Seven Steps for Your Board When Reviewing the Form 990

Posted on Aug 1, 2017

Highlights

Best practices recommend your organization perform a management review process for the Form 990 before filing.

By Karen Dunn, JD, LLM

How does your organization’s management review the Form 990 before filing? Perhaps the finance committee performs the review, or perhaps your entire board performs it instead.

Regardless of the method, most organizations have some form of management review process for the Form 990 before it is filed; best practices recommend such a review, and in some states, it is legally required.

Some organizations have their accountants or financial officer explain each portion of the form to the board, but not all organizations have this luxury. Thus, if a board member wishes to understand the organization’s Form 990, he or she would either need to have experience with the form, or receive some guidance.

Here are some quick tips for those board members, and anyone else reviewing the return.

Approaches to Review

There are many approaches to reviewing the form. Some may prefer to dive directly into the financial detail, others plow through in page order, while still others prefer a broader approach. No approach is better than the other – it just depends on the reviewer’s preference.

It also depends on what the reader is looking for. If I want to know an organization’s activities, I look at Part III. If I want to see the size of the organization, I start by looking at Part I. If I want to know about governance and the organizational structure, I look at Part VI and Schedule R. And if want to know about the board, officers, and compensation, I look at Part VII.

The following approach is intended for those who prefer a broad overview.

Seven Step Review

1. The Initial Overview:

When first approaching the Form 990, a high-level overview will provide a sense of the organization’s purpose and help reveal areas that warrant deeper review. Some questions during this phase include:

  1. Are all parts fully complete?
  2. Are all the questions in Parts IV, V, and VI answered?
  3. What schedules are included and why?
  4. If any part of the return or attached schedules are left blank, do you know why?
  5. Is the return neat? A sloppy return may create the impression that it was ill prepared and the data is suspect.

2. Programs:

For the next part of a high-level overview, look at Part III and ask the following questions:

  1. Is the mission statement correct?
  2. Does it reflect your organization’s mission and what was reported on Part I, Line 1?
  3. Do the program descriptions reflect the organization’s three largest programs?
  4. Is the organization presented in the best light?
  5. Have you quantified yearly accomplishments? This is the place where the organization can highlight its charitable accomplishments to the IRS, general public, donors, and potential donors.
  6. Are there any new programs and, if so, are they described in Schedule O?
  7. Were there any significant changes in program conduct or any program cessations? If so, has this been described in Schedule O?
  8. Do the reported expenses, grants, and revenue amounts associated with each program match the organization’s operations?
  9. Flipping to Part IX, is the ratio of Program Service, Management and General, and Fundraising Expenses reasonable based on your understanding of how the organization uses its resources?

3. Required Schedules:

Look at the Part IV Checklist of Required Schedules.

  1. Are all questions answered correctly?
  2. For questions answered “yes,” is the appropriate schedule included with the return?
  3. Is Schedule B attached? If not, do you understand why?
  4. If the return includes Schedule R, does it accurately reflect the related organizations or unrelated partnerships through which the organization conducted more than five percent of its activities?
  5. If there is a Schedule L, does it reflect your understanding of any transactions with interested persons?
  6. Review all other attached schedules for accuracy and completion. Does the information in each statement reflect the organization’s tax year activity?

4. Part VII, Compensation:

  1. Are all the officers, directors, trustees, and key employees listed in Part VII?
  2. Is each individual’s hours reasonably accurate?
  3. Have appropriate boxes in column C been checked?
  4. Does their compensation match your understanding of what it should be? Note that compensation and payments to independent contractors are reported based on the calendar year within which the tax year ends.
  5. Are reasonable estimates of other compensation from the organization or related organizations reported in column F?
  6. If Schedule J is required, has it been completed?

Is Section B completed for independent contractors? Have investment managers or professional fundraisers been included in Section B? These contractors are frequently overlooked because their compensation is often reported as a reduction of their generated income.

Is total compensation in Part IX, lines 5 – 9 reasonable? Note that, unlike Part VII, Part IX is reported for the tax year. Thus, compensation in Part IX may not match Part VII if the organization reports on a fiscal year rather than a calendar year.

5. Parts V and VI, Tax Compliance and Governance:

Read all the questions and answers in Part V and VI. If there’s anything you don’t understand, ask your tax advisor, CFO, or finance committee to explain it. To the best of your knowledge, are all the questions answered correctly? Where the form asks for additional explanation in Schedule O, have you provided an adequate explanation?

6. The Financial Data:

Page 1, Part I, contains an overview of revenue, expense, assets, and liabilities, as well as some other detail. Review this for reasonableness and accuracy.

  1. Does the gross and net amount of unrelated business income reported on lines 7a and 7b agree with your understanding of the unrelated business taxable income the organization generated during the tax year?
  2. Does it agree with the Form 990-T for the tax year?

Compare the amounts reported on lines 8 – 22 with the prior year’s tax return.

  1. Do the amounts agree with your understanding of the organization’s financial activity?
  2. If there is a net surplus or deficit, does this match the organization’s performance for the year?

7. Special Interest:

Some other parts of the return that may be of particular interest include:

  1. Schedule A, Public Charity Status and Public Support – Which box is checked in Part I? Does it appear correct? If box 7 or 10 (9 for 2015) is checked, has the organization passed its public support test (Part II line 16, Part III line 19)? If box 12 (11 for 2015) is checked, are all the supported organizations listed and is Part IV completed?
  2. Schedule C, Political Campaign and Lobbying Expenses – If Part I shows political activity, has the organization consulted with its tax advisor regarding the limitations? Is the correct section of Part II completed? Is Part III applicable and if so, does line 4 show a carryover or line 5 show an amount subject to the proxy tax? Do you understand and agree with the decision to either carry over the lobbying expense to the next year, or pay the proxy tax?
  3. Schedule F, Statement of Activities Outside the United States – If the organization gives foreign grants or has foreign activity, does this look complete and accurate? Do you understand the questions in Part IV and do the answers look accurate?
  4. Schedule K, Supplemental Information on Tax Exempt Bonds – Has the organization’s bond counsel prepared, reviewed, or advised in regard to Schedule K?

Remember, the Form 990 is open to public inspection for three years and is available on the web through www.guidestar.org. Donors, potential donors, the general public, and the media may view the form.

The objective of the Form 990 is to demonstrate that the organization is fulfilling its tax-exempt purpose; that financial resources are used to further these purposes; and to ensure accountability and transparency of activities, governance, and relationships. Review the return with an eye toward what you would want the general public to see.

© 2017 Clark Nuber PS All Rights Reserved

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