This article first appeared in the New York State Society of CPAs (NYSSCPA) Tax Stringer.

While the IRS Form 990, “Return of Organization Exempt from Income Tax,” is often viewed as a routine compliance requirement, its impact and audience reach far beyond tax reporting and the IRS. For nonprofit organizations, this form can serve as a powerful public-facing tool that shapes perceptions of governance, transparency, and financial stewardship. Executives and board members should therefore approach the Form 990 as not just a tax form, but a reflection of their mission, values, and operational excellence.

Here, we take a section-by-section look at the Form 990 (and its accompanying schedules) and how to review it, as well as common preparation errors, differences from GAAP reporting, and a quick compliance checklist.  

Starting context: What rating watchdogs look for

Nonprofit watchdog organizations such as Candid (formerly GuideStar), Charity Navigator, and the Better Business Bureau (BBB) publish independent evaluations of a nonprofit’s performance, accountability, and transparency. These ratings – often in the form of stars, numerical scores, or seals of approval – serve as a shorthand for trustworthiness and impact and help prospective donors, funders, and the public assess how effectively a nonprofit uses its resources and fulfills its mission.

Watchdog organizations (and other public websites) often use and share the Form 990 as part of their evaluations. What factors typically influence an organization’s rating? 

• Financial health
  • Percentage of total expenses spent on program activities
  • Percentage of total expenses spent on fundraising
• Accountability and transparency
  • Board governance and number of independent board members
  • Compliance with state audit requirements
  • Organizational policies (conflicts of interest, whistleblower, compensation, etc.)
  • Amount of compensation paid to board members
  • Timely filing of the Form 990

Given these considerations, it becomes clear that both board members and the management team should carefully evaluate key elements of the filing, recognizing that its audience extends well beyond the IRS.

Form 990: Key sections

Part III, Statement of Program Service Accomplishments, should be thought of as another marketing tool. Organizations should make the verbiage as descriptive as possible. 

• Focus on alignment across the core Form 990 as well as all Schedules, particularly Schedule O, Supplemental Information. 
• Make sure the document aligns with the organization’s financial statements, website, and current governing documents, such as the articles of incorporation and bylaws.

Part IV, Checklist of Required Schedules, drives the additional schedules for the annual filing. In this section, the IRS asks about the organization’s activities. There are important questions a board member can ask when reviewing a Form 990 in comparison to the prior-year filings. Understand:

• Have facts changed? Why?
• Are the facts consistent with what you know of the period of the filing?
• What is new for the period in question: programs, agreements, contracts?
• What operations have ceased: programs, agreements, contracts?

Part V, Statements Regarding Other IRS Filings and Tax Compliance, is a key area to assess risk. The IRS utilizes this schedule to confirm whether the organization is complying with other annual filing requirements, such as employment tax filings, withholding forms, foreign reporting, excess remuneration, and more. And remember, these answers would not only tell the IRS of a gap in compliance, but also provide that information to the public. In review, this part considers:

• Employment tax and withholding filings
• Events and support
• Foreign operations
• Donor acknowledgment and backup withholding

Part VI, Governance, Management, and Disclosure, highlights whether an organization has “good” governance, with questions around independence and various policies and procedures.

• Although not required, having board-approved rules like a whistleblower policy and document retention and destruction policy shows good governance and showcases a strong board, and therefore is a best practice in the charitable community.
• The IRS does require the Form 990 to be made available to the public. Organizations have varying options to meet the requirement, such as providing by request, posting on their website, or posting on another’s website. While providing access in multiple ways is not required, it is viewed as a best governance practice.
• Review of the Form 990 prior to filing of the return is not required, but does impact ratings on charity rating websites, as well as show good governance. Aim to answer “yes” to Part VI, question 11.
• Compensation is heavily scrutinized by the IRS and the public. While not required, best practice requires organizations to meet everything outlined in the Rebuttable Presumption, as defined in IRS Treas. Regulation Section 53.4958-6, when setting compensation of executives and other disqualified persons: 1) approval by independent persons; 2) use of comparability data; and 3) contemporaneous substantiation of the deliberation and decision.

