Why charities should stop filing extensions for their Form 990
Around this time every year, an unfortunate ritual occurs in the nonprofit sector. Countless charities file Form 8868 to extend the time they may take to submit their Form 990. Form 990 is the annual information return that 501(c)(3) organizations are required to submit to the IRS within four months and 15 days following the end of their fiscal yea
Filing for extensions has become so commonplace that it is now viewed as normative, acceptable behavior rather than an exception to be considered only in extenuating circumstances.
It is high time that we re-consider this dubious practice.
Let's start by considering the most common reason why nonprofits take this path. Often the CPA or accountant that has been hired to prepare their Form 990 will say, "This is tax season, our busiest time of year. We'll file an extension for you and get your 990 done later when things slow down."
There are at least three very wrong things about that statement.
First, timing. Most personal and corporate tax returns are due April 15th, while the Form 990 is not due until May 15th (if the nonprofit's fiscal year ends December 31). So, what is the CPA or accountant doing during those 30 days that they can't meet the May 15th deadline?
Second, equity. Other clients of the CPA or accountant are surely paying good money for their returns with the expectation of timely service. Why shouldn't the nonprofit have the same expectation for their money?
Third, ethics. This is about the 990, the most consequential annual government filing for 501(c)(3) organizations! A nonprofit's on-time submission of its 990 should take precedence over accommodating its CPA's or accountant's preferred work-life balance. Unfortunately, some CPAs have taken advantage of the Form 8868 option to ease their workflow on the backs of their nonprofit clients. In so doing they may be violating the AICPA Code of Professional Conduct concerning due care and the prompt rendering of services.
Often a nonprofit will accept the CPA's or accountant's insistence on filing the extension because they're receiving a discount. The National Society of Accountants reports that the average fee for preparing a Form 990 is $667. If getting a discount means the nonprofit has to file its Form 990 late, I would suggest it is not worth it. The nonprofit should be willing to pay a few extra dollars and insist upon a timely submission. When nonprofits do a request for proposals and/or sign an agreement for the preparation of their Form 990, they should make clear from the outset that filing an extension will not be acceptable and will likely result in termination of the agreement.
Let's now consider what filing an extension may say about the nonprofit.
First, it means the organization missed a key deadline. The nonprofit may use all manner of excuses for filing the extension (most of which the general public won't understand), but the fact remains: they had four and a half months to get the 990 done, it is now past due, and it will be even further delayed when it is actually filed. Missing important deadlines is an undisciplined way to run any business, but especially one that is about building trust and social capital.
Second, it suggests that the nonprofit and its assets may not be managed very well. I've always believed that to see how well an organization is run, look at how its resources are managed. Filing an extension because the hired CPA or accountant cannot or will not do the work on time suggests not only misplaced priorities and poor use of donor funds, but ineffective handling of key business practices. Simply put, it's a classic case of the "tail wagging the dog."
Third, the extension deprives interested individuals, prospective donors, and the public at large from learning about the charity's purpose, use of resources, and accomplishments from the previous year. How many times have you researched a nonprofit on Guidestar only to find that the most recent Form 990 is from three years ago? One can only wonder how many opportunities are lost because an organization's information on Guidestar is woefully out of date.
We can and should do better.
I applaud nonprofit leaders and their CPAs and accountants who work diligently each year to prepare, review, and submit the critically-important Form 990 on time. Let's commit to ensuring that more will follow their lead.