MLR

Form 990: What the watchdogs are watching

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Several years have passed since the IRS revamped Form 990 Informational Return for Tax Exempt Entities to its current, voluminous, core form which often needs numerous additional schedules.

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Nonprofit entities and tax preparers seem to be getting a handle on the new form despite continued IRS modifications and clarifications. They are also becoming more comfortable with the document being publicly available upon request and published on websites such as Guidestar.org.

However, there are increased pressures from public scrutiny that should be making
nonprofits and their advisers take a second look at their Form 990.

Not only is the IRS heavily examining these forms, but watchdog agencies are also reviewing Form 990s so they can rate charities – and their rating reports are gaining popularity with donors and grantors alike.

There are a variety of watchdog groups, and most make their reports available on their websites with in-depth search capabilities. Some of the more popular groups include Charity Watch, Charity Navigator, Guidestar and JustGive.

Charity Navigator’s goal is to “advance a more efficient and responsive philanthropic marketplace by evaluating Financial Health and Accountability and Transparency of 6,000 of America’s largest charities.” Charity Watch is a “charity rating and evaluation service dedicated to helping donors make informed giving decisions.”

Traffic to these sites is on the rise, and they experience large spikes during times of crisis or natural disasters. Rating of a nonprofit could influence a potential donor’s decision to contribute to that particular nonprofit.

Being aware of the rating criteria employed by the watchdog groups may help favorably improve a nonprofit’s overall ratings on watchdog websites and increase the likelihood of potential donors making contributions to the organization.

What are some of the criteria watchdog groups use in their evaluations of charities? Most relate to financial health, transparency or governance. Obviously, accurate financial statements and reporting are important for financial health metrics. They also review:

  • Conflict of interest policy which is renewed annually
  • Whistle-blower policy
  • Record retention and destruction policy
  • Donor privacy policy
  • Policy to document board minutes
  • Policy to provide Form 990 to the governing body in advance of filing
  • Policy to have financial statements audited and an audit committee established
  • Process for determining top management official’s and other key officers’ salaries
  • Process for Reviewing Form 990

Watchdogs are looking at revenue and expense growth from year to year, working capital ratios and years of available assets. In addition, heavy emphasis is placed on percentages of program, administration and fundraising expenses.

Nonprofit organizations should carefully review their methods of allocating these functional expenses and make sure they are accurate and reasonable for their service type. Nonprofits may have greater opportunity to improve watchdog ratings of their organization under the transparency and governance metrics.

Part IV of Form 990 has a series of governance questions that must be answered either “yes” or “no.” Negative answers will degrade ratings with watchdog groups, so it is important to implement policies and procedures, if possible, that result in affirmative answers to these questions.

Nonprofits should also review their Form 990 to ensure that required salary disclosures are provided. The salary of the organization’s chief executive officer is required to be disclosed regardless of the amount, but this information is often missing from the Form 990. Nonprofits should consider reviewing the composition of your board of directors and address issues if you have fewer than five independent members.

In addition to Form 990, watchdogs are reviewing nonprofits’ websites for transparency. Best practices include current listings of board members and key staff, published audited financial statements and Form 990, and a donor privacy policy disclosure. Including these items on the nonprofit’s website could help improve their scoring for transparency metrics with little additional effort from the nonprofit.

Nonprofit organizations should be highly cognizant of charity watchdog groups and their rating criteria. The most important step a nonprofit should begin with is to review the organization’s current watchdog ratings. If the scores are high, take advantage and publicize these ratings. If they are low, determine what areas are contributing to these low ratings and take steps to address these areas to give the nonprofit the highest scores possible.