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5 Best Practices to Ensure Smooth Form 990 Preparation

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We talk a lot about IRS Form 990 around here, and for good reason. It’s the most critical annual compliance filing you have. What we don’t talk a lot about, however, is how best to prepare for Form 990 season. Let’s take a look at some best practices to make your next filing that much easier.

Introduction

Form 990 is a big deal. Our last article in this series talked about how your Form 990 is a window into your nonprofit, and it is. It’s also a challenging tax (information) return to complete. But, there are ways to prepare in advance to make sure that the actual task of completing and filing Form 990 isn’t quite so painful.

Here’s our top 5 best practices, in no particular order:

Have Solid Financial Records

This should be obvious, shouldn’t it? Sadly, that’s just not the case. You would be shocked at the number of nonprofits (mostly smaller charities) that fail to keep any financial records at all! Bank statements are all that they have when Form 990 time comes along. That’s not only irresponsible, it’s a violation of state and federal regulations that require tax-exempt organizations to maintain accurate books.

So what exactly does it mean to have solid financials? Several things…

Use a real bookkeeping or accounting app – Foundation Group recommends Quickbooks Online or Aplos for the vast majority of nonprofits. These are two, fantastic web-based accounting apps that are affordable, and can help you keep accurate records of income and expenses, plus provide you with periodic financial reports. Do NOT rely solely on written records to track financial activity. Also, while desktop accounting software is perfectly fine, we prefer online apps due to the ability to log-on from anywhere you have an internet connection, plus it makes it much easier to provide your bookkeeper, accountant, or tax preparer access.

Keep your records current – It’s not enough to have the right tools. You actually have to use them properly and regularly. It’s easy to find yourself several months behind reconciling your books, so stay on top of it. You don’t want to be trying to catch up 8 months worth of books when your Form 990 is due soon.

Your books should reflect accounting standards for nonprofits – This is a tough one, particularly for those keeping their own books. It’s great that you have a Quickbooks Online subscription, and even better that you are putting all your transactions into it (pun there for the nerds), and reconciling monthly. But if you don’t know how to properly account for certain things, such as restricted gifts, or your chart of accounts is a disaster, you’re really not ahead of the game. You might look good on the screen, but someone will have to invest a lot of time fixing the problems before a Form 990 can be completed. Hire a professional bookkeeper who knows how to do it right.

Related Article: What Is IRS Form 990?

Keep Good Donor Records

It’s just as important to accurately track your donor data as it is to keep your financials in good order. For one, they’re related. Two, you need this information readily available to provide the IRS a list of your biggest contributors, plus to calculate your annual public support percentage.

We recommend you track donations in an online app designed for nonprofits. We like Kindful for organizations with robust donor cultivation and fundraising activity. It is a great tool to keep historical records of who gave how much, for what, and when they gave it. It’s also fantastic for planning donor campaigns. For smaller orgs with fewer donors, you can probably get by with an Excel spreadsheet, or something similar.

The important thing is to keep this information organized, and don’t get rid of prior year information. The public support test calculation we mentioned above requires a rolling 5 years of donor data.

Keep Track of Activities and Accomplishments

Most nonprofits keep financial records and donor history of some kind. Even if they’re a mess, the records are there. But relatively few organizations think to record activities and accomplishments as the year rolls along.

Form 990 has a section in it that requires you to list your individual charitable programs by name or purpose, then describe in detail what was accomplished during the year. Things like: a description of the program itself, the number of people served, income and expenses allocated to the activity, and whether or not it was a new program or the continuation of an existing one.

You can always try to summarize this activity later, but it’s far better to keep track of it as it happens, making that one less thing you’re scrambling to put together at Form 990 time.

Get On It Early!

Admit it…you’re a procrastinator. Most people are. But please don’t procrastinate when it comes to getting your information ready to file Form 990.

Here’s a mild tax accountant’s rant. There’s a reason our Compliance Team works 16 hours days between May 1 and May 15, then again between November 1 and November 15. Trust me, it’s not because they want to. Clients drag their feet about getting their information to us, waiting until the 11th hour to send it in. Then they don’t understand why we can’t turn around their return before the due date, not realizing 100 other clients procrastinated too! Every tax firm deals with this reality.

But it’s not just a rant. While it may be frustrating to us, it’s really bad for you. Filing a late Form 990 subjects your nonprofit to a penalty of $20 per day, plus compounded interest, every day that your return is late. We have seen many penalty assessments in the thousands of dollars.

Don’t procrastinate with your nonprofit’s fiduciary responsibility. Get on it, please 🙂 !

Work With a Nonprofit Tax Professional

As the old saying goes, “You don’t know what you don’t know.” These are very true words when it comes to Form 990 preparation.

Form 990 is a complex tax return, requiring in-depth knowledge of nonprofit tax law and compliance, plus accounting standards for nonprofits. Very few charitable organizations have someone on the inside with the requisite experience necessary to prepare an accurate return.

Still, we frequently see nonprofits attempt it on their own, usually to save money…or so they think. That rarely works out, as mistakes can result in an IRS audit (more on that in an upcoming article) or require paying someone to amend the return and fix the mess.

Chances are, you wouldn’t attempt to work on your modern, computer-controlled car if you’re not a certified mechanic. The same logic goes here. Trust a professional.

Conclusion

We hope this little list provides you with some insight on how to make your next Form 990 filing season a little easier. May your nonprofit experience much success in the coming year.

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Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

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