5 Things to Review as a Reader of Form 990
Whether someone is a donor, board member, or community stakeholder, understanding what to look for when reading the IRS Form 990 can help draw meaningful conclusions about an organization’s health and transparency. Form 990 is a public document filed by a tax-exempt organization that can be found on Candid and sometimes on an organization’s website, as well. Some members of the public will use Form 990 as their main source of information about an organization. The way that information is presented on Form 990 can impact how the public perceives an organization. As a reader of a 990, here are 5 key areas to review.
1. Mission Statement and Program Services
The first key areas to review when reading Form 990 are the mission statement and the description of program services. These descriptions should give an accurate overview of what the organization does. The mission statement can be found in Part I, Line 1, as well as Part III, Line 1 of Form 990. Part I, Line 1 will give a brief overview of the mission, and Part III, Line 1 will provide further details of the mission. Program service descriptions can be found in Part III, Lines 4a-4d. It is important that the program descriptions support the mission of the organization. If an organization does not take time to fully explain its mission and program service accomplishments, this could be an indicator of a lack of transparency or organizational accountability.
2. Governance, Management, and Disclosure
The second key area to review when reading Form 990 is Part VI, Governance, Management, and Disclosure. Appropriate governance is essential for any nonprofit organization, and governance practices are among the most visible indicators of organizational integrity. If an organization answers “no” to any questions about governance, its policies, and disclosure, that might raise a question to the reader as to how the organization is being run. Per the IRS Form 990 instructions, whether a particular policy, procedure, or practice should be adopted by an organization depends on the organization’s size, type, and culture.
3. List of Officers and Board Members
The third key area to review when reading Form 990 is Part VII, Compensation of Officers, Directors, Trustees, Key Employees, and Independent Contractors. In this section, readers can review compensation to determine reasonableness compared to industry standards. Officer and board member compensation is also one of the most publicly scrutinized areas of Form 990, as disproportionately high pay relative to an organization’s size or mission can raise concerns among donors, the media, and regulators about whether resources are being directed appropriately.
Additional compensation details can be found in Schedule J of Form 990 for those with compensation greater than $150,000. Other items a reader can look for in this section are whether it appears that the correct people have been listed, such as the top management official and top financial official, often the CEO and CFO, which are always required to be listed as officers.
4. Statement of Functional Expenses
The fourth key area to review when reading Form 990 is Part IX, the statement of functional expenses. When reviewing the statement of functional expenses, it’s important to look at the ratio of program service expenses, management and general expenses, and fundraising expenses, as a percentage of total expenses.
Program service expenses are related to activities that further the organization’s exempt purpose and should make up a large portion of the expenses listed on this statement. Management and general expenses relate to the organization’s operations and management functions, such as management salaries and legal fees. Fundraising expenses are just that – expenses that the organization incurred from fundraising activities. It is important to remember when reviewing the statement of functional expenses that there is no universally mandated threshold for what constitutes an acceptable program service percentage, and that each organization should be evaluated independently.
5. Public Support Test
The fifth key area to review when reading Form 990 is the public support test on Schedule A. To maintain tax-exempt status, a 501(c)(3) organization must meet the public support test, which requires that at least 33.3% of an organization’s funding comes from the public. To pass this test, an organization must show that over 33.3% of its total support comes from government units, publicly supported organizations, or the public. The public support test is calculated over a five-year period and if an organization fails the test for two consecutive years, it can result in loss of public charity status.
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