Before 2008, preparers always had to be careful not to file an incomplete Form 990. Why? Because the Form 990 is technically an information return and not a tax return, the IRS treats an incomplete filing as a return never filed. Then, when the “new” Form 990 was introduced in 2008, exempt organizations got a bit of a grace period to adjust and learn about the much more voluminous and complicated Form 990. The IRS was not as quick to “bounce” incomplete returns back to filers.
Alas the grace period has ended, and it is now essential once again for an exempt organization to ensure that they file a complete Form 990. A simple way to ensure that an exempt organization is filing a complete Form 990 is to file that return electronically. This is because an incomplete return will not be accepted electronically.
Margaret Von Lienen of the Internal Revenue Service indicated that, of the approximately 29,000 Forms 990 the IRS received since the Form 990 filing season kicked off in January 2018, about 7% of them were determined to be incomplete.
Here are the top reasons why a filed Form 990 was considered incomplete:
- Missing or incomplete Schedule A
- Missing or incomplete Schedule B
- Missing Schedule O
- Missing the required response to Part VI, Line 11
- Missing the required response to Part VI, Line 19
If a “small” exempt organization (annual gross receipts of less than $1,028,500) fails to file their Form 990 (or files an incomplete return) by the applicable due date (including any extensions), it must pay a penalty of $20 a day for each day the return is late, up to a maximum of $10,000. All other exempt organizations that fail to file their Forms 990 (or that file an incomplete return) by the applicable due date (including any extensions), must pay a penalty of $100 a day for each day the return is late, up to a maximum of $51,000.
If an exempt organization happens to receive an incomplete return notice from the IRS, the exempt organization should explicitly follow the directions in the letter promptly (within 10 days of receiving the notice) to avoid late filing penalties.
- Late filing penalties for filing an incomplete return oftentimes can be abated by preparing and submitting a reasonable cause penalty abatement letter.
- Automatic revocation of tax-exempt status occurs when an exempt organization that is required to file an annual return (e.g., Form 990, 990-EZ, Form 990-N, or 990-PF) fails to do so for three consecutive years.
In summary, exempt organizations that receive an incomplete return notice from the IRS should consider the following tips:
- Follow the instructions to provide the missing or incomplete information but remember that the IRS may not have identified everything. It is the exempt organization’s responsibility to file a complete and accurate return.
- Be sure to sign the return.
- Be sure to attach a copy of the IRS notice received in the response.
- Be sure to include a reasonable-cause explanation of why the exempt organization didn't initially submit all the required information with the return.
- To avoid penalties, send the corrected return and reasonable-cause statement within 10 days of the date of the notice; the date that the IRS receives a complete and accurate return is the date they consider such return filed.
AICPA Not-for-Profit Section members can download the Form 990 Organizer and Form 990 Checklist(s), as well as several schedule-specific resources, in the Not-for-Profit Tax Compliance Resource Library.