Does a Nonprofit Need a Lawyer for IRS 990 Forms?
What’s tricky or dangerous for the tax-exempt organizations that are required to submit them
on December 20, 2019
Updated on February 8, 2021
Many DC-based nonprofit organizations are exempt from paying federal income tax. But this does not mean they are exempt from filing tax forms with the Internal Revenue Service. To the contrary, most nonprofits (except religious organizations) must typically file an annual information return with the IRS to ensure their continued tax-exempt status. These are known as the IRS 990-series forms.
“They are a fairly extensive report, as to your financial activities, your holdings, how much you pay your people, what your purpose is, and more,” says Edward J. Beckwith, a nonprofit attorney at Baker & Hostetler in Washington, DC. “It’s intended to inform the public and ensure the IRS and state that the money is being spent for charitable purposes.”
There are three basic types of this form:
- Form 990-N, which is a simplified electronic notice (or e-postcard) filed by organizations with gross receipts of $50,000 or less;
- Form 990-EZ, which is a “short form” filed by organizations with gross receipts of less than $200,000 and total assets of less than $500,000 as of the end of the relevant tax year
- Form 990, which is the long form filed by organizations with gross receipts of $200,000 or more or total assets of $500,000 or more
Which form a nonprofit needs to file depends on its gross receipts (i.e., the total amount of donations and other money it received during the organization's normal annual accounting period). Whatever type is applicable, a nonprofit must normally file its required 990 form by the 15th day of the 5th month after the end of the organization's fiscal year, although it is possible to obtain a six-month extension without showing cause.
Obligations of Nonprofits and Their Board Members
Unlike an individual tax return, which is normally non-public information, any Form 990 filed by a nonprofit organization must be made available to any member of the public who requests access. This helps to fulfill a critical role of the Form 990 series, which is to ensure adequate public disclosure about a tax-exempt nonprofit organization's mission and operations. Indeed, failure to file 990 forms can lead the loss of tax-exempt status.
“These documents end up, in many instances, becoming the annual report for a lot of charities,” Beckwith adds. “Charities are often under the microscope because people suspect things are going on that shouldn’t be, so an annual report is good to explain why they’re worthy of contributions and how robust their activities are. A lot of charities don’t take advantage of that or put their best foot forward.”
Among other things, a regular Form 990 must include a copy of the nonprofit's balance sheet, a statement of revenue and expenses, and detailed information regarding the compensation of directors, officers, key employees, and even outside contractors who provide services to the organization.
The Form 990 also asks questions regarding the nonprofit organization's procedures for reviewing the return itself. For instance, there is a question asking if a copy of the Form 990 was provided to all members of the nonprofit organization's board prior to filing. Similarly, the form asks the organization to describe what procedures, if any, were in place for reviewing the form prior to filing.
Why It’s Worth Considering an Attorney
“There are two things that a knowledgeable lawyer’s review of a 990 provides,” Beckwith explains. “These questions aren’t ‘gotcha’ questions, but it’s not easy to know what they’re asking. Very often a well-intentioned person will answer a question wrong and it may trigger a whole mess of problems.”
An attorney with experience in the nonprofit arena knows what they’re asking for and, equally important, how to answer questions properly. “We often encourage you to attach explanations—a narrative which tells, for example, what your dollars were used for. … You really should care what you’re telling the public about what you’re doing, how you conduct yourself, and why you exist,” he adds.
The purpose is rarely to review an accountant’s calculations, Beckwith says, “although an extra set of eyes never hurts and, from time to time, I do see something. So that’s a secondary benefit.”
In short, you’re covering your bases with the regulatory agencies and general public.
“The 990 is a task, just like your own taxes, that you have to do every year. Nobody likes doing it, but charities shouldn’t give it short shrift, put it in the mail, and walk away. You want to make sure whoever picks up that 990 understands what you’re doing, that you’re doing it right, and that you’re doing it impactfully and purposefully,” says Beckwith.