Part VII, Section A, Compensation of Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees, captures a great deal of information about voting board members, officers with authority, key employees, highest compensated employees, and former individuals. Board members should consider the following important facts in reviewing Part VII, Section A:

• To provide comparability for the IRS across taxpayers, compensation reported is for the calendar year, which may vary from the fiscal year that the full Form 990 is covering.
  • A common point of confusion is how to list current board members and officers, as “current” for this form’s purposes may not be the same as what you typically think of as the current active board.
  • Do list as current anyone who has served even one day during the filing year. Former positions require a person to not have served even one day during the year.
  • Do not list as current members who are active now but were not during the tax year; these should be reported on the subsequent 990.
  • But, the listing of the principal officer or the officer signing the form should be based on those in those roles at the time of filing.
• Pay attention to IRC Section 4960 excess remuneration thresholds. (Excess remuneration refers to compensation exceeding $1 million annually paid to any covered employee, or certain parachute payments triggered by separation from employment, which may result in a 21% excise tax on the organization.)

Part VII, Section B, Independent Contractors, requires nonprofits to disclose their five highest-paid independent contractors who were paid over $100,000 during the tax year.

• These are always reported for the calendar year, and reported for services, not just purchases of goods.
• Consider whether the contractor qualifies as a substantial contributor – one that is required to be reported on the Schedule B, Schedule of Contributors – in which case activities may need to be reported as related party transactions.

Part VIII, IX, X, and XI, Statement of Revenue, Statement of Functional Expenses, Balance Sheet, and Reconciliation of Net Assets, present a nonprofit’s financial activity and position. They cover revenue sources, expense allocations, and assets and liabilities, and reconcile differences between GAAP financials and tax reporting to help ensure transparency and consistency.

Board members should consider the following when reviewing these sections:

• Confirm that classification of revenue is accurate and reflective of operations, and new revenue streams are considered for unrelated business income.
• Program and management expenses shown on Part IX Line 24 should typically be in line with prior years and the audited financial statements. If they have shifted, there should be an explainable reason.
• Parts X and XI should be consistent with the audited financial statements’ presentation.

Beyond the ‘Core Form 990’

The additional schedules of the Form 990 have a large amount of detail and depth, which this piece will not fully delve into.

A few highlights of areas that board members should consider when reviewing the complete Form 990 are below.

• Schedule A, Public Charity Status and Public Support. For public charities meeting tax-exempt status through demonstration of public support, an emphasis should be placed on public support percentage, confirming that it meets IRS-defined public support requirements. There are the following two different tests:
  • Part II, Support Schedule for Organizations Described in Sections 170(b)(1)(A)(iv) and 170(b)(1)(A)(vi)
    • Public Support should be at least 33 1/3% – Section C Line 14/15
    • Facts & Circumstances at least 10% is available, unlike Part III, below – Section C line 17a/17b
  • Part III, Support Schedule for Organizations Described in Section 509(a)(2)
    • Public Support should be at least 33 1/3% – Section C Line 15/16
    • Investment Income can be no more than 33 1/3% – Section C Line 17/18
• Schedule B, Schedule of Contributors, which details large contributors, is not open for public inspection, and the identity and privacy of donors should be carefully protected. In order to comply with one of the important board governance questions in Part VI of the core Form 990, all contributor information must be provided to the board. Note, if this information is redacted when provided to the full board, then Form 990, Part VI, Line 11 cannot be checked as “Yes,” as it would not be the complete document. 
• Schedule D, Supplemental Financial Statements, Parts XI and XII, show a reconciliation from total revenues and expenses reported on the financial statements to the information reported on the Form 990.
• Schedule J, Compensation Information, reports compensation in excess of $150,000, and provides greater detail than Core Form 990, Part VII, Section A.
• Schedule L, Transactions with Interested Persons, and Schedule R, Related Organizations and Unrelated Partnerships, disclose relationships and transactions that could raise governance or compliance concerns to the IRS. Schedule L captures business transactions with disqualified persons or related parties, requiring organizations to assess conflict of interest policies and maintain proper documentation. Schedule R reports entity relationships, including creations, acquisitions, and dissolutions, to clarify organizational structure and potential control issues. Regular review of these schedules helps safeguard transparency and IRS compliance. Related Parties on Schedules L and R should be reviewed carefully.
  • Consider the conflicts of interest process and the requirements of the Form 990 for potential business transactions (captured in Schedule L).
  • Consider transactions which create, acquire, and dissolve entities within the period in question (capture in Schedule R).
  • Accurate reporting depends on thorough internal knowledge of organizational activities and relationships throughout the tax year.

