Most board members know — or should know — that the not-for-profit organization they serve files an annual Form 990 information return with the IRS. However, not every board member knows that they can, and should, review the form before it is submitted. Read on to learn why such board reviews are important and how to make them effective.

IRS makes its case

Although the IRS doe not require not-for-profit boards of directors to review their respective Forms 990, it does encourage boards to review the return. The agency believes that a correlation may exist between board review of the return and “the accuracy and effectiveness of the form in conveying the organization’s mission, activities, accomplishments, finances, compensation, business relationships and transactions.” The IRS also has noted that a board’s review of Form 990 may reflect good governance. There is even a question on Form 990 whether the organization provided a complete copy of the return to all members of its governing body before filing the form.

Of course, it is not just the IRS that might scrutinize the information in your Form 990. Potential financial supporters, from individual donors to private foundations, may examine this readily available information. In addition, the media increasingly has taken an interest in the information available about organizations.

Related Read: How to Find Key Nonfinancial Information on Form 990

Start a successful review

If your board does not already review Form 990, start now. Your board should receive the draft Form 990 to review before the IRS due date (the 15^th day of the 5^th month following the end of your organization’s taxable year or up to six months with an extension). The board needs enough time to assign review responsibilities, conduct the review and come back to management with any concerns. Your staff then needs to respond to board inquiries and make any necessary adjustments to the initial draft before submitting the final form to the IRS.

Be sure to assign responsibilities appropriately. In not-for-profits that have a formal review process for Form 990 in place, the task is often assigned to the audit or finance committee. Your CPA, legal and financial advisers can provide vital assistance, especially on compliance-related matters.

Related Read: Tasks for a Successful Not-for-Profit Finance Committee

Pay attention to critical areas

The core section of Form 990 is 12 pages long and there are up to 16 additional schedules. Form 990 reveals a wide range of information about an organization, but certain areas are more likely to draw the attention of the IRS and other stakeholders — for example:

Governance
Form 990 includes a section that requests information on organizational policies — including those regarding conflicts of interest, whistleblowers, document retention, compensation and joint ventures. It also asks questions concerning the governing body and management, such as documentation of meetings and actions and whether the governing documents have undergone any significant changes. Your board should ensure that such information is properly reported to demonstrate your organization’s transparency and accountability.

Compensation
Another section is devoted to compensation of officers, directors, trustees, key employees, highly compensated employees and independent contractors. Many organizations have made it into the headlines over the years because the media got wind of excessive compensation. If an individual’s position and average hours per week do not correspond with their compensation, your board needs to address the issue by, for example, ensuring adequate documentation exists to support the compensation level.

Cost Allocation
Form 990 of 501(c)(3) or (4) organizations allows users to compare earned revenues with expenses, including for the organization’s three largest program services. It also provides a breakdown of functional expenses among program services expenses, management and general expenses, and fundraising expenses.

Be proactive

According to the IRS, a board’s review of Form 990 is a sign that the board is “proactive, informed and engaged” to ensure their not-for-profit is organized and operated solely for exempt purposes. That stance — combined with the intensified interest of donors, funders and the media — make formal board review essential.

For more information, contact Jeff Chiles at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.