Common Return Preparation Mistakes

As the filing deadline (for June 30 year-end organizations) and the extended deadline (for calendar year organizations) approach, it’s important to avoid common return preparation errors. Some of these errors are highlighted in this edition.

Form 990

Common errors occurring when completing Form 990 include the following:

• Return is not electronically filed even though it is mandatory.
• The tax period reported on the return does not agree with the IRS’s Business Master File and the organization is not filing a short period or final return. Additionally, the organization has not clearly indicated a change in accounting period.
• Activity for the year is reported on an incorrect form year.
• The name of the filing organization reflected on Form 990 does not agree with the IRS records nor is the “name change” box in Item B selected and required documentation included with the return.
• The final return box in Item B is incorrectly selected, closing the entity’s tax-exempt status and creating problems when the organization attempts to file returns in future years.
• Form 990 is submitted with an EIN that does not belong to the filing organization. Organizations may have filed a return without an EIN when returns could be filed by paper. However, it is unlikely the return would be accepted if electronically filing a return without an EIN.
• Item F on Form 990, page 1, is not completed.
• Failure to check the box on Form 990, Part I, line 2, that the organization has sold, exchanged, disposed of, or transferred more than 25% of its net assets.
• Fundraising fees paid to officers, directors, trustees, key employees, and disqualified persons are often included on Form 990, Part I, line 15, rather than Part I, line 16a.
• An improper individual signs the return (Part II) because of the differing definition of officer throughout the return.
• New program service activities are not disclosed on Part III, Line 2, and described on Schedule O.
• Related organizations are not correctly identified, and not reported correctly on Part IV, lines 33 and 34, and Schedule R.
• Part V, line 4, related to reporting foreign financial accounts, is not completed (or is not completed correctly).
• Nonvoting directors and trustees are reported in Part VII.
• Deferred compensation from Section 457 plans and certain severance agreements is omitted from the return (Part VII).
• Part VII includes the incorrect amount for an officer’s or employee’s compensation when the individual is employed by a third party (e.g., common paymaster arrangement, loaned employee, or management company employee).
• Because related organizations are misidentified, compensation paid by these related organizations is omitted from Part VII.
• Donated services and facilities are recorded in Part VIII as revenue or in Part IX as expenses.
• Part IX does not accurately reflect the allocation of expenses.
• Math errors exist on the return because the total line does not sum to the detail reflected on the return. This includes the following:
  • Revenue included on Part VIII lines 1a-11e does not agree with the total reported on Line 12.
  • Total Functional Expenses on Part IX, Line 25 does not agree with the total expenses reflected on lines 1-24e.
  • The End of Year Net Assets/Fund Balances reported on Part X, Line 33, Column (B) does not agree with the total on line 16.
  • Beginning of Year Net Assets/Fund Balances reported on Part X, Line 33, Column (A) does not agree with the total on line 16.The requirement to electronically file the return should reduce or eliminate the math errors previously mentioned.
• Schedule A, when required, is not included with the return.
• When Schedule A is prepared, Part II is incorrectly completed as indicated:
  • Line 1 improperly includes or excludes grants because unusual grants are not properly identified.
  • Donations from major contributors are not tracked and therefore line 5 is improperly completed.
  • Contributions from private foundations and Section 509(a)(2) organizations are not included in the public support test.
  • Form 990 is prepared using the accrual method of accounting, yet donor contributions used for the Schedule A calculations are not.
  • Income from special events (normally reported on line 9) is improperly reported.
  • Public support percentages are trending down for the first five years, yet the organization does not monitor this trend or make support changes within the five-year period.
  • Organizations improperly analyze and report membership fees for Schedule A.
• Events that should be disclosed, such as loans, grants, and business transactions with interested persons, are not properly reported on Schedule L.
• Schedule M, when required, is not included with the return (commonly due to a failure to value noncash donations associated with special events).
• Schedule O is not included with the return. Schedule O is required to be submitted by all filing organizations.

