By Robert C. Clothier • Governance Consultant
For many non-profit trustees, the annual review of IRS Form 990 is treated as a routine, bureaucratic chore. It is frequently viewed as a dense, complex tax document best left to the organization’s auditors or chief financial officer. This perspective is not only mistaken; it is dangerous. The Form 990 is far more than a simple financial report card. It is also a governance self-report and a powerful marketing tool.
Under the law, board members bear a fiduciary duty of care to their organization. This duty requires trustees to be active overseers of the non-profit’s financial health, compliance, and strategic direction. When a board collectively signs off on Form 990 without thoroughly understanding its contents, it is taking risks. This overview is designed to identify both the opportunities and risks inherent in the Form 990, giving examples of how oversight failures can have real-world ramifications.
The Public Nature of Form 990
The most fundamental point that trustees often fail to grasp is that Form 990 is completely public. Unlike individual or corporate tax returns, which remain confidential between the taxpayer and the IRS, Form 990 is designed for public scrutiny. Databases like Candid (formerly GuideStar) and ProPublica index these documents automatically, making them instantly downloadable by journalists, major donors, community activists, and competitors.
When someone wants to evaluate the health or integrity of your non-profit, they do not read your glossy annual report; they download your Form 990. As a result, every narrative answer, every financial line item, and every policy check-box must be treated as a public statement. If your board views the 990 purely as a compliance filing, you are missing the fact that it serves as your organization’s most visible public report card. [Read: The IRS Just Joined Your Marketing Team, ~ Editor]
The very first page of the Form 990 (Part I) asks for a description of the organization’s mission or significant activities. Part III — titled “Statement of Program Service Accomplishments” — similarly asks for a brief description of the organization’s mission. This is not the time to say something simple like “public charity” or “education” or “art museum.” It is the time to market your organization, its mission and its accomplishments. Say it loud and proud!
Critical Components of the Form 990
While the financial tables in Parts VIII (“Statement of Revenue”) and IX (“Statement of Functional Expenses”) capture significant attention, the most substantial liabilities for trustees often lie in the non-financial sections. There are three specific zones where board members are consistently unknowledgeable: governance disclosures, compensation metrics, and transaction transparency.
1. Part VI: Governance, Management, and Disclosure
This is arguably the most critical section for a trustee, yet it contains zero numbers. Part VI asks a series of “Yes” or “No” questions regarding how the board operates. The IRS wants to know: Do you have a written conflict of interest policy? Do you have a whistleblower policy? Do you actively monitor and enforce compliance with these policies? Have you made any changes to these policies? While these policies are not required by federal law, the IRS considers them to be best practices. Trustees should ask why there are any missing policies.
More concerning are “Yes” answers that aren’t really true. Many trustees are completely unaware that their organization checks “Yes” to these questions while practicing something entirely different. Checking “Yes” to a policy that does not exist, or that you do not actively enforce, or have never read, is a compliance red flag that can invite immediate regulatory scrutiny during an audit.
Section B, Question 11 asks whether the organization provided a complete copy of the Form 990 to all members of its governing body before filing, and asks for a detailed description of the review process. Trustees, therefore, must review the Form 990 before filing, and must satisfy for themselves that the answers are true and that they don’t raise issues that warrant further attention by the board.
2. Part VII: Compensation of Officers, Directors, Trustees, and Key Employees
Part VII requires the disclosure of salaries, bonuses, and benefits not just for the CEO, but for “Key Employees” and “Highest Compensated Employees” who earn over certain thresholds. This means all forms of compensation and includes deferred compensation and non-taxable benefits (e.g., housing).
These numbers are scrutinized by the IRS, employees and donors, and they can get a lot of attention in the press. Who is likely the highest-paid employee at a large public university? Probably the football coach. How did a retiring CEO get paid multiples of her salary in her final year? Likely a big, and previously unknown, deferred compensation package. All of this comes out in the Form 990.
Is such compensation reasonable? Trustees often assume that if a compensation package feels reasonable within their local corporate circle, it is legally acceptable. They fail to realize that the IRS enforces strict rules regarding “reasonable compensation,” which must be backed by independent market data from peer organizations. Indeed, Part VI asks just that: “Did the process for determining compensation of the following persons include a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision?” Many board members have no idea and won’t even think to ask if they don’t themselves review the Form 990 carefully.
