For nonprofit organizations, filing the IRS Form 990 is not just a legal requirement—it’s an opportunity to showcase transparency and accountability to donors, funders, and the public. However, Form 990 can be complex, and even seasoned nonprofits often fall into common pitfalls. Mistakes on the 990 can lead to penalties, lost funding opportunities, or scrutiny from the IRS. Here, we highlight some of the most common errors nonprofits make when filing Form 990 and provide practical tips to avoid them.
Missing Deadlines
One of the simplest yet most frequent errors is missing the filing deadline. Nonprofits must submit their Form 990 by the 15th day of the 5th month after their fiscal year ends. While the IRS allows a 6-month extension, failure to file on time without an extension can result in fines of $20 a day, up to a maximum of $10,000 or 5% of the organization’s gross receipts.
**Tip**: Set calendar reminders and develop an internal process to ensure your team prepares the necessary documents well before the deadline. If you’re concerned about meeting the deadline, file Form 8868 for an automatic extension.
Failing to Report Accurate Revenue and Expenses
Nonprofits must provide a detailed breakdown of all revenue streams and expenses. Many organizations either underreport or overreport figures, which can raise red flags with the IRS. Common mistakes include forgetting to categorize program service revenue, failing to report donated services or goods, or misclassifying grants.
**Tip**: Maintain accurate financial records throughout the year and work closely with your accountant or bookkeeper. Consider using accounting software specifically designed for nonprofits, ensuring every transaction is categorized correctly.
Incorrectly Filling Out Schedule B (Contributors)
Form 990 Schedule B requires nonprofits to report contributions over certain thresholds, depending on the type of nonprofit. Many organizations either overlook this requirement or incorrectly calculate the amounts. Failing to file Schedule B or providing incomplete information can lead to penalties.
**Tip**: Review IRS guidelines for your organization’s contribution reporting requirements. Ensure all substantial donations are tracked and reported accurately on Schedule B and consult a professional if you’re unsure about thresholds.
Mistakes on Governance Disclosures
Nonprofits are required to disclose information about their governance structure, including board members, conflict of interest policies, and executive compensation. Inaccurate or incomplete governance disclosures can reflect poorly on the organization’s commitment to transparency.
**Tip**: Update your governance policies and board meeting minutes regularly. Ensure that the information on your Form 990 matches your internal governance records and reflects the current structure of your board.
Misclassifying Employees and Independent Contractors
Another common mistake is misclassifying workers as independent contractors instead of employees. This can lead to issues with payroll taxes and compliance. Misclassification can result in back taxes, penalties, and even audits by the IRS.
**Tip**: Ensure you classify all workers correctly by reviewing IRS guidelines on employee versus contractor status. If in doubt, consult with a tax professional or attorney to ensure compliance.
Underreporting Lobbying Activities
Nonprofits, especially 501(c)(3) organizations, are allowed to engage in limited lobbying activities. However, failure to report these activities accurately on Form 990 or incorrectly assuming they don’t apply is a common mistake.
**Tip**: Keep thorough records of any lobbying expenditures and time spent by employees or board members. If your organization engages in lobbying, complete Schedule C and report this information accurately.
Failing to Include All Required Schedules
Form 990 includes multiple schedules that must be filled out based on your organization’s activities. Failing to include a required schedule or incorrectly completing it can result in an incomplete return, which could delay the processing of your 990 and potentially trigger penalties.
**Tip**: Review the IRS instructions for Form 990 carefully to determine which schedules apply to your organization. Completing a checklist before submitting the form can help ensure all required schedules are included.
Overlooking Public Support Test Calculations
The public support test is critical for 501(c)(3) organizations to maintain their tax-exempt status. If a nonprofit fails to meet this requirement and doesn’t report it accurately, it risks losing its tax-exempt status.
**Tip**: Track donations and contributions carefully throughout the year, distinguishing between public and private sources. Use Form 990, Schedule A to ensure you’re meeting the required thresholds.
Reporting Zero Salaries for Key Employees
While some nonprofits operate with volunteers, reporting $0 compensation for employees, especially for key positions, can raise red flags with the IRS. This may suggest the organization is not providing adequate oversight or governance.
**Tip**: Ensure all paid employees, including key executives, are reported correctly, even if they receive modest compensation. Volunteers should be listed separately to avoid confusion.
Not Seeking Professional Help When Needed
Nonprofits may attempt to handle the 990-filing process internally, assuming it’s a straightforward task. However, with changing tax laws and complex reporting requirements, this can lead to costly errors.
**Tip**: Don’t hesitate to seek professional help. Whether it’s a CPA, tax attorney, or nonprofit consultant, having a professional review your Form 990 can save your organization from future headaches and ensure compliance.
Conclusion
Filing Form 990 accurately is essential for your nonprofit’s financial health and reputation. Avoiding these common mistakes will not only keep you in compliance with the IRS but also enhance your organization’s transparency and credibility with stakeholders. By maintaining accurate financial records, adhering to IRS deadlines, and seeking professional guidance, when necessary, your nonprofit can avoid costly errors and focus on what matters most to achieve your mission.
Ready to simplify your nonprofit’s compliance process?
At BryteBridge Nonprofit Solutions, we help nonprofits like yours navigate Form 990 filings with ease. Our experienced team provides expert guidance, ensuring accuracy and compliance every step of the way. Speak with a BryteBridge consultant today by calling 877-857-9002 and learn how we can support your organization and give you peace of mind.
