate user fee no later than 15 months after the later of the date of the organization's Revocation Letter or the date the organization appeared on the Revocation List on the IRS website;
(2) Establish that the organization had reasonable cause for its failure to file a required annual return for, at a minimum, one of the three consecutive years it failed to file; and
(3) Include a statement confirming it has filed required returns for those years and any other taxable years after such period.
Retroactive Reinstatement (after 15 months). Organizations that file for reinstatement 15 months after the later of 1) receiving a revocation letter or 2) the date of appearing on the Revocation List may regain their tax-exempt status retroactively.
However, they must satisfy all the requirements described for retroactive reinstatement (within 15 months), except they must show reasonable for its failure to file a required annual return for all three consecutive years in which it failed to file.
Post-mark Date Reinstatement. An organization may fail for reinstatement effective from the post-mark date of their application if they complete and submit a form with the appropriate use fee.
Maintaining compliance with IRS Form 990 may seem overwhelming and confusing. We are here to help our clients ensure compliance and understand the steps and procedures of 1) why they must maintain compliance and 2) how to maintain compliance.
Contact us today so that we can help you understand your non-profit's requirements and how to maintain compliance with Form 990.