What the IRS Form 990 Really Signals to Regulators

SPEAKER_01: 0:00

Welcome to the Nonprofit Compliance Brief, where we explain charitable solicitation and multi-state fundraising requirements in clear, practical terms for nonprofit leaders and finance teams. This podcast is produced by Ironwood Registrations.

SPEAKER_00: 0:14

Welcome back to our latest deep dive.

SPEAKER_01: 0:16

Yeah, and we’re doing something uh something a little different today.

SPEAKER_00: 0:19

A bit of a pivot.

SPEAKER_01: 0:20

Right. Usually we’re looking at these really broad trends or you know, specific state laws, but today we are looking at one specific document. This one. And it’s a document that sits on the desk of pretty much every nonprofit leader in the country, uh usually buried under a stack of other urgent paperwork.

SPEAKER_00: 0:38

Aaron Powell Oh, absolutely. It’s a paperwork everyone loves to hate.

SPEAKER_01: 0:40

I mean, it looks like the driest, most bureaucratic obligation you could possibly imagine. We are talking, of course, about the IRS Forum 990.

SPEAKER_00: 0:49

Yeah, it’s long, it’s complicated, and for a lot of people, it feels like a massive distraction from the actual mission work.

SPEAKER_01: 0:55

Exactly. But looking through the stack of research and sources we’ve pulled for you today, it’s becoming very clear that treating this forum as, well, just taxes or just routine paperwork is actually a really dangerous blind spot.

SPEAKER_00: 1:11

A huge blind spot.

SPEAKER_01: 1:12

Aaron Ross Powell Because there’s this really strong argument in the sources that the 990 isn’t really a tax return at all. It’s described as a public signaling device.

SPEAKER_00: 1:22

Aaron Powell That is just the perfect way to frame it. I mean, if you take one thing away from this deep dive, it should be that the 990 is a transparency tool first and a compliance requirement second. Right. And our mission for this conversation is to really figure out who was looking through that public window, what they’re actually looking for, and how you can control what they see.

SPEAKER_01: 1:40

Aaron Powell Because the assumption, and I have definitely been guilty of this in the past, right? The assumption is that I sign it, I send it to the IRS, and it just disappears into some federal black hole.

SPEAKER_00: 1:49

Aaron Powell Right, some basement in Washington.

SPEAKER_01: 1:51

Yeah. Maybe a computer algorithm checks the math, but otherwise it’s gone. But you’re saying that’s not the reality at all.

SPEAKER_00: 1:57

Aaron Powell It’s the exact opposite of reality. I’d argue the IRS is almost the least interesting audience member here. When you file a 990, you’re basically publishing your data to a massive stadium of people. Trevor Burrus, Jr.

SPEAKER_01: 2:11

Because of how tax exempt law works in the U.S.

SPEAKER_00: 2:13

Exactly. This document is in the public domain. It is completely public.

SPEAKER_01: 2:17

Aaron Powell So who exactly is sitting in that stadium?

SPEAKER_00: 2:19

Oh, it’s crowded. You have state regulators, obviously.

SPEAKER_01: 2:22

Uh-huh.

SPEAKER_00: 2:23

But you also have investigative journalists who know exactly where to look for discrepancies. Right. You have grantmakers who will pull your 990 as part of their very first initial screening. And then you have the aggregators, sites like Candid Charity Navigator, ProPublica.

SPEAKER_01: 2:37

They just scrape it all.

SPEAKER_00: 2:39

Instantly. They scrape this data the moment it’s available. So within weeks of you filing, your financial guts are basically searchable by anyone with an internet connection. It’s like a public resume for the nonprofit. Trevor Burrus, Jr.

SPEAKER_01: 2:50

A public resume. I like that. That actually brings us to the first major concept from our sources, which they call the regulator shortcut. We talk a lot about state registration here, registering to solicit funds in different states. I found it fascinating that these state agencies use the federal form as their primary weapon.

SPEAKER_00: 3:09

They absolutely do. Because if you think about the workflow of a state charity official, they’re swamped. Exactly. They are processing thousands of renewals every single year. They do not have the time or the manpower to do a deep forensic audit on every charity. So they use the 990 as a shortcut. Because it’s standardized across the whole sector, it becomes their baseline verification tool. It tells the story of how you operate.

SPEAKER_01: 3:34

So let me picture this. They’re literally holding the state renewal form in one hand and the 990 in the other.

SPEAKER_00: 3:39

Effectively, yes. They’re looking for alignment. They look at the numbers you put on your state renewal form, say your total revenue or your fundraising costs, and then they look at your 990. If those numbers match, great. Stamp of approval, the conveyor belt keeps moving. And if they don’t match, then the conveyor belt stops.

SPEAKER_01: 3:55

Oof.