Board review of 990 reminder

While board review of Form 990 (Return of Organization Exempt from Income Tax) is not statutorily required, it is a prudent practice. An organization’s review procedures are reported on the Form 990, which is publicly disclosed. In addition to being important for tax compliance, the Form 990 is also an important tool for communication with stakeholders. It is important to consider “the story” the forms are telling about the organization. The readers of the Form 990 may be potential donors and grantors that want to know if the organization’s mission aligns with their purpose, potential board members looking for information about the organization, or external evaluators determining the effectiveness of programs. While more than a cursory review of Form 990 may seem overwhelming, focused board review is important. Note that the additional information disclosed on Schedule O, “Supplemental Information to Form 990 or 990-EZ,” is an integral part of the return and should be reviewed carefully where it is referenced in the return. For a helpful tool to assist a board member in reviewing the Form 990, see Checklist C501 in PPC’s 990 Deskbook.

Form 990-PF

Common errors occurring when completing Form 990-PF include the following:

• Failing to complete and submit Schedule B or check the box on Line 2, Part I, to certify that Schedule B is not required. Schedule B is open to public inspection for an organization that files Form 990-PF (do not include social security numbers).
• Expecting (or forcing) Part I to crossfoot. Columns (a), (b), (c), and (d) should not foot across for foundations using the accrual accounting method. However, column (a) of Part I and columns (a) and (b) of Part II should flow together with Part III (and balance).
• Failing to complete Part II. Foundations with total assets of $5,000 or more at any time during the year must complete all of columns (A), (B), and (C). Foundations with total assets less than $5,000 at all times during the year must complete all of columns (A) and (B) and only line 16 of column (C).
• Using the incorrect basis when reporting the sale of appreciated donated assets. A foundation assumes the donor’s basis in appreciated donated assets. This incorrect reporting can occur if the stock is recorded at FMV when received instead of the donor’s carryover basis.
• Part VI-B, Questions 1a through 1d, answered incorrectly. These questions require careful attention. Items 1(a)(1) through 1(a)(6) are factual inquiries—an affirmative answer indicates an act of self-dealing. However, question 1(b) should be answered “No” if the acts occurred and the self-dealing exceptions were met [for all “Yes” answers to 1(a)(1) through 1(a)(6)]. No self-dealing violation is indicated by a “No” answer to item 1(b). Note: The double negative inherent in the wording is confusing.
• Part VI-B, Questions 3a and 3b, answered incorrectly. These items request information as to whether the foundation is subject to the tax on excess business holdings. If the permitted holdings (i.e., percentage limitations) in an active business enterprise are exceeded, this results in exposure to excise tax on excess business holdings. Related-party and flow-through rules on the ownership percentage must be considered in determining if the limitations have been exceeded.
• Foundation made grants to individuals for travel or study without obtaining IRS advance approval. If Part VI-B, Question 5(a)(3), is answered “Yes” and advance approval was not obtained, the foundation may be liable for the tax on taxable expenditures.
• Expenditure responsibility reports not included with Form 990-PF for all required years. Foundations will sometimes report a grant earlier than when required, but early reporting does not alleviate the requirements to satisfy the reporting requirements for each tax year for each grant made during the tax year that is subject to the expenditure. Question 5d of Part VI-B asks if the foundation is claiming exemption from the excise tax because it maintained expenditure responsibility over the grants.
• Tax on excessive executive compensation is not properly allocated between related organizations. The Section 4960 tax is reported and paid on Form 4720, Schedule N, pro rata by all related organizations (both the applicable tax-exempt organization and for-profit organizations). Line 8, Part VI-B, must also be answered.
• Parts IX and X are not completed. All domestic foundations, foreign foundations claiming status as a private operating foundation, and private operating foundations described in IRC Sec. 4942(j)(3) or 4942(j)(5) must complete Parts IX and X.
• Improperly calculating the private operating foundation test reported in Part XIII. The forms and instructions can be misleading when performing the income test required by Reg. 53.4942(b)-1(c).
• Failing to complete Part XIV. Supplementary information must be provided if the foundation has assets of $5,000 or more at any time during the year. Lines 2(a) through 2(d) should be completed unless the box in line 2 is checked indicating that the foundation makes grants only to pre-selected organizations. If Part I, line 25 has an amount and the box for Part XIV, line 2 is not checked, Part XIV, line 3 must be completed.

Practical Consideration: In addition to avoiding these common errors, be sure to complete all the required parts of the return, enter “N/A” on lines that do not apply, and answer “Yes,” “No,” or “N/A” to each question. Filing an incomplete return can result in the potentially steep failure to file penalties being incurred.