The Annual Tax Filing for Nonprofits

A previous article provided an overview of how to apply for Federal Tax Exempt Status for a new nonprofit organization. In order to apply for tax-exempt status, nonprofits must complete and submit Form 1023 (or in some circumstances, the streamlined Form 1023-EZ). This form must be submitted electronically by creating an account at pay.gov. Because the Form 1023 is a lengthy and complex form that requires detailed information about the nonprofit’s programs, financial projections, compensation practices, and board governance, it is advisable to work with a legal or tax professional.

Upon approval, the Department of Treasury will send a determination letter to the nonprofit organization which can be used to confirm its tax-exempt status. Among the details contained in the letter is whether or not the organization is required to file the annual information return (Form 990, 990-EZ, or 990-N) with the IRS. While some organizations, such as churches, are not required to file the annual information return, most nonprofit organizations are required to do so.

 If an organization is required to make the annual filing, the determination letter will contain language to the effect that the entity is required to file the information return and, if it fails to do so for three consecutive years, its tax-exempt status will be automatically revoked.

 In many ways, the annual information form mirrors the original tax-exempt application form, and serves as periodic check-up to ensure that the organization is operating within its non-profit purposes, consistent with the information used to obtain exempt status. At first glance, the Form 990 looks like a tax return form. Yet its purpose is to confirm that the organization has remained qualified for tax exemption.

The form asks for descriptions of the mission and activities of the organization, as well as detailed financial reporting, and information about the organization’s governance processes. An organization must disclose the amount of income it received for the year, and break it down into categories such as donations, grants, and program revenue. The organization must also disclose the amount of its expenditures for the year, and break those down into categories including grants given, compensation paid, and expenditures to raise funds. The entity must disclose its total assets and liabilities each year. Questions are asked about the entity’s governance, including specifics about membership, the board of directors, and the governing documents.

The Form 990 is due on the fifteenth day of the fifth month following the end of the organization’s fiscal year. For organizations on a calendar year, the due date is May 15th of the following year.

All of the information disclosed on the annual filing is public information. Nonprofit organizations are required to provide copies to the public upon request.