Organizations exempt from income tax nonetheless have to report their activities to the IRS each year. This annual reporting is a requirement created by the Internal Revenue Code (IRC). Annual reporting is done on Form 990, Return of Organization Exempt From Income Tax. These organizations are ones that are exempt under IRC Section 501(c) (various types of charitable organizations), 527 (political organizations) or 4947(a) (nonexempt charitable trusts). Private foundations do not file this form; they have their own annual filing requirements (Form 990-PF).
Form 990 must be filed by an exempt organization even if it has not yet filed Form 1023 with the IRS to receive official approval of its tax-exempt status. (See The Purpose of IRS Form 1023.) However, certain organizations are exempt from filing the form (see the instructions to the form). Unlike income tax returns that are private, this form is open to public inspection.
Overview of the Form
The form is intended to give the government and the public a picture of the organization’s activities each year. Presumably, some contributors base their gifting decisions on what they learn from the form. The amount of information required from the organization is extensive; instructions to the form run 100 pages. The organization can be subject to a stiff penalty if it does not file on time.
This 12-page form consists of various parts:
- Part I is a summary of the organization. It requires information about the activities and governance of the organization (e.g., its mission, number of employees and volunteers, etc.), its revenue, its expenses and its net assets or fund balances.
- Part II is the signature block where an officer of the organization attests under penalty of perjury that the information is true, correct and complete to the best of his/her knowledge.
- Part III is a statement of the organization’s accomplishments, including its mission statement and the expenses and revenues for the organization’s three largest program services.
- Part IV is a checklist of schedules that must be completed and accompany the form (explained later).
- Part V is for statements about other IRS filings and tax compliance. For example, if the organization can receive tax-deductible contributions, it must indicate whether it has provided donors with the required substantiation for their donations.
- Part VI asks for information about the governing body and management of the organization as well as its policies.
- Part VII lists the compensation paid to current and former officers, directors, trustees, key employees, employees receiving more than $100,000 in compensation and up to five independent contractors receiving more than $100,000 in payment from the organization.
- Part VIII is a statement of the organization’s revenue from related or exempt funds and unrelated business income (which requires the filing of Form 990-T; this income is not exempt)
- Part IX is for reporting the organization’s expenses.
- Part X is the organization’s balance sheet.
- Part XI is a reconciliation of the net assets of the organization.
- Part XII explains the organization’s financial statements and reporting (e.g., whether it uses the cash, accrual or other method of reporting to prepare the form and whether its financial statements were compiled and reviewed by an independent accountant).
In addition to the form, the organization may have to attach various schedules (A through O and R) to the form. Which schedules to use depends on answers to questions throughout the form. The one schedule used by most organizations to provide supplemental information to Form 990 is Schedule O.
Instead of completing Form 990, the organization may be eligible to complete a simplified Form 990-EZ, Short Form Return of Organization Exempt from Income Tax, This four-page form requires some, but not all, of the information on Form 990. It can be used by an organization with gross receipts of less than $200,000 and total assets of less than $500,000 at the end of its tax year. This short form is also open to public inspection.
The Bottom Line
The price of tax exemption for an organization is complete disclosure of its activities every year. Providing all the information required on the form likely will necessitate the assistance of a tax professional versed in this area of tax law.