BKD’s exempt organization tax professionals prepare thousands of IRS Forms 990 every year. Throughout the course of the year, our tax professionals review thousands more Forms 990 prepared internally or by other professional accounting firms.
As a result of these reviews, 1 fact remains clear: Many Forms 990 are prepared incorrectly or incompletely.
Because the Form 990 is a public document -- nearly all are posted on GuideStar.com and many organizations post them on their websites -- it is important that the Form 990 be prepared completely, correctly and consistently.
An incorrect Form 990 could reflect negatively on the organization when reviewed by possible donors, the community or even the media. More importantly, an incorrect Form 990 might be viewed as an incomplete filing by the IRS, subjecting the organization to late filing and other penalties even though a Form 990 was filed.
Unfortunately, our exempt organization tax professionals discover numerous common errors and omissions. They range from inconsequential errors that should be corrected in future filings to serious errors that merit an amended filing.
Here are some of the most common errors our tax professionals encounter.
Form 990, Page 1, Part I
Page 1 of Form 990 includes summary information relating to the organization and creates a first impression for the reader.
Many times, organizations include a lengthy summary of their most significant activity on Page 1. When this description is too long, most return preparation programs will carry over the description or print the description in its entirety at the end of the return in Schedule O.
Organizations should consider a concise description that fits in the allotted space on the first page, so the reader can gain a clear idea of the organization’s most significant activity without searching through the voluminous disclosures in Schedule O.
Part I of Page 1 also includes summary information regarding the number of voting board members, employees and volunteers. Unpaid board members are considered volunteers for purposes of reporting the number of volunteers on Page 1.
Organizations with unpaid board members often fail to count them as volunteers on Form 990.
Form 990, Part V
Part V of Form 990 asks several questions that may result in additional IRS filings. In many cases, some of these questions are applicable to an organization while many questions are not applicable. Inapplicable questions should not be answered “yes” or “no.”
Instead, these questions should be left blank according to the IRS instructions. Often, organizations answer nonapplicable questions as “no” in error.
If a question is answered "no" when the question should be left blank, the organization appears to not be in compliance with that particular item.
Form 990, Part VI
Total members of the governing body and total independent members of the governing body are often counted incorrectly on Form 990.
The IRS instructions ask for the total number of voting members of the governing body, which may not be the same number listed in Part VII of Form 990.
In addition, the concept of independent members of the governing body is defined differently for purposes of Form 990 completion. Often, members of the governing body who are compensated for services performed outside their service as a board member, as well as members of the governing body who have interested person transactions reported on Schedule L, are counted as independent board members in error.
Business and family relationships often are not disclosed as required in question 2. Exempt organizations that have large numbers of board members -- more than 20 -- or are located in rural areas are likely to have a business or family relationship with fellow board members. This question is often answered “no” in error.
Many organizations outsource management duties to another company or service provider. Part VI, Question 3 asks for additional information when a management company (related or not related to the organization) has been hired to perform specific services for the organization.
When this question is answered “yes,” the required footnote in Schedule O is often missing or incomplete. More importantly, reporting of compensation paid to the management company as a highest-paid independent contractor in Part VII is omitted.
Compensation disclosures required for the individuals performing the duties often are not properly disclosed, and the expense generally is not reported correctly as a fee for services in Part IX.
Compensation Reporting Errors Form 990 Part VI & Schedule J
Related compensation and overall compensation reporting, including the number of Forms W-2 and Forms 1099 filed with the IRS, often is not reported correctly among organizations included in a related group of Form 990 filers.
Reporting compensation paid, or deemed to be paid, by the organization and paid, or deemed to be paid, by a related organization is required based on the thresholds outlined in Part VII for officers, directors, trustees, key employees and highest-paid employees (ODTKEs).
Many times, compensation reporting is incomplete. Designations as to the ODTKE’s role with the organization are not checked or are checked in error. The IRS includes complete definitions of each role as an officer, director, trustee, key employee or highest-paid employee, including definitions of current and former ODTKEs, which often are overlooked, resulting in incorrect reporting.
In addition, required footnotes (now included in Part VII for 2012) disclosing the hours worked per week for related organizations are often incomplete or omitted.
Schedule J reporting is required when compensation exceeds a certain threshold. Page 1 of Schedule J includes various questions regarding benefits provided to ODTKEs, and each question requires additional disclosure when checked. Many benefits are not checked on Page 1 even though a disclosure is made in Part III, or benefits are indicated in Part I but the disclosure required in Part III is lacking or completely omitted.
Part II of Schedule J often is completed in error, as well. Allocations of amounts reported in Box 5 of Form W-2 as base, bonus and other compensation often are omitted by reporting 100 percent of the amount as base compensation.
Deferred compensation reporting can be misunderstood and includes employee retirement plan deferrals (included in Box 5 of Form W-2, causing duplicate reporting of the amount). Deferred compensation often omits accrued bonuses not paid within two and a half months after year-end and other employer deferral items.
