The Buried Truth in Your Chapter 990s and How You Can Access It

What are 990s?

990s are nonprofit tax forms filed annually by applicable nonprofit organizations such as private foundations, small nonprofits, larger nonprofits, public charities, sororities, fraternities, and associations. Although these businesses typically don’t have to pay federal income tax, they still have to declare their income. A 990 form is how they report their income to the IRS and retain their tax-exempt status.

There are traditionally twelve parts of a 990 form. The form begins with a nonprofit’s statement of purpose and includes governance all the way to financial statements from the previous fiscal year. A finished annual report will give the IRS, and public viewers, a detailed understanding of what a nonprofit does and how they work towards its organization’s mission.

Think of 990s as a way for a nonprofit business to prove that they’re financially honest while demonstrating their overall mission.

Who Uses 990s?

Most commonly, 990s are used by nonprofit organizations to document their financial history. The vast majority of tax exempt organizations, including sororities, fraternities, and associations, file a 990 IRS form at the end of the tax year.

There are several types of 990s that nonprofits have to file depending on the size of their gross receipts and total assets. Possible types of 990s include a 990-EZ and a 990-N. For example, a nonprofit with gross receipts of $50,000+ must use a form 990 EZ.

Regardless of income, every nonprofit must file a 990-PF annually.

Why are 990s so Important?

At their core, 990s have two distinct functions. The first and more straightforward of the two is that a 990 must be submitted to the IRS for them to grant a nonprofit their tax-exempt status. Failure to submit a 990 three years in a row will result in an organization’s tax-exempt status being revoked.

Another vital function of 990s is that they act as a way to communicate a charity‘s mission, as well as document their sustainability to donors. As 990s are visible to the general public, a potential investor can check out a nonprofit’s 990 to determine if the charity is fiscally sound and sustainable in the long term.

Key information, from how a charity uses and sources its income to its financial reserves, is all present on a 990. If a nonprofit has a well-documented 990, they’ll be able to demonstrate to potential donors exactly why they should receive additional funding.

A 990 tax form can be used to tell the story of a nonprofit, garnering support and boosting potential donations. Part of the 990 process involves documenting the breakdown of a nonprofit’s mission and how they are working to achieve those goals, as well as other useful financial information.

Due to this, a comprehensive 990 form can result in a convincing document that details the good a nonprofit is doing in the world. When individual donors read these statements, and also see a history of financial honesty, they are more likely to trust a nonprofit and follow through with donating.

In addition to maintaining a tax-exempt status, 990s can be converted into a successful PR tool.

Why Collect 990s?

Why would Headquarters/National collect 990s from chapters?

Compliance
Commitment to competence
Risk identification
Financial risk
Integrity and ethical values
Tax exempt status
Member trust

When thinking about all the exciting plans you have for your chapters, fraud and embezzlement policies likely don’t jump to the front of the line. Yet you might feel a pang of anxiety when reading the headlines of another seemingly infallible organization collapsing due to malicious activity.

We’ve all seen headlines about embezzlement at local nonprofits. You can’t help thinking:

How could someone like that get into a position of responsibility?
How could they get away with their crime for so long?
Weren’t there any warning signs?
Didn’t the organization have controls in place?

It’s time to shake off the “it would never happen to us” mindset. In the end, the time spent organizing prevention strategies will be less costly than the legal, financial and reputational damage of the fraud crisis.

Fraud Happens

In an economic climate that makes every dollar precious, no organization wants to lose 5% of its annual revenue to fraud. In its 2016 Report to the Nations on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners found that the typical organization, no matter its size, loses a median of $150,000 from a single case of occupational fraud. In fact, 80% of companies said they experienced fraud in past years.

Risk Factors in Chapter Financial Mismanagement

Chapter leader positions are a great opportunity for members to learn the ropes of fiscal responsibility. However, with so much on their plate already and a limited background in organizational finances, it increases the chances for mistakes. Recognizing and identifying the risk factors of financial mismanagement can allow you to offer help before the problem reaches crisis level. Ask yourself if any of the following factors are putting your chapters at risk:

Insufficient training and orientation resources
Limited time for officers to spend on chapter financial duties
Annual turnover of chapter officers
Lack of financial policies and procedures

Prevent Chapter Financial Fraud

Even with training and procedures in place, you can’t rule out the chance for fraud. There are, however, steps you can take to minimize your chapter’s risk.

Ask yourself if your chapter leaders would be comfortable seeking you out for help. They should feel confident you are ready and able to respond appropriately. Let chapters know that if they see something, they should say something and will be protected from repercussions. Establishing a whistleblower policy will ensure chapter leaders who report are shielded from retaliation. You can also consider an anonymous hotline run by a third party that can be used to report unethical behavior.

While financial policies and procedures may not sound warm and fuzzy to chapters, in the end, having tight guidelines to follow will make them feel more secure. Here are some items to consider adding to your policy:

Establish term limits for chapter leaders and volunteers.
Require 2-3 representatives to have access to review online banking.
Provide technology that can automate bank reconciliation and have it reviewed by chapter leadership on a monthly basis.
Separate financial functions such as handling from record-keeping or purchasing from payables.

Virtual Banking to Minimize Financial Fraud

It can be daunting to oversee these prevention strategies for all of your chapters. Consider an online banking platform that can automate these functions for you and your chapters. An automated platform can minimize financial risk for chapters and take some administrative duties off National.

A virtual banking platform eliminates the burden of reporting while at the same time providing fraud controls like spending approvals and notifications. Consolidated platforms have one master bank account for National divided into separate virtual bank accounts for each chapter. Chapters can interact separately while also allowing National to monitor accounts for fraud red flags.

Alternatively, you can build up the resources to manage chapter finances at National. Chapters may see this as a loss of control, so it’s important to provide complete transparency and adequate response times to payment and information requests. By outsourcing back-office processes, officers and volunteers can focus their time on chapter programming and engagement.

Fraud can happen to any organization — having the proper plans in place can reduce the risk to your chapters and the headache of dealing with the consequences of being unprepared.