Nonprofit Form 990 red flags impact donor trust and reveal lack of due diligence. The 990 is a snapshot of how well an organization has complied with government regulations and what activities it has carried out to ensure it is upholding its mission.
Who Files Form 990?
Every nonprofit organization must file an annual IRS Form 990, a tax return document formally known as “Return of Organization Exempt from Income Tax”. It is the most public-facing document and should be posted on your website. Any astute donor will look at an organization’s 990s on Guidestar or the organization’s website before making a large donation. And, it is a requirement to be in compliance with your nonprofit status. Therefore, rather than a precursory glance given by the board, it should be given a level of importance that is beyond reproach.
Criteria For Filing Form 990
There are four 990 forms that can be filed, and your organization’s gross income and total assets determines which 990 you must file:
- Organizations with gross receipts less than $50,000 file Form 990-N (epostcard).
- Organizations with gross receipts greater than $50,000 and less than $200,000 and total assets less than $500,000 must file Form 990-EZ.
- Organizations with gross receipts greater than $200,000 or total assets greater than $500,000 must file Form 990.
- Private foundations must file Form 990-PF.
Organizations that fall below the threshold of filing the full Form 990 can still choose to file a 990.
Form 990 Red Flags
The admissions bribery scandal has shown the 990s often get a precursory glance, and for years an organization can get away with not upholding its integrity to the public. However, the media impact of these scandals has changed the ways donors view the 990 and its importance in your NFP’s financial reporting.
Your mission and program service accomplishments can highlight your statistics and impact report, showing stakeholders that you take your mission seriously and are committed to making an impact with the use of donations, grants, and other nonprofit funding sources.
College and university scandals have topped news stories the past couple of years because they have raised red flags for donors.
There are several red flags that can suggest your 990s are not given their due diligence. Here are some of them:
Red flag #1 – Your NFP is not audited by an independent accounting firm.
Organizations with over $100,000 in annual donations may want to consider having an independent account review their financial statements and prepare their 990. This independent, third-party accountant will take a close look at the 990 to ensure everything is in compliance with the tax code for nonprofit organizations. Even a simple bank reconciliation to ensure your general ledger is accurate should be reviewed by a third-party to ensure that no mistakes are missed before you file. Additionally, having this process in place when you are smaller makes it easier to keep your records in order as your organization grows and receives larger donations.
Red flag #2 – Your executive director and board members are not well-versed on the financial situation of your NFP. They cannot (or do not) provide sound leadership to the organization through transparent record keeping.
A nonprofit organization is founded for public benefit. Therefore, complete transparency to your stakeholders is paramount. In a sense you might say the public-at-large “owns” your nonprofit, a board has the fiduciary responsibility to ensure it carries out its mission for the public good, and an Executive Director ensures that the daily operations are implemented so the strategy drawn out by the board is supported.
Red flag #3 – Your 990 does not accurately represent the use of donor- or board-restricted funds.
Because donated funds are to be stewarded for the use they were intended for, the third red flag on your organization’s 990 tax return filing is not having records to substantiate the use of those funds. There are to be records showing selection criteria, or how the program supported the mission, to prove responsible stewardship.
Using funds as they were intended was the highlight of the Brown University scandal. The school had funds earmarked for low-income students, yet preferential treatment was given to children whose parents gave large donations to the foundation.
The functional expense allocation should align with the organization’s overall budget. If it doesn’t, this could create yet another red flag on the 990s. Monitoring the use of donations is critical to adhering to the government’s guidelines. This could potentially indicate a misuse of funds, embezzlement, or fraudulent expense reports.
Red Flag # 4 – You have significant problems with the balance sheet
Your balance sheet and income statements should not only be transparent; they should also reflect a positive bottom line and overall financial health of the NFP. If you notice any of these balance sheet red flags, you must address potential gaps in your financial or strategic planning:
- If the cash balance is not more than one-sixth of total annual expenses
- If the organization has a high level of debt in ratio to assets
- If the record of accounts receivable and payable are inaccurate or disorganized
- If the income statement does not have a positive bottom line
Form 990 Red Flags Invite Scrutiny
Red flags invite scrutiny from regulators as well as stakeholders. The 990 Form is intended to be used as a detailed financial report, and also gives a glimpse into the organization’s primary activities. The activities should align with the mission statement, offering congruence from start to finish.
It is important that a Board of Directors and/or a finance committee review the 990s each year before they are filed to ensure compliance and transparency. Donors, grantors, charity watch organizations, and the State Attorney General may look at the 990 filings. Therefore, it’s critical they are done well, and monitored for accuracy.
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