Six Steps for Board Review of the Form 990

This is updated from an article that was originally published on 8/1/2017.

Most tax-exempt organizations wisely have a review process before they file their annual Form 990. Whether your organization requires review by the entire board, the finance committee, or some other subset of upper management, it is important to understand the information on the form, its numerous disclosures, and additional compliance questions.

One such disclosure on the form is the question about whether the board sees the return before it is filed and a description of the process for reviewing the form. If the organization does not require a board review of the Form 990 before it is filed with the IRS each year, the board may want to reconsider this policy. While federal tax law doesn’t require such a review, it is regarded as a best practice.

There are many approaches to reviewing the form. Some may prefer to dive directly into the detailed financial numbers, while others might prefer an initially broader approach. No option is better than the other, and the best route depends on the preference of the reviewers. The following six-step-review approach is intended for those that prefer a broad overview of the return.

1. The Initial Overview:

When first approaching the Form 990, a high-level overview will provide a sense of what the organization is about and help determine areas of the form that warrant deeper review. Part I on page one is a summary of the information shown later in the form.  Read this page. Does it make sense given the organization’s operations for the reporting year and as compared to the information for the prior year? As you review, also make sure that the return is complete.

1. Are all the parts fully completed, including the questions in Parts IV, V, and VI?
2. If any parts of the return or attached schedules are left blank, do you know why?
3. Is the return neat? A sloppy return with misspellings and typographical errors may create the impression that it was ill-prepared, and that the data is suspect.

2. Part III, Programs:

The next part of a high-level overview would be to look at Part III. This is where an organization can advertise its charitable accomplishments to the general public, donors, and potential donors. Pay particular attention to the mission statement and accomplishments. Are they current? Do they present the organization in the best light? Do the descriptions show how the programs further the organization’s mission? Are all programs during the tax year described either in the top three spaces or on Schedule O?

In addition, consider the following:

1. Have accomplishments during the year been specifically quantified? For example, include an updated number of persons served.
2. Are there any new programs, and if so, are they described in Schedule O?
3. Were there any other significant changes in the conduct of any programs or discontinuation of any program, and if so, has this been described in Schedule O?
4. Do the expenses, grants, and revenue amounts associated with each program reported at the top of each section match your understanding of the organization’s operations and as reported in Parts VIII and IX?

3. Part IV, Required Schedules:

Look at the Part IV checklist of required schedules.

1. Are all the questions answered correctly?
2. For any question answered yes, is the appropriate schedule included with the return?
3. Is Schedule B attached? If not, do you understand why?
4. If there is a Schedule R, does it accurately reflect any disregarded entities, 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 the other schedules that are attached for accuracy and check that all required parts are completed. Does the information in the various statements agree with your understanding of the organization’s activity for the tax year?

4. Part VII, Compensation:

This section is important not only because compensation is disclosed, but also because it lists the persons responsible for the actions of the organization during the tax year.  Check that the list in Part VII of officers, directors, trustees, and key employees is complete and accurate for the tax year. Make sure it also lists persons that served for only part of the tax year and who may not be on the board or an officer at the end of the tax year. It is also important that persons not required to be listed are not listed, because of the public nature of the form.

Also consider the following:

1. Are the hours of each individual reasonably accurate?
2. Have appropriate boxes in column C been checked?
3. Does their compensation match your understanding of what it should be?
4. Are reasonable estimates of other compensations from the organization or related organizations reported in column F?
5. If Schedule J is required, has it been completed?
6. Is Section B completed for independent contractors?
7. 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 the income they generate.

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

Read all the questions and answers in Part V and VI. If there are any questions that you don’t understand, ask your tax advisor, CFO, or finance committee to explain them.

1. To the best of your knowledge, are all the questions answered correctly?
2. Where the form asks for additional explanation in Schedule O, has an adequate explanation been provided in Schedule O?

6. The Financial Data:

Detail of revenue, expense, assets, and liabilities is reported in Parts VIII, IX, and X. Review this for reasonableness and accuracy. Consider the following:

1. Does the revenue on Lines 1 and 2 match your understanding of the organization’s funding and programs? Is it consistent with Part III and Schedules A and B?
2. Do you understand the classifications of line items between program revenue, contributions, and revenue statutorily excluded from unrelated business income? Is unrelated business income, if any, reported in Part VIII Column C?
3. In Part IX, is the ratio of Program Service to Management and General and to Fundraising reasonable based on your understanding of how the organization uses its resources?
4. Is total compensation in Part IX, Lines 5 – 9 reasonable?  Is it consistent with everything else shown on the return?
5. Does the balance sheet in Part X, look reasonable based on your understanding of the assets, liabilities, and net assets at the end of the year?
6. If Schedule D Parts XI and XII are completed, review the differences between the audited financial statements and the tax return.

Conclusion

You may want to have the Form 990 presented to the board by the tax preparer or advisor. Remember, the Form 990 is open to public inspection for three years and is available on the web through Candid’s GuideStar platform, ProPublica’s Nonprofit Explorer, and the IRS’ Tax Exempt Organization Search Tool (TEOS). It may be looked at by current or potential donors, the general public, and the media. 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.

Are you looking for assistance in reviewing your organization’s Form 990? Clark Nuber can help. Send us an email to get the conversation started.