The increase in actuarial value of a defined benefit plan accounts is a common deferred compensation reporting omission. In addition, for years when a deferred compensation amount becomes taxable and reportable on Form W-2, organizations fail to report the double reporting in Column F.
When completing Part VII, Section B, organizations often include nonservice-provider vendors among the five highest-paid independent contractors listing in error.
Form 990 Parts VIII & IX
While reporting revenue and expenses of an exempt organization should be routine, many times items of revenue or expense are not properly reported. Common reporting issues include:
- Reporting fees paid for services rendered (contract services) incorrectly.
- Contributions and revenue reported in the incorrect column.
- Security sales, fundraising and/or gaming events not reported properly.
- Incorrect or lacking allocations of a reasonable amount of expense to either management G&A or fundraising expense.
- Related rental revenue not reported as program related revenue on Line 2.
- Incorrectly recognizing membership dues as contributions (Line 1) or program-related (Line 2).
- Missed reporting of amounts paid to disqualified persons or their family members -- generally compensation paid to a family member of an ODTKE reported on Schedule L -- on Line 6 of Part IX.
Schedule A Public Charity Status
Schedule A reports the public charity status of an organization. Many times, organizations select the wrong public charity type in Part I. For organizations classified as publicly supported, one of the public support tests included in Part I or Part II must be completed.
These computations often are completed inaccurately with incorrect amounts reported throughout. A common error is the omission or incorrect computation of excluded support on Line 5 of Part II or Line 7 of Part III.
Schedule H Hospitals
Schedule H is completed by organizations licensed as a hospital under state law and provides information regarding financial assistance and community benefits. Schedule H also is the mechanism to report compliance with the new exemption requirements for tax-exempt hospitals under new Section 501(r).
Accurate completion of Schedule H is essential to maintaining the exempt status of a hospital organization. Unfortunately, reporting errors on Schedule H are too broad and numerous for the confines of this article; BKD will present additional information on Schedule H in the near future.
Schedule K Supplemental Information on Tax-Exempt Bonds
Schedule K reports information regarding tax-exempt financing. Schedule K is completed for exempt bond issues exceeding $100,000 and issued after December 31, 2002. Included in Schedule K are numerous questions assessing the compliance with several IRS requirements.
Incorrectly completing Schedule K could trigger additional inquiry from the IRS. Many times, organizations and practitioners do not understand Schedule K and its purpose contributing to the reporting errors.
Organizations should take care to complete Schedule K completely and accurately and consider engaging bond counsel to assist with completion or review of Schedule K.
Schedule L Transactions with Interested Persons
Schedule L reports a variety of transactions with interested persons. Many organizations define interested persons too narrowly and only inquire as to possible transactions with board members.
Interested persons are defined differently depending on the type of transaction reported on Schedule L, and inquiries regarding these transactions should include not only officers, directors and trustees but also key employees, highest-paid employees and, in some cases, certain donors.
Organizations should take care to inquire about interested-person transactions regarding all interested persons.
Once a transaction with an interested person is identified, the organization reports certain information in Schedule L. Business transactions tend to be the most often reported transaction on Schedule L. Part IV requests the name of the interested person (and not the ODTKE), the relationship and amount of the transaction. In many cases, the ODTKE of the organization is reported in error as the interested person.
Schedule O Miscellaneous Disclosures
Schedule O is used to provide required disclosures based on the answers to certain questions contained in the core form of Form 990. The disclosures range from expanded program service descriptions and internal Form 990 review processes to availability of certain documents for public access and compensation-setting processes.
Often the disclosures are incomplete, not updated for current reporting information or so lengthy the purpose of the disclosure is lost to the reader.
Care should be taken to read each disclosure to ensure it answers the question or describes the issue completely, correctly and concisely.
Schedule R Related Organizations & Unrelated Partnerships
Related organizations are reported on Schedule R of Form 990. The instructions to Schedule R provide detailed definitions for related organizations that should be reported in Schedule R.
When an organization or entity is considered related to an exempt organization, related compensation and other items will be reported elsewhere in Form 990.
Therefore, care should be taken to only report organizations or entities that meet the related definitions in the instructions. A common omission is the reporting of a supported or supporting organization as related in Schedule R.
Part I of Schedule R reports identifying information for disregarded related entities owned by the organization. Exempt organizations often use single-member limited liability companies (SMLLC) for a variety of reasons. These entities are 100 percent owned by the exempt organization and are disregarded for federal tax purposes. As such, the activity of the SMLLC should be included in the Form 990 as if the SMLLC did not exist.
Many times, organizations fail to include the activity of the SMLLC in the Form 990 filing, or they report only the net income of the SMLLC in error.
Part V, Line 1 of Schedule R reports various transactions between the organization and related organizations reported elsewhere on Schedule R. Part V, Line 2 provides numerical information regarding the various transactions listed in Part I.
The instructions to Schedule R direct only controlling entities to complete the numerical information requested in Line 2. Line 2 often is completed by noncontrolling organizations in error.