SPEAKER_00: 3:56

And that is where the pain begins. If you tell the state of New York that you raised a million dollars, but your 990 says you only raised 800,000, that is not just a typo to them.

SPEAKER_01: 4:08

Right. It’s a red flag.

SPEAKER_00: 4:09

It’s a huge red flag. It’s a signal of poor internal controls.

SPEAKER_01: 4:12

Aaron Powell It seems like the stakes are particularly high when we talk about revenue. The notes we have highlight that regulators zoom in specifically on contribution revenue. Why is that specific line item so critical compared to, say, program service revenue?

SPEAKER_00: 4:29

This is a really crucial distinction. Total revenue includes things like fees for service. Maybe you sold tickets to a performance or you have investment income. Sure. But regulators are interested in public support. They want to know how much money you went out and asked the public for. That contribution revenue line dictates your compliance tier.

SPEAKER_01: 4:47

Compliance tier. That sounds like something we need to unpack.

SPEAKER_00: 4:49

Well, in the world of compliance, size matters. The rules that apply to a$50,000 organization are very different from the rules for a$5 million organization. Which brings us to a core theme that surfaced again and again in our research for today. Let’s hear it. Compliance tends to expand alongside fundraising growth, and organizations that review requirements periodically avoid most problems.

SPEAKER_01: 5:14

I want to just pause on that for a second because it feels almost like a law of physics for this sector. Compliance expands as fundraising grows.

SPEAKER_00: 5:23

It’s totally unavoidable. As your contribution numbers go up on the 990, the gravity of regulation increases. Like audit thresholds. Perfect example. In many states, once your contributions hit a certain number, say 500,000 or 2 million, depending on the state, you are legally required to have an independent financial audit.

SPEAKER_01: 5:41

And the 990 is the undeniable proof of whether you hit that number or not.

SPEAKER_00: 5:45

Precisely. You cannot tell a state, oh, we’re just a small operation, we don’t need an audit. If your Form 990 clearly shows$2 million in contributions, the document tells on you.

SPEAKER_01: 5:55

It’s a signal that the nonprofit is growing up.

SPEAKER_00: 5:58

Right. It signals to the regulator that you’ve entered a new bracket of responsibility.

SPEAKER_01: 6:02

Aaron Powell So if a nonprofit has had a breakout year, maybe they had a viral campaign or a big unsolicited grant came in, they can’t just pop the champagne. They have to realize they’ve likely tripped a bunch of wires in different states.

SPEAKER_00: 6:15

Exactly. Growth is a compliance trigger. And the 990 is the bell that rings to let everyone know you’ve grown. If you aren’t paying attention to that, you’re gonna get hit with fines for failing to upgrade your registration status.

SPEAKER_01: 6:30

Let’s move to another section that seems to act like a trap for the unprepared. Schedule G. Even the name sounds bureaucratic.

SPEAKER_00: 6:37

It really does.

SPEAKER_01: 6:38

But looking at the breakdown and the source material, this section feels like a complete minefield.

SPEAKER_00: 6:43

Schedule G is the fundraising practices schedule. And yes, minefield is a very fair description because it connects the dots between the money you raised and exactly how you raised it.

SPEAKER_01: 6:53

What specifically are regulators looking for there?

SPEAKER_00: 6:55

Two main things usually professional fundraisers and events. Let’s stick with professional fundraisers for a moment, because this is where we see the most gotcha moments. Okay. There is a section where you have to list the 10 highest paid entities that you hired to help you solicit money.

SPEAKER_01: 7:12

And when we say professional fundraisers, we aren’t just talking about, you know, a telemarketing firm or no, and that is such a common misconception.

SPEAKER_00: 7:20

It could be a grant writing consultant who works on a retainer. It could be a strategic consultant who helps run your capital campaign.

SPEAKER_01: 7:27

Wow, okay.

SPEAKER_00: 7:28

If they are in the business of advising you on how to get money or asking for money on your behalf, and you pay them over a certain threshold, their name and address go right on Schedule G.

SPEAKER_01: 7:38

Okay, so transparency, that makes sense on the surface. Where is the trap?

SPEAKER_00: 7:42

The trap is that many states require those professional fundraisers to be registered with the state before they make a single call or write a single grant. So here’s the scenario. You hire a consultant, you pay them, you list them on Schedule G because you want to be completely honest on your taxes. A state regulator sees that name, looks up their database, and sees that consultant is not registered in their state.

SPEAKER_01: 8:06

So you have just provided documented evidence of noncompliance.

SPEAKER_00: 8:10

You’ve handed them a signed confession. You are effectively saying, look, we paid this unregistered person to solicit funds from your residents. That triggers fines for you, fines for the fundraiser, and potentially a cease and desist order on your entire fundraising operation.

