By Simon Mont, Legal Intern
On February 11, staff and volunteers of the Sustainable Economies Law Center (SELC) gathered to see just how much fun we could have engaging with IRS Form 990—a required filing for nonprofits. Below are 7 things we've learned about the 990, particularly for worker self-directed nonprofits. Read on!
Most nonprofits hire accountants or lawyers to help them complete the form, and we were curious about whether we could complete it ourselves. We also thought it might teach us something about our organization and the legal ecosystem in which we operate, and create an opportunity for us to design a way for other organizations to DIY their 990s.
After a few hours of prep and a few hours around a table, we discovered that the form is quite manageable. The IRS provides a step-by-step guide with instructions for every line, and the ideal order in which to complete the sections. There are little nuances and intricacies that can make having an experienced nonprofit lawyer helpful, but not totally necessary. And there’s a lot of financial information that makes an accountant useful, but someone who has familiarity with the organization’s finances and a bit of patience can handle it.
We discovered that, not only is it possible for us to complete it ourselves, but it is beneficial as well. Going through the form together provided us with an opportunity to reflect on our own organization – which is structured as a worker self-directed nonprofit – and on ways that we challenge common expectations about what a nonprofit is and how it operates. Our 990 party also allowed us to think about how we wanted to present our organization to the IRS and to the potential funders that commonly examine 990s when deciding where to put their money.
Through our experience we learned 7 things that we want to share so far! We look forward to engaging with the 990 further and maybe helping other organizations develop the capacity to fill it out for themselves too!
1. Form 990 is a required filing for almost all nonprofits
Form 990 is a tax filing for non-profits that compels them to report financial information, program activities, and governance practices.All organizations that are exempt from income tax under 501(a) must file a Form 990. This includes all 501(c) organizations other than private foundations and black lung benefit trusts.
Organizations that have either (1) gross receipts greater than or equal to $200,000, or (2) total assets greater than or equal to $500,000 at the end of the tax year must file the full Form 990.The current form has twelve sections that must be completed by all organizations, and sixteen additional schedules that have to be completed by organizations meeting certain criteria (for example, only school’s have to complete schedule E). The main components include a statement of program service accomplishments, a checklist of governance and management best practices, a list of officer and key employee compensation, a statement of revenue a statement of expenses.
Organizations with gross receipts less than $200,000 and total assets at the end of the year that are less than $500,000 must file the abbreviated Form 990-EZ.
Organizations with gross receipts of $50,000 or less must submit Form 990-N(https://www.irs.gov/instructions/i990/ch01.html).
2. It was revised in 2009 to include more questions about governance
Form 990 was first used in 1941 to collect basic financial information. The form was broadened in 1979 to include more detailed financial information, as well as descriptions of programs. The IRS made significant changes to 990 in 2009 to address increased demand for transparency and accountability in the wake of Enron, Worldcom, and the Sarbanes-Oxley Act. The new form inquires into the governance practices of nonprofits, an area that is governed primarily by State law and represents a contentious expansion of the IRS’s scope.
Governance information is located in Section VI. The form elicits information such as whether any directors had family or business relationship with someone the organization is transacting with, whether there are governance decisions reserved to parties other than the chief governance body, and how many members comprise the governing body.
3. The governance portions are primarily unenforceable.
The IRS is a federal regulatory body, but nonprofit governance is subject to state law, so it’s a bit odd that the IRS would be asking about it. The IRS has been clear that “federal law does not mandate any particular management structures, operational policies, or administrative policies.”
The IRS is using disclosure and transparency as a tool for regulation without any explicit enforcement mechanism. The theory is that by making practices public, donor pressure and professional reputation will encourage organizations to comply with the IRS suggestions. The IRS generally cannot revoke tax-exempt status in direct response to non-traditional governance practices. However, unusual governance provisions could trigger the IRS to conduct an audit to review other activities over which the IRS does have enforcement power.
4. Funders read 990s
The IRS isn’t the only organization that reads the 990 returns; funders do as well. The form gives funders an opportunity to examine how money is being managed and what programming is occurring. This means that a nonprofit’s 990 functions as an advertisement to potential funders as much as it does as a mechanism to hold the organization accountable to the IRS.
Organizations like GuideStar use an algorithm to give other nonprofits a quantitative rating based on their financials so that potential funders can compare them quickly. And most sophisticated funders, if they don’t use a service like GuideStar, will still examine 990s before donating. This means it’s important to fill them out with intentionality. It also means that worker self-directed organizations need to be especially careful about how they describe their governance. They may have practices that do not comply with the best practices for hierarchical organization, and they will need to use other portions of the form (like Schedule O) to help funders understand their operation.
5. Aligning financials throughout the year with 990 requirements makes completion easier
The statement of revenue (part VIII), statement of functional expenses (part IX), and balance sheet (part X) require very particular pieces of information. Some of the lines—like accounts receivable or insurance costs—are thing that most organizations already keep on their own books, but organizations don’t always keep track of the information required on other lines.
Part VIII line 8 is an example of information that organizations may not be tracking; it requires organizations to report on the gross income of fundraising events less the expenses of producing those events. To know the expenses of producing the event the organization will need to know how many hours of labor were spent and how they were valued. If an organization has all of its employees track how much time they spend on working on fundraising events, this will be very easy to fill in. But if the organization doesn’t track it, coming up with an accurate number can be challenging.
If organizations track the information required on the 990 throughout the year, filling out the form will straightforward. This presents a trade-off for operations decisions. It costs employees time and energy to track lots of things, but it lowers the cost of completing Form 990.
6. Completing 990 as a staff is an opportunity to evaluate and strategize
It could be particularly fruitful to complete Part III: “Statement of Program Service Accomplishments" and "Part VI: Governance, Management and Disclosure” as a whole staff.
Part III asks for a description of the three largest program services as measured by expenses. This provides a good opportunity for the organization to reflect on exactly what it is doing, especially because the answer may not be as simple as it seems. There are questions about how to define particular programs and how to present them to the potential funders that will be reviewing the form. For example, if an organization provides community education, legal services, and policy advocacy around issues of housing, immigration, and labor they will have a number of choices of how to define and describe their three biggest programs. Their programs could be “community education,” “legal services,” and “policy advocacy,” or they could be “housing services,” “immigration services,” and “labor advocacy.” Or they could choose to highlight specific projects within any of these umbrella concepts like “eviction defense to residents of Oakland.”
These types of decisions are not just semantic. They provide an opportunity to reflect on the core structure of the organization. Thinking through how to define and describe projects is akin to organizational management, visioning, and marketing. Reflecting on these questions as a group can empower staff to share their experience of working in the organization, can increase their understanding of what the organization is doing, and could productively surface potential tensions.
Completing Part VI as a group presents similar opportunities by creating transparency around governance. Not only will the whole staff become aware of how the organization is actually being governed, but they will also gain some insight into other possibilities and best practices. This portion of the form can be used to ground a conversation about whether the organization is accountable, efficient, and transparent.
7. WSDNs are particularly well suited to complete the form as staff
Most Executive Directors would cringe at the thought of putting the completion of 990 on their already full plates instead of just outsourcing it. And in a hierarchical structure, the staff might not have the information necessary to complete it. This usually leaves the ED with one option: hire an outside accountant or lawyer to review the books and complete the form in consultation with the ED herself.
The information in worker self-directed organizations, on the other hand, is much more widely distributed. More people know more about the operations, finances, and accounting of the organizations. This means that strategically selected group of staff that includes whoever has the most intimate knowledge of the finances can complete the form themselves. WSDNs are also perfectly situated to take advantage of the opportunity to collectively reflect on their practices.