3. Director Independence and Transactions with Interested Persons
Are there family or business ties among directors and/or key employees? Part VI wants to know. So, for example, if you have trustees who are family members (e.g., father and daughter), this must be disclosed. Or if trustees do business with each other (e.g., one trustee serving as a financial advisor or lawyer to another), this must be disclosed. All of this goes to director independence and is closely watched by others.
Does your nonprofit have business relations with board members or their businesses? Schedule L is designed to flag insider deals, nepotism, and self-dealing. It requires disclosures of loans, grants, or business transactions between the non-profit and any “interested persons” — which includes board members, executives, and their immediate family members. Most transactions with interested persons are not considered best practice by the IRS and are viewed negatively by employees, donors and community members. Trustees are often ignorant of what constitutes a reportable conflict. They might vote to award a printing contract to a fellow trustee’s business as a friendly gesture, completely unaware that this must be explicitly disclosed on Schedule L for the public to see.
Real-World Ramifications
When trustees fail to scrutinize the Form 990, they risk exposing themselves and their organizations to regulatory enforcement and reputational harm. Here are three potential examples of where things can go wrong.
Example 1: Excessive Executive Compensation
The board of a mid-sized healthcare non-profit wanted to reward their high-performing CEO. They approved a generous bonus structure and paid for a country club membership, relying on the executive’s assurance that it was “standard practice.” The board did not take the time to review Part VII or Schedule J of their subsequent Form 990, where these perks were explicitly detailed.
A local investigative journalist downloaded the 990 from GuideStar and published a front-page story detailing how the charity spent donor funds on luxury perks while cutting community services. Because the board could not prove they used an independent, data-driven process to establish “reasonable compensation” (as required to protect themselves under IRS Intermediate Sanctions rules), individual trustees risked personal penalties, and the non-profit stood to lose grants.
Example 2: Undisclosed Conflict of Interest
A university trustee owned a commercial construction firm. When the university needed a roof repaired, the trustee offered to do it at a slight discount, which the board accepted. The organization checked “Yes” on Part VI regarding its conflict of interest policy, but it failed to record the transaction details on Schedule L.
During an independent audit, the missing Schedule L data was exposed, revealing that the board had falsely affirmed their active monitoring of conflicts in Part VI. The organization was hit with a public penalty for filing an incomplete and inaccurate return. The fallout forced the board chair to resign and caused alumni to cut back on giving.
Example 3: Program Expense Misallocation
Donors look closely at Part IX (Functional Expenses) to calculate a non-profit’s efficiency ratio — the percentage of funds spent on direct programs versus overhead and fundraising. A social services charity lumped all of its direct-mail marketing costs under “Program Expenses” because the mailers contained an educational message. The board signed off on the 990 without looking at the line-item allocation.
Watchdog agencies flag organizations that use aggressive accounting to inflate program percentages. Charity rating sites may downgrade a non-profit for misleading reporting. Donors may pull back.
Quick Trustee’s Form 990 Review Checklist
- Verify Part VI, Question 11: Ensure the full board actually received and reviewed the exact draft prior to its submission to the IRS.
- Audit the Policies: Confirm that the conflict of interest, whistleblower, and document retention policies checked “Yes” actually exist and are enforced.
- Check Schedule L for Hidden Connections: Review all business relationships or loans involving board members and executives to ensure accurate reporting and compliance with the board’s conflict of interest policy.
- Examine the Program-to-Overhead Ratio: Look at Part IX and ensure that fundraising and administrative costs are accurately categorized and defensible to donors.
- Read the Mission Statement (Part I & III): Ensure the statement of mission matches that approved by the board and the summary of achievements makes the best case for your organization.
The fastest way to do this well is to review your organization’s Form 990 exactly as a donor, journalist, or prospective board member would. Pull up your organization’s 990 on 990 Scout and read it the way a donor or journalist will.
Conclusion
Fiduciary duty cannot be delegated to an external CPA. If you sit on a non-profit board, you own the contents of that organization’s Form 990. By ensuring careful and active review, trustees can transform the Form 990 process from a compliance burden into an asset — a signal to the world that your board is well-run, ethically sound and upholding its fiduciary responsibilities.
Editor’s Note: Form 990 is more than an IRS filing—it is often the first document a prospective donor, journalist, or board member reviews. If you’d like to better understand what others see, visit our Form 990 Resource Center.