SPEAKER_01: 8:24

It connects the action of asking for money with the legal requirement to report who is asking. That is massive. And I imagine most finance directors aren’t checking the state registration status of every vendor they cut a check to.

SPEAKER_00: 8:36

Rarely. The finance team usually fills out the 990 based on the Denver ledger. They see consulting expense, they put it on the form. They don’t know that the development team never bothered to check if the vendor was registered. It’s a classic silo problem.

SPEAKER_01: 8:50

We will get to the silo problem in a minute because I think that is the root cause of a lot of this. But I want to touch on the governance section first. We’ve talked about money, but the 990 asks a lot of questions about behavior too. Like, do you have a conflict of interest policy? Did the board review this form? Right. It feels like a checklist where you just want to tick yes and move on.

SPEAKER_00: 9:11

It looks like a checklist, but you really have to read between the lines because the IRS and state regulators are using this section to judge your internal controls. They are trying to figure out is this a professionally run organization or is it the Wild West?

SPEAKER_01: 9:26

The Wild West. I can imagine what that looks like on paper.

SPEAKER_00: 9:29

It looks like blank spaces. It looks like checking no on the question, did the board review this form before filing? When regulators see that, they see risk.

SPEAKER_01: 9:38

Why is that specific question about the board review so important? I mean, does the board really need to read every single page of a tax return?

SPEAKER_00: 9:46

They need to understand it. Because if the board didn’t review the return, who is actually accountable? It suggests the executive director or the CFO is operating completely without oversight.

SPEAKER_01: 9:58

That makes sense. So strong governance disclosures, having a whistleblower policy, document retention, a rigorous conflict of interest policy, these act as trust signals.

SPEAKER_00: 10:09

Exactly. They are trust signals. They effectively tell the regulator, hey, we have our house in order. You don’t need to worry about us.

SPEAKER_01: 10:15

And I assume that changes how they treat you.

SPEAKER_00: 10:17

Absolutely. Regulators have very limited resources. They have to prioritize who they audit. If you look low risk, meaning your governance section is full of yes answers and clear explanations, you get processed faster. If you look high-risk, no policies, weird numbers, inconsistent data, you are practically inviting them to dig deeper. And once a regulator starts digging, they usually find something.

SPEAKER_01: 10:38

So good governance on the 990 is essentially audit insurance.

SPEAKER_00: 10:41

It is risk reduction, plain and simple.

SPEAKER_01: 10:43

I want to circle back to something you mentioned earlier, the mismatch between documents. The source material calls this the consistency trap. We touched on it with revenue, but I really want to go deeper here. Why is it so hard for organizations to just tell the same story across different forms?

SPEAKER_00: 11:00

Aaron Powell Because usually different people are telling the story. Think about the anatomy of a typical nonprofit. Who writes the 990? Usually the CFO or maybe an external CPA. Who writes the state registration renewals?

SPEAKER_01: 11:14

Aaron Powell Often the development director or a legal compliance manager if they have one.

SPEAKER_00: 11:18

Aaron Ross Powell Right. And who writes the annual report or the website copy? The marketing director.

SPEAKER_01: 11:23

And they aren’t having lunch together?

SPEAKER_00: 11:24

They aren’t even in the same building half the time. So the accountant writes a very technical description of the mission for the IRS. The marketing person writes a flowery emotional description for the website. And the development person just copies and pastes something from three years ago for the state renewal.

SPEAKER_01: 11:40

Aaron Powell And the regulator is sitting there with two monitors looking at three completely different descriptions of what the charity actually does.

SPEAKER_00: 11:46

Aaron Powell Exactly. And to a regulator, inconsistency looks like incompetence. Or worse, it looks like deception. If you tell the IRS you are a medical research organization, but you tell the state of New York you are providing direct patient care, those are two very different activities with different legal implications.

SPEAKER_01: 12:04

And that triggers the dreaded please explain letter.

SPEAKER_00: 12:08

The absolute worst phase of compliance is the please explain phase. It stops everything. Your renewal hangs in limbo while you draft letters trying to explain why your own documents don’t agree with each other. It burns time and money that should be going to the mission.

SPEAKER_01: 12:22

Aaron Powell It seems like there are some persistent myths that keep nonprofits stuck in this cycle. We’ve busted the myth that it’s only a tax form. We’ve busted the myth that only the IRS sees it. But there is one more in the notes about the narrative sections the idea that nobody actually reads the text.

SPEAKER_00: 12:38

Aaron Powell That is such a dangerous one. You see it all the time, people putting C schedule O or just writing one generic sentence like we help people.

SPEAKER_01: 12:45

We do good stuff.

SPEAKER_00: 12:46

Right. But remember the audience. It is not just regulators, it is journalists and major donors. Yeah. If a sophisticated donor is thinking about writing a$50,000 check, they might pull your 990 just to do their due diligence.

