Tax Brief: Board Review of the Form 990
The IRS requires nonprofit organizations to disclose whether the Form 990 was provided to all members of the Board of Directors prior to filing and to describe the review process used.
Board review of the Form 990 is not statutorily required, but the IRS believes such review is important; it is certainly a best practice to have the Board, Finance Committee, or a subset thereof, review the Form 990 prior to filing.
In order for the Board review process to be effective and efficient, it is important that Board members know what to look for when performing a review of the Form 990. We recommend that the Board pays special attention to the following areas during the review process:
Statement of Program Service Accomplishments – Form 990, Part III
This is where the Organization can tell its story and share the impact of its programs. It is important to review this information annually for accuracy. We recommend ensuring the key elements of the program service accomplishments are reported on page 2 and minimizing the information that wraps to Schedule O or you can ensure you have a good summary that fits on page 2 and then include additional details on Schedule O.
Checklist of Required Schedules – Form 990, Part IV
Part IV consists of two pages of yes/no questions that should be reviewed by management and the Board for accuracy. These questions should be thoroughly understood and not taken lightly, as “Yes” answers typically indicate that an additional schedule needs to be completed. If the Board is uncertain of the answer, it should request more information to ensure the questions are answered properly. If the Board is still having difficulty understanding a particular question, the IRS has guided instructions, which include a glossary of terms, that can be utilized to further understand the Form.
Statements Regarding Other IRS Filings and Tax Compliance – Form 990, Part V
Part V of the Form 990 is also comprised of a list of questions, the answers to which the Board should review closely, while obtaining additional information as needed to ensure questions have been answered accurately.
Governance, Management, and Disclosure – Form 990, Part VI
This section consists of perhaps the most important areas for Board review. Section A is comprised of questions regarding the governing body and management, such as: the number of independent board members, disclosure of relationships between board members, information regarding changes to governing documents, and processes used to track all board meetings held and decisions made — i.e., board minutes. Keep in mind when reviewing the Form that, in order for a Board member to be considered independent, he/she cannot have a listed transaction on Schedule L Transactions with Interested Persons. Also, if a family or business relationship exists between any of the Board members and a current officer, director, trustee, or key employee of the organization, the relationship should be disclosed on the Form 990 and also considered in the Organization’s conflict of interest policy.
Section B of Part V relates to organizational policies. It is implied by the IRS that each of the policies listed in Section B are of high importance and therefore should be in place. A public charity’s answers to these policy questions have an impact on its rating on websites such as Charity Navigator. In addition to answering the yes/no questions about current policies, the Form 990 includes narrative on how some of those policies are designed and implemented. The Board should describe the process by which it reviews the Form 990 within the Form. Additionally, the Form 990 discloses how the conflict of interest policy is implemented, monitored, and enforced. The procedures used to determine compensation of the organization’s officers and key employees is also disclosed in the Form 990. Some of the best practices for determining compensation include the use of a compensation committee and utilization of comparability data.
Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors – Form 990, Part VII
The Board should review the listing of the organization’s key figures, such as officers and directors, for accuracy. The Form 990 instructions indicate that the Organization’s top management official and top financial official must be listed in Part VII as officers, regardless of his/her title. Compensation must also be included in Part VII and reported on a calendar year basis, regardless of fiscal year end.
Statement of Revenue – Form 990, Part VIII
Board members should review the Statement of Revenue in Part VIII for appropriate reporting of the organization’s revenue sources. The Board should be familiar with the reporting of revenue between contributions and program service revenue. Finally, the Board should review for any unrelated business income, taking into consideration any increases over prior years and how they could possibly affect the organization’s tax-exempt status.
Statement of Functional Expenses – Form 990, Part IX
Part IX of the Form 990 presents the detail of expenses for the organization by type, such as rent and depreciation, and function, such as program services, management, general, and fundraising. It is especially important for the Board to review the allocation of expenses between the functions. The Board should inquire about the allocation methodology of overhead or indirect expenses. It is essential to have a reasonable allocation methodology that appropriately reflects the way in which the organization spends funds. A key area to include in review is the allocation of management compensation. It is vital to ensure that compensation is not allocated 100% to management and general as a default; the allocation of compensation should reflect where management actually spends their time.
Supplemental Schedules
Finally, the Board review wraps up with a look at the supplemental schedules. One of the most important supplemental schedules is Schedule A – Public Charity Status and Public Support. When reviewing Schedule A, the Board should review the sources of revenue reported for accuracy. The most pivotal piece of information is the public support percentage. This figure indicates whether the Organization is in danger of becoming a private foundation rather than a public charity. In general, the public support percentage must be at 33.33% or higher for the organization to maintain its status as a public charity. If this percentage is declining and/or is close to that threshold, the Board should be discussing the methods in which it could improve its public support, as well as the effects of falling below the threshold, with the organization’s CPA.
The Organization may file several other supplemental schedules. Board members should have an understanding of the purpose of the schedule and review information for completeness and accuracy. See our other Tax Briefs for additional details on the Form 990 and related supplemental schedules.
