Filing IRS Form 990 is a crucial process for nonprofit organizations, not only because it is a legal requirement but also because it serves as a reflection of your nonprofit’s transparency, accountability, and financial integrity. However, many nonprofits make tax return mistakes that can lead to penalties, complications with the IRS, or even loss of public trust. Understanding these mistakes and how to avoid them is vital for maintaining your nonprofit’s good standing. Below, we share with you the most common tax return errors and provide strategies to help you avoid them.
1. Missing the Filing Deadline
One of the most common tax return mistakes is failing to submit Form 990 by the deadline. Nonprofits must file their Form 990 by the 15th day of the fifth month after their fiscal year ends. If this deadline is missed, the IRS may impose penalties that can quickly accumulate, potentially costing the organization up to $10,000 or more.
To avoid this tax return error, it’s important to stay organized and plan ahead. Set calendar reminders and ensure that all necessary documents are prepared well before the filing deadline. If you’re concerned about meeting the deadline, you can apply for an automatic six-month extension using IRS Form 8868. However, keep in mind that an extension only postpones the filing date, not any potential penalties for late payments.
2. Failing to Report Accurate Revenue and Expenses
Nonprofits are required to provide a detailed breakdown of their revenue streams and expenses on Form 990. One of the most frequent tax return errors is inaccurately reporting financial information, such as failing to categorize program service revenue, misreporting donated goods or services, or inaccurately classifying grants.
To prevent such mistakes, nonprofits should maintain meticulous financial records throughout the year. Working closely with an experienced accountant or bookkeeper is key to ensuring all income and expenditures are properly categorized. Nonprofits should also consider using accounting software designed specifically for nonprofits to streamline the reporting process and ensure accuracy.
3. Incorrectly Completing Schedule B (Contributors)
Schedule B of Form 990 requires nonprofits to report substantial contributions received from donors over a certain threshold. A common mistake is either failing to file this schedule or reporting incorrect amounts. This tax return error can lead to penalties or audits by the IRS.
Nonprofits should track and accurately report all donations that meet the threshold for Schedule B. If you are unsure about the contribution limits or how to properly complete the schedule, consulting a tax professional can help avoid costly mistakes.
4. Misclassifying Employees and Independent Contractors
Misclassifying workers as independent contractors instead of employees is a common tax return mistake that can lead to significant penalties. This misclassification can result in back payroll taxes, fines, and potential audits. It’s critical for nonprofits to understand the difference between employees and independent contractors and classify them correctly.
The IRS provides guidelines to help determine whether a worker is an employee or an independent contractor. When in doubt, it’s best to consult a tax professional who can assist with proper classification. This helps ensure compliance with tax regulations and prevents potential issues during future audits.
5. Underreporting Lobbying Activities
For 501(c)(3) organizations, there are specific guidelines regarding lobbying activities. A common mistake is underreporting or failing to report lobbying expenditures and activities altogether. This tax return error can jeopardize the nonprofit’s tax-exempt status and expose the organization to IRS scrutiny.
Nonprofits that engage in lobbying should keep thorough records of time spent by staff or board members on lobbying activities, as well as any expenditures related to such efforts. Schedule C of Form 990 is specifically designed to report lobbying activities, so ensuring that this section is completed accurately is essential for compliance.
6. Failing to Include All Required Schedules
Form 990 requires various supplementary schedules to be completed based on the nonprofit’s activities. A common tax return mistake is neglecting to include one or more of these required schedules, which can delay the processing of the return or lead to penalties.
To avoid this error, nonprofits should carefully review the IRS guidelines for Form 990 and make sure they include all applicable schedules. Developing a checklist before submission can help ensure that all sections are completed properly and nothing is overlooked.
7. Overlooking the Public Support Test
501(c)(3) organizations must pass the public support test to maintain their tax-exempt status. If the nonprofit fails to meet the required thresholds, it could risk losing its tax-exempt status. An overlooked tax return mistake in this area can lead to serious consequences, including the revocation of your nonprofit’s status.
Nonprofits should track donations and contributions throughout the year and accurately report them in the appropriate sections of Form 990, particularly on Schedule A. It’s important to distinguish between public and private donations to ensure compliance with the public support test.
Conclusion
Filing Form 990 is an essential process for nonprofits to demonstrate transparency and maintain their tax-exempt status. By understanding and avoiding common tax return mistakes, nonprofits can ensure their filing is accurate and complete, minimizing the risk of penalties or IRS scrutiny. Regular record-keeping, attention to detail, and professional guidance are crucial to preventing tax return errors and maintaining good standing with the IRS.
Ensuring your nonprofit stays on top of these best practices will not only save you from potential issues but also bolster your reputation with donors, funders, and the public. Meanwhile, if you need a service for filing articles of incorporation in Florida, A2Z Filings is your best choice! Get in touch with us today.
