Avoiding Common Form 990 Mistakes: A Guide for Nonprofit Leaders

Avoiding Common Form 990 Mistakes: A Guide for Nonprofit Leaders

As an executive director or financial leader of a nonprofit, filing IRS Form 990 is a critical responsibility. This annual information return not only maintains your organization's tax-exempt status but also serves as a public document showcasing your mission and financial transparency. However, many nonprofits make avoidable mistakes when preparing Form 990, which can lead to penalties, increased scrutiny, or damage to their reputation. Here’s a guide to the most common mistakes and how to prevent them.

1. Failing to File on Time

One of the most common mistakes is missing the filing deadline. Nonprofits generally must file Form 990 by the 15th day of the 5th month after the end of their fiscal year.

How to Prevent It:

• Set Reminders: Use calendar alerts or task management software to track deadlines.
• Plan Ahead: Begin preparing your 990 well before the due date to allow for data gathering and review.
• Request an Extension: If necessary, file Form 8868 to get a 6-month extension.

2. Inaccurate or Incomplete Information

Errors in financial data, such as income, expenses, or assets, can trigger IRS scrutiny. Additionally, failing to complete all required sections can lead to an incomplete return.

How to Prevent It:

• Double-Check Data: Reconcile your financial statements with the numbers reported on Form 990.
• Review All Sections: Ensure every relevant part of the form is completed, including schedules.
• Leverage Software: Use accounting software designed for nonprofits to reduce human error.

3. Misclassifying Expenses

Improperly categorizing expenses, such as misclassifying program costs as administrative, can distort your financial picture and raise red flags.

How to Prevent It:

• Follow IRS Guidelines: Familiarize yourself with IRS definitions for program, management, and fundraising expenses.
• Train Staff: Ensure that your finance team understands proper expense allocation.
• Conduct Regular Reviews: Periodically review expense classifications to catch and correct errors early.

4. Ignoring Public Disclosure Requirements

Form 990 is a public document, and omitting information like executive compensation or governance policies can damage donor trust.

How to Prevent It:

• Be Transparent: Fully disclose required details, including board member compensation and conflict of interest policies.
• Prepare a Public Summary: Create an easy-to-understand summary of key information for your stakeholders.

5. Failing to Report Unrelated Business Income (UBI)

Nonprofits often overlook reporting unrelated business income, which can lead to penalties or loss of tax-exempt status.

How to Prevent It:

• Understand UBI Rules: Know what qualifies as unrelated business income and its reporting requirements.
• File Form 990-T: If you have UBI, ensure you file this form alongside your 990.

Conclusion

Filing Form 990 correctly is vital for maintaining your nonprofit’s tax-exempt status and demonstrating transparency to donors and the public. By avoiding common mistakes, you protect your organization from unnecessary penalties and ensure that your mission remains the focus. If you’re unsure about any part of the filing process, consult with a nonprofit accounting professional to get the guidance you need.

Need Help with Your Nonprofit’s Finances?
Consider partnering with a Complete Balance! We specializes in nonprofits to ensure your Form 990 is accurate and compliant. A little investment in professional support can save your organization from costly mistakes down the road.

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