Financial Statements (Generally Accepted Accounting Principles/GAAP) vs. Form 990

GAAP financials and the Form 990 serve different purposes: GAAP informs internal and audited reporting, while the Form 990 communicates financial and governance data to the IRS and the public.

Key differences in treatment can affect how your organization appears to external stakeholders. Consider these examples:

• Donated services and use of facilities: Reported as revenue and expense for GAAP, but removed on the Form 990. 
• Unrealized gains/losses: Recorded for GAAP, but are reconciling items on the Form 990. 
• Functional expenses: GAAP categories often include further breakout between programs, while the Form 990 has different adjustments. Grants are 100% program; donated services are removed; reconciling items removed or added; and percentages overall may vary from the financial statements. 
• Special events: Regardless of the reporting options available under GAAP, the Form 990 requires the reporting of total receipts from special events, reduced by any contributions and deductions for both direct donor benefit expenses and any other direct special events expenses, often resulting in presentation of a net loss.   
• Related parties: GAAP views related parties through financial control, consolidations, and minority interests, while the Form 990 considers a definition of “control,” IRC Section 512(b)(13), parent/child and brother/sister relationships. Disregarded entities are included within, if applicable, as there are no “consolidated” returns within the 990 world. 

Overall Form 990 compliance checklist

Board members can use the following checklist for top considerations when reviewing organizational governance and compliance disclosures on the Form 990.

• Meet Annual Electronic Filing requirements for the Form 990 and 990-T.
• Register with appropriate states for charitable solicitations, and consider the interplay with the Form 990. 
• Be sure to comply with states that require online submission.
• Comply with foreign filing requirements.
• Properly classify each worker as an employee vs. independent contractor.
• Issue timely contemporaneous written acknowledgements (CWA) to donors.
• File Form 8282 for disposition made of certain non-cash gifts within three years. 

Common errors made when preparing the Form 990

Even well-managed nonprofits can make avoidable mistakes when completing the Form 990. These errors – ranging from misreporting compensation to mishandling donor data – can trigger IRS scrutiny, impact public ratings, and undermine transparency. Careful attention to detail, especially on the part of the preparer and management, helps ensure compliance and protect organizational credibility.

• File the applicable Form 990/EZ/N, and make sure the Employer Identification Number (EIN) matches IRS records. Confirm that the IRS master file is accurate (name, year-end, status).
• Report foreign bank accounts on Part V, line 4. File FinCEN Form 114 Foreign Bank Account (FBAR) if required. Preparers should confirm with clients that all FBAR filings have been completed.
• Compensation reported on Part VII should reflect calendar year compensation. Use W-2 information for the year ended during the organization’s fiscal year.
• Part VII of the Form 990 should only include voting board members who were on the board at any time during the tax year, even if they only served for a few days. 
• If the organization’s fundraising events were online or if no benefit was received by the attendee, these may not be considered fundraising events for 990 purposes, and presentation needs to be revisited.
• Excess contributors need to be tracked every year to make sure that public support percentage is accurately calculated.
• Schedule B should include both cash and noncash contributions.
• Anonymous donors should not be listed on Schedule B. An organization can only list a donor as anonymous if it genuinely does not know the donor’s identity.
• Answer and provide supporting statements for Schedule J questions on deferred compensation from Section 457 plans (Schedule J, Part I, Line 4b), severance agreements (Schedule J, Part I, Line 4a), and bonuses (Schedule J, Part I, Line 7).

In conclusion

In today’s accountability-driven landscape, the Form 990 is more than a regulatory obligation – it’s a reputational asset. A thoughtful, accurate, and well-aligned filing can reinforce public trust, support donor confidence, and strengthen governance ratings. By engaging board members in a comprehensive review process and aligning the form with financial statements, policies, and public messaging, nonprofits can transform compliance into opportunity. Ultimately, the Form 990 is a chance to tell your organization’s story with clarity, credibility, and purpose.