Nonprofit organizations play a crucial role in communities, offering services that support social welfare and development. However, managing these organizations requires adherence to various regulations, one of which is completing Form 990. This form is not just a tax document but a vital tool for transparency and compliance. In one of the recent episodes of our Summer CPE Series, our team members Sam A. Lazzara, CPA, and Brooke Dawson, CPA, shed light on the significance of Form 990 and how nonprofits can leverage it effectively.
What is Form 990?
Form 990 is an informational tax form that tax-exempt organizations file annually with the IRS. Unlike standard tax returns aimed at revenue collection, Form 990 primarily provides the IRS and the public with financial and operational information about nonprofits. It is a public document that helps nonprofits communicate their mission, financial health, and governance practices to stakeholders.
Importance of Form 990
Transparency and Credibility
Form 990 plays a pivotal role in establishing a nonprofit’s transparency and credibility. By detailing financial status, governance policies, and program accomplishments, nonprofits can build trust with donors, grantors, and the general public. The form includes narratives on program accomplishments, community impact, and financial stability, allowing organizations to showcase their effectiveness and accountability.
Compliance and Oversight
The form is also a critical compliance tool. The IRS uses it to gather information about tax-exempt organizations, educate them about tax laws, and promote compliance. Many states rely on Form 990 for charitable oversight, ensuring organizations adhere to regulations.
Differentiating Public Charities and Private Foundations
Form 990 is crucial for differentiating between public charities and private foundations. Public charities generally derive a significant portion of their support from the public or government units and interact more with the community. On the other hand, private foundations are typically controlled by a small group and focus on distributing grants rather than direct charitable activities.
Recent Updates and Tools
The presentation also highlighted recent changes to registration processes and introduced tools like the IRS Tax Exempt Organization Search Tool. This tool allows users to view Form 990s and determine an organization’s eligibility for receiving tax-deductible contributions. Understanding these updates is essential for nonprofits to stay compliant.
Filing Requirements and Penalties
Nonprofits must adhere to specific filing requirements based on their size. Smaller organizations with gross receipts generally under $50,000 may file a Form 990-N, while larger organizations file the standard Form 990 or 990EZ. These returns must be filed by the 15th day of the 5th month after the end of the organization’s accounting period. Nonprofits can request an automatic 6-month extension of time to file using the Form 8868. Failure to file on time can result in penalties, emphasizing the need for timely compliance.
Watchdog Agencies
A charity watchdog agency is a nonprofit organization that provides information, ratings, and reviews of other nonprofits. These agencies gather data primarily from publicly available documents, like Form 990. Donors often rely on charity watchdogs to help them identify organizations with favorable ratings, ensuring their contributions go to reputable causes. Some more prominent and well-known charity watchdogs include Charity Navigator, GuideStar (now part of Candid), and the Better Business Bureau. These agencies promote transparency and accountability in the nonprofit sector, helping donors make informed decisions about where to contribute their resources.
Conclusion
Form 990 is more than just a paperwork requirement; it is a strategic tool for nonprofits to communicate their value and maintain regulatory compliance. Staying informed about filing requirements and recent updates and utilizing available tools can significantly enhance a nonprofit’s operational efficiency. For organizations seeking guidance, consulting with experts in nonprofit accounting, like Rivero, Gordimer & Company, can provide invaluable support and insights.
By understanding and effectively utilizing Form 990, nonprofits can ensure they continue to serve their communities while maintaining transparency and accountability.
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