Nine Years after Pension Protection Act, NPOs Still Struggle to Provide Accurate Information
While nonprofits are granted a special exemption from federal income tax on most of their revenues, they are not exempt from filing requirements, especially after the Pension Protection Act of 2006. The Act resulted in the largest overhaul of Form 990 in 20 years and created Form 990-N for small organizations.
Forms 990 are not “tax returns,” so they do not enjoy confidential treatment; they are available for public inspection (with donor information redacted for public charities). Although the IRS accepts and processes the Forms 990, approximately 70 percent to 80 percent of the data included in the filing is “non-financial,” making it crucial that organizations provide a clear, positive picture of their operations.
An Opportunity for NPOs to Tell their Stories
“The Form 990 not only provides the IRS with the necessary information to evaluate an agency from a compliance perspective, but it also allows the agency the opportunity to tell its story,” said Lisa Hearn, chief financial officer of Epworth Children & Family Services.
“Due to the highly public nature of the Form 990, it is critical to have a well-prepared document that not only shares financial data with users and prospective donors, but is also a clear reflection of the organization’s mission and overall effectiveness of its programs, operations and governance,” Hearn said.
Monica Marsh, executive director of TREE House of Greater St. Louis, said it is prudent for nonprofit leaders to carefully consider the quality of their Form 990 preparation and review process. “Given the expansive scope of this form, the significance to the IRS and others, as well as the implications of submitting incorrect and incomplete information on the form ... It truly eases the mind of all management knowing that it has been done correctly and can be shared publicly without hesitation or question,” Marsh said.
Before the 2006 Act, most small nonprofits — those with less than $25,000 of average gross receipts — were not required to file anything annually with the IRS, while larger organizations were required to file information returns (Form 990, 990-EZ or 990-PF). Since the Act passed, almost all organizations, regardless of revenues, are required to file an information return annually with the IRS. There are still special exemptions for religious organizations, though.
Changes implemented by the Act were designed to enhance transparency and comparability among nonprofits, promote compliance and minimize the burden on organizations. Pat Holterman-Hommes, president and CEO of Youth In Need, understands the value provided by Form 990.
“One of the core values that Youth In Need has as a fairly large, complex regional nonprofit is transparency, both internally and externally,” Holterman-Hommes said. “A 990 accurately represents our financial picture each year and helps us do exactly that.”
Confusion about Form 990
Even though the revised Form 990 has been around for several years, there are still significant areas in which organizations struggle to provide accurate information. Most preparers would agree the Form 990 is a complex document and the Act did not succeed in minimizing the burden on organizations.
Key areas of confusion include:
- Who is listed as a director or trustee of the organization? Form 990 Part VII reports a detailed listing of anyone who held a board position anytime during the year. In contrast, Form 990 Part I and Part VI only include directors and trustees on the board as of year-end. Therefore, the count reported in Part VII may be different than the number in Parts I and VI.
- Whose compensation has to be reported? In addition to directors, trustees, and officers, IRS instructions state an organization’s “Top Management Official” (executive director or CEO) and the “Top Financial Official” (controller or CFO) are deemed officers of the organization and their compensation is required to be disclosed. Organizations should also be familiar with the redefined “Key Employee” tests and the top five “Highest Compensated Employees” rules.
While these governing body and compensation areas are very small portions of the entire Form 990, complexities abound.
To learn how to improve your Form 990, click here to register for the Brown Smith Wallace Nonprofit Speaker Series “We Fix Ugly 990s” on Dec. 9.
To further discuss your Form 990, contact Jen Vacha, Manager, Tax Services, at firstname.lastname@example.org or 636.754.0230.