SPEAKER_01: 12:59

Yeah.

SPEAKER_00: 13:00

If they get to the program service accomplishments, that’s part three on the form, and it is full of internal jargon or acronyms or it’s just poorly written, that is a massive missed marketing opportunity. Trevor Burrus, Jr.

SPEAKER_01: 13:14

It’s almost like the 990 is the ultimate unspinnable marketing document. You can’t hide behind graphic design or beautiful photos. It is just text and numbers.

SPEAKER_00: 13:23

Aaron Powell That is a great way to put it. It’s naked transparency. If the story doesn’t hold up there, it doesn’t hold up anywhere.

SPEAKER_01: 13:27

Aaron Powell So how do we fix this? If I’m listening to this right now and I’m realizing, wow, our process is totally siloed and I have no idea what our Schedule G looks like, what do I do differently tomorrow? The sources outline a few strategic moves.

SPEAKER_00: 13:38

Aaron Powell The first move is the pre-filing huddle. This is non-negotiable. Before that 990 gets submitted to the IRS, there needs to be a meeting, not just an email chain, an actual meeting. You need finance, development, and leadership in the room.

SPEAKER_01: 13:51

Aaron Powell And what are they doing in that meeting? Just proofreading for typos?

SPEAKER_00: 13:55

No. They are cross-referencing reality. The development director needs to look at Schedule G and ask, does this match the contracts we signed this year? Does this match the events we actually held? The executive director needs to read the narrative and ask, does this match what we are telling our donors on the website?

SPEAKER_01: 14:13

So you are aligning the stories.

SPEAKER_00: 14:15

You are forcing consistency. You are making sure the left hand knows what the right hand filed. If the development team knows that the finance team is going to list a consultant on the 990, they can make sure the consultant is registered before the filing goes out. You catch the problem upstream.

SPEAKER_01: 14:30

That seems like it would solve 90% of the problems we’ve discussed today.

SPEAKER_00: 14:33

It really would. It turns the 990 from a finance task into a strategic alignment task.

SPEAKER_01: 14:40

And the second tactic mentioned in our sources was about the narrative itself. The advice was to write for a stranger.

SPEAKER_00: 14:46

Yes. Assume the person reading the 990 knows nothing about your organization and knows nothing about your industry. Strip out the acronyms. If you are an education nonprofit, don’t talk about Title I LEA variants. Talk about helping kids in low-income districts read. Clarity is a compliance asset.

SPEAKER_01: 15:04

Because if the regulator understands what you do instantly, they don’t have to ask questions.

SPEAKER_00: 15:09

Exactly. Confusion causes delays. Clarity speeds things up. If a regulator has to read your mission statement three times to figure out what you do, you have already lost.

SPEAKER_01: 15:19

There’s a downstream effect to all this too, right? If you put in the work to get the 990 right really right, does it make the rest of the year easier?

SPEAKER_00: 15:26

Immensely. Because the 990 is the source data for almost every other filing. If the data is clean and accurate there, your state renewals become almost automatic. You are basically just copying clean data to state forms. Right. If the 990 is messy, every single state renewal becomes a headache. You are fighting the same battle 40 times over.

SPEAKER_01: 15:44

That ties perfectly back to that core theme we discussed. Compliance expands as you grow. But what I am hearing is that if you get the foundation right, the 990, that expansion doesn’t have to be painful.

SPEAKER_00: 15:56

It doesn’t have to be painful. It just has to be managed. It becomes predictable. And in the world of nonprofit finance, predictable is the best word you can hear. You want boring. You want routine. You do not want surprises from the Attorney General of Pennsylvania.

SPEAKER_01: 16:09

Boring is good. I think that is a very solid motto for this kind of work. So for the listener sitting at their desk right now, maybe staring at a PDF of their draft 990 and feeling a bit overwhelmed by the weight of it, what is the final word?

SPEAKER_00: 16:23

The final word is change your lens. Stop looking at it as a receipt for the IRS. Look at it as a public snapshot of your organization’s soul. This document is going to live on the internet forever. It is going to be scrutinized by people who can help you or hurt you. If you view the Form 990 as a transparency opportunity rather than a routine chore, you stop playing defense and start playing offense. You control the narrative before the regulator, or the public controls it for you.

SPEAKER_01: 16:49

That is a powerful place to leave it. But I do have one final provocative thought for you, the listener, to mull over. We’ve talked about all the humans reading this form regulators, journalists donors. But think about how AI and automated scraping tools are now reading your 990 before any human ever does. Your organization’s credibility is increasingly being judged by an algorithm based on this one single form. It’s not just your story, it’s your digital footprint to make sure you are the one shaping it. If you found this discussion helpful, you can find additional compliance guides and visual resources at ironwoodregistrations.com. Thanks for listening.