Form 990: Page 5 Compliance RequirementsFebruary 10, 2021
We continue our 990 blog series with part five, how to complete page 4 and 5, part V on your 990.
*Editor's Note: This blog has been updated as of February 10, 2021 for accuracy and comprehensiveness.
In Part 5 of our 990 blog series, we dive into compliance requirements. Get caught up on parts 1-4 here. The primary mission of the IRS is to monitor compliance with the tax code. Even though tax-exempt organizations are exempt from the federal income tax; they must still comply with all other IRS regulations applicable to every business in the United States of America. In Part V, starting on page four, the IRS asks questions which will help them identify those organizations that need assistance understanding their compliance requirements.
What kinds of questions are included in part 5?
Some of the questions in this section request that you report information reported in other filings such as #1a, requests the number of reported in box 3 of Form 1096. Most of the questions in this section are Yes/No questions like Part IV covered in our previous blog in the 990 series. Like in Part IV, the “Yes” response may trigger the additional filing requirements.
Question 3a asks “Did the organization have any unrelated business income gross income of $1,000 or more during the year?”. If you respond yes to 3a, 3b asks if you have filed the Form 990-T? A “no” response requires that the organization provide an explanation on Schedule O. The Form 990-T is a separate form that reports the unrelated business gross income and the related expenses to calculate taxable income and income tax expense, if applicable. We discuss unrelated business income further in our Special UBTI Rules for 990-T Fiscal Year Filers.
What happens when you don’t report foreign accounts?
Failure to report Foreign accounts can generate some scary penalties which is why special attention should be paid when answering question #4. If you respond yes to question 4, you should make sure that you are filing the Form 114, Report of Foreign Bank and Financial Accounts (FBAR) timely to avoid costly penalties.
Questions 1 and 2
Employee payroll and payroll taxes are the main areas of focus with regards to tax compliance for a tax-exempt not-for-profit organization. Thus, the first set of questions inquire about the number of employees and whether all the required payroll tax filings have been made throughout the year.
Question 3- UBI
Question three is about Unrelated Business Income or UBI. UBI results from an organization’s involvement in income producing activities that are unrelated to their tax-exempt mission. Although excessive amounts of UBI are prohibited, a smaller amount of income from unrelated activities merely triggers an income tax on this income. This question asks if the organization has UBI of $1,000 or more during the year and, if so, has it filed the Form 990-T, Exempt Organization Business Income Tax Return.
Other questions ask if the organization was a party to a prohibited tax shelter transaction and whether the organization solicited any contributions which were not tax deductible as charitable contributions. As with all the questions asked on the Form 990, the organization must understand the regulations behind the questions to answer properly. For example, if you do not know how it is possible for you to solicit a contribution that may not be deductible as a charitable contribution, you should discuss this with your advisor so that you understand this area of the law.
Question seven asks several questions relating to fundraising.
The first is about payments in excess of $75 made partially as a contribution and partially for goods or services. For example, when you charge participants $250 to play in your charity golf tournament, that is a payment that would trigger a “yes” answer to this question.
Once you answer “yes” to this question, you are next asked if you notified the donor of the value of the goods or services provided. The reason for this question is because (to continue our example) the participant in your charity golf tournament should not deduct the full $250 as a charitable contribution since that participant received something of value in return – the value of golf and dinner and/or other items included in the golfing “package”.
The IRS wants to make sure you have done your part to provide the participant the amount they are entitled to deduct as a charitable contribution. There are financial penalties assessed against organizations if they fail to provide sufficient information to the donor in these situations.
There are similar questions related to the regulations surrounding non-cash contributions. Specific forms must be filed if the organization sells or otherwise disposes of a contributed item within a specified period after the donation.
Is form 990 part of an organization’s annual audit?
Many not-for-profit organizations have their accountants prepare the Form 990 as part of the annual audit engagement. However, what should be evident from the number and scope of the questions asked on the 990 is that your auditor may not necessarily know the answers to these questions regardless of the scope of the audit performed.
For example, it is unlikely that the auditor will be performing audit work to determine if the organization has disposed of a contributed item within the time frame for reporting such a sale back to the IRS. Since the organization is primarily responsible for the preparation of the 990, the organization has a responsibility to understand the questions and provide the appropriate answers to the Form’s preparer. The preparer of the 990 should review all questions with appropriate management to ensure that to the best of their knowledge and belief, the answers are true, correct, and complete.
Question 14 in Part V is a very unusual one. The IRS asks if the organization received any payments for indoor tanning services and if the answer is “yes” did they file the appropriate tax form and pay the tax associated with these services. I don’t know of any tax-exempt charitable organizations performing indoor tanning services so this question at first appears misplaced on the Form 990. The reason why such a question is included is because the 990 must be completed by organizations that are tax-exempt under sections of the Internal Revenue Code other than 501(c)(3) – public charities. Therefore, it is possible, for example, that a tax-exempt country club could be operating an indoor tanning service and since this organization also files a Form 990, this question would apply to them.
The final questions in Part V are related to the changes implemented from Tax Cuts and Jobs Act. Question 15 asks if the organization had excess compensation (or remuneration of $1,000,000 or more) and question 16 relates to educational institutions subject to excise tax on net investment income (endowment tax), responding “Yes” to these Questions requires that the Organization file Form 4720.
We encourage you to understand every question on the form, there will be some questions that simply do not apply to a 501(c)(3) tax-exempt charity. However, we caution not to assume the question is meant for some other type of organization. The safest approach is to ask your CPA for guidance!
Read our Form 990 blog series