If you own a non-profit, you may wonder “Do I owe the IRS?” The use of IRS form 990 will give you the answer, as it is an annual return that is required to be filed by certain tax exempt organizations.
Your organization may be exempt from taxes, but it still needs to file annual nonprofit tax returns using Form 990. Generally all federally tax exempt organizations must file, with the exception of churches and state institutions. A full list of organizations that must file is available on the IRS.gov website. Although it may seem like an unnecessary hassle, the government uses IRS Form 990 to ensure nonprofit organizations conduct business properly and stay consistent with their responsibilities—thus ensuring the protection of your tax exempt status. It’s against your interest to avoid Form 990 and land your organization in hot water with the IRS, so take a moment to read through this material and make sure you’re complying with federal tax law.
What is Form 990?
Why must federally tax exempt organizations file a Form 990 return? This return is not a tax return in the traditional sense of the term. Form 990 is an informational return used by the IRS to gather information on an organization’s mission, programs and finances. Getting tax exempt status under the Internal Revenue Code is very difficult. An organization must prove, in general, that their operations, finances and business structure exist solely for tax exempt purposes. The IRS is concerned with knowing that their actions are not substantially geared toward political motivations and that the profits do not inure to private persons or shareholders, among many other factors.
IRS Form 990 “Return of Organizations Exempt from Income Tax” is a financial information statement used to regulate nonprofit organizations and ensure they are not abusing their tax exempt status. Donors and grant-makers also use Form 990s—which are made available to the public—to decide which affiliations to donate money toward and to make sure that their donations are being used appropriately. Nonprofit tax returns supply critical information for public inspection, such as:
- The mission of the organization and its activities
- How the organization is governed
- Names of officers, directors, and highly compensated employees
- Revenues, expenses, assets and liabilities
IRS nonprofit tax returns report highly-detailed financial information to the government and public citizens. It also includes information regarding the organization’s governance, as well as a section in which they can outline their accomplishments to defend their tax exemption.
Form 990 helps the federal government determine whether an organization is operating according to tax exempt rules. The IRS will pry through the numbers and look for any discrepancies, such as frivolous expenses or undocumented purchases. An organization that over-compensates its management may also jeopardize their tax exempt status.
Who Files IRS Form 990?
Many tax exempt organizations are required to file nonprofit tax returns using IRS Form 990. The various entities are described in section 501(c)(3), and include:
- Section 527 political organizations
- Private foundations
- Public foundation centers
- Various non-profit companies
Typically any tax exempt organization with gross receipts of at least $200,000 or assets worth at least $500,000 must file annual nonprofit tax returns using Form 990. The IRS defines gross receipts as the total amount of money the organization received from all sources during its fiscal year (without the subtraction of and costs or expenses), and they need to be diligently maintained by a bookkeeper or an equivalent person.
Form 990 Instructions
The instructions for Form 990 will vary depending on what type of nonprofit organization is filing and its financial activities. There are several versions of the Form 990 tailored to specific entities, and it’s important to submit the appropriate one.
Form 990-PF, Return of Private Foundation
A private foundation center is required to file Form 990-PF regardless of their asset size if they file at least 250 returns in a calendar year, including income, excise, employment tax and information returns.
Form 990-N, Electronic Notice
Small, tax exempt organizations with gross receipts of up to $50,000 may be required to file an electronic notice (sometimes called an e-Postcard) using Form 990-N, unless they voluntarily file the full Form 990 version.
Form 990-EZ, Short Return of Organization Exempt from Income Tax
Section 6033 enables tax exempt organizations, nonexempt charitable trusts, and political organizations with gross receipts under $200,000 and total assets under $500,000 to file Form 990-EZ instead of Form 990. The EZ version is shorter and designed to help filers make less mistakes.
Nonprofit organizations with gross receipts over $200,000 and assets over $500,000 must complete the full Form 990. The Form 990 instructions can be found online—including its various versions—since all of the documentation must be submitted electronically unless an e-file waiver is requested. If an organization is required to e-file Form 990 but fails to do so, may be assessed with penalties from the IRS, even if a paper tax return is submitted. Under section 6652(c)(1)(A), failure to file penalties for nonprofit tax returns are usually $20 per day the return is late, not to exceed the lesser of $10,000 or 5% of the year’s gross receipts. For organizations with gross receipts over $1,028,500, a penalty of $100 per day will be assessed each day failure to file continues (with a maximum penalty of $51,000).
If an organization fails to file a nonprofit tax return using IRS Form 990 for three consecutive years, their tax exempt status will be automatically revoked. Use the help of Community Tax to file your organization’s Form 990—fully and without error— stay in good standing with the government and preserve your tax exemption. If you’re passionate about your nonprofit’s mission, protect it with the help of our dedicated professionals. We offer free consultations, so contact us today to learn how we can help.