Q&A #137 – Is an amended Form 990 required to correct a minor error or omission?
Question: My nonprofit organization discovered that one of our volunteer Board members was inadvertently left off from the list of Board members in our most recently filed Form 990. Are we required to file an amended Form 990 to correct this mistake?
Answer: Tax-exempt, nonprofit organizations are required by law to file Forms 990 that are complete and correct, but there is no affirmative legal duty to file an amended Form 990 to correct a newly discovered error or omission. While an organization may wish to file an amended Form 990 to manage public perception, show transparency, or mitigate the risk of penalties, this step may not be worth the cost and effort in the case of an inadvertent good-faith mistake like the omission of a single, volunteer Board member.
The U.S. Supreme Court has recognized that an amended tax return is “a creature of administrative origin and grace,” but there is no requirement under the Internal Revenue Code or the Treasury Regulations to amend a return to correct an error or omission. See Badaracco v. Commissioner, 464 U.S. 386, 393 (1984).
However, filing an incorrect Form 990 could potentially subject the organization to penalties, so filing an amended return could be advisable in some cases to mitigate the risk of penalties.
For example, filing an amended Form 990 is often advisable if the error or omission results in the underpayment of tax (e.g., unrelated business income tax), causes the Form 990 to be deemed incomplete (e.g., failing to fill out a required Schedule), or is relevant to other sensitive and/or significant issues such as the organization’s public charity status under Schedule A, the reporting of foreign assets, or dealings with a Board member, executive employee, or other “disqualified person” that could be subject to the “excess benefit transaction” rules.
Whether omission of a Board member rises to the level of an issue that would subject the organization to penalties if the Form 990 is not amended would ultimately depend on the facts and circumstances, such as whether the omission impacted other disclosures (e.g., financial transactions between the organization and the Board member) or was part of a deliberate attempt to conceal information.
Additionally, some organizations decide to file an amended Form 990 to get out in front of potentially sensitive issues and clarify any discrepancies, thereby demonstrating their commitment to transparency. This may be an especially important consideration if the organization is well-known and highly scrutinized by the public or if the error or omission involves information that the organization’s grantors or donors weigh heavily.
However, while voluntarily correcting a Form 990 is generally admirable, be aware that filing an amended return can potentially create a confusing record in public databases like Guidestar and the IRS Tax-Exempt Organization Search website. Moreover, the organization’s reputation could be affected if some people see the amended Form 990 and mistakenly assume that the error was more significant than it actually was.
For this reason, you may wish to consider other approaches in lieu of amending, such as explaining the error or omission in the Form 990, Schedule O for the subsequent year and making any necessary adjustments in that return.
Planning Tip – If your organization becomes aware of an error or omission in a previously filed Form 990, plan on trying to file the subsequent year’s Form 990 earlier than usual so that you have an opportunity to explain the issue in Schedule O and clarify the record as soon as possible. Many organizations become accustomed to submitting their Form 990 very close to the filing deadline (with the 6-month extension). The need to clarify an error or omission can be a good excuse to file earlier and get out of the habit of last-minute filings.
In summary, the decision whether to amend a Form 990 should not be made lightly. It is important to explore options, seek input from Board members (particularly those impacted by the mistake), and discuss the costs and benefits with your organization’s tax preparer and other appropriate advisors.
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