Analysisof the Form 990 for a Non-Profit Organization

Analysisof the Form 990 for a Non-Profit Organization

Non-profitorganizations are given a special consideration when filing taxes andpreparing financial reports because they exist to ease the burdensthat members of the society face on a daily basis. Tax exemption isone of the key benefits that non-profit organizations enjoy. However,they are required to prove their qualifications for tax exemption byfiling Form 990 (Intuit Incorporation, 2016). In this paper theanalysis of Form 990 will be provided, where Human Rights Watch willbe used as a case study. The paper will address the overview of HumanRights Watch, the focus of Form 990, intended users of the form, anda comparison between From 990 and the annual report.

Overviewof Human Rights Watch, Incorporation

TheHuman Rights Watch is a non-governmental organization that conductsresearch as well as advocacy on issues pertaining to human rights.The headquarters of Human Rights Watch are located in New York, butit has offices in other places, such as Nairobi, Moscow, Washington,DC, Brussels, Paris, Los Angeles, and London, among others (HumanRights Watch, 2016). This organization was founded in 1978 as aprivate NGO, with the objective of assessing the level of SovietUnion’s compliance with a set of laws set in Helsinki Accords. Theaim of forming this organization was to pressure governments torespect human rights through a direct engagement with the keystakeholders and publicly shaming regimes that were abusive. Theagency changed its name from Helsinki Watch to Americas Watch in 1981(HRW, 2016). Other agencies (such as Africa Watch, Asia Watch, andMiddle East Watch) were established between the middle and late1980s, but they operated under the umbrella of a single internationalorganization known as the Human Rights Watch.

Definitionand uses of Form 990

Form990 refers to a document that is returned by non-profit organizationsto Internal Revenue Service (IRS). The form serves as a tool toindicate the level of tax-compliance by non-profit organizations.These organizations use the form as a declaration of their taxcompliance since they do not engage in profit making activities,which implies that they are tax-exempt entities (IntuitIncorporation, 2016). Consequently, organizations that are requiredto file Form 990 annually follow slightly different procedures fromthe profit making entities when filing their taxes. Therefore, theprimary focus of Form 990 is to ensure that all organizationscarrying out their operations in the United States are tax compliant(Intuit Incorporation, 2016). The form is filed annually in order tomonitor the operations non-profit organizations and assess theirqualifications for tax exemption in each financial period.

Apartfrom serving as a confirmation for tax compliance, Form 990 is alsointended to provide information about the organization and itsoperations. For an instant, the document has sections that requirethe tax exempt entities to provide information about their corporategovernance, activities, and financial details (Intuit Incorporation,2016). The government can use this information to determine whetherthe organization has engaged in illegal activities. The informationmay also indicate whether the entity acted ultra vires by engaging inlegal operations for which it was not registered to carry out. Inaddition, the IRS requires that the tax exempt organizations shoulduse the form to outline their accomplishments during the previousfinancial period (Intuit Incorporation, 2016). This information isused by the IRS to determine whether the tax-exempt body deserves toenjoy the benefits associated with this exemption. Organizations areexempted because of the perceived benefits that they bring to thesociety, which implies that the tax exempt status of a non-performingentity can be renewed or cancelled.

Form990’s intended users

Theform is intended for three users, who include prospective donors, theIRS, and investigative reporters. Prospective donors are interestedin the form because they can use its content to assess the level ofthe organization’s compliance with the tax laws (Keating &ampFrumkin, 2011). An organization that files its Form 990 by providingthe required information has a higher probability of attracting moredonors. The aspect of compliance is an indication of honesty, whichincrease the confidence as well as the trust of prospective donors inthe organization. The IRS relies on the content of the form to makeseveral decisions, including the determination of whether theorganization should continue being classified as a tax exempt entity(Intuit Incorporation, 2016). Failure to file the form as per the lawand a poor financial performance can deny the firm the right to beclassified as a tax-exempt organization. Investigative reporters maybe interested in knowing whether the non-profit organization obeysthe law. Any information that is published by these reporters canaffect the reputation of the organization negatively or positivelydepending on its level of compliance. Other unpopular users of theform may include the beneficiaries and employees of the organization.

ComparingHuman Right Watch’s Form 990 and its 2015 Annual report

Form990 and the annual report have several similarities and differences.The two documents are used to indicate the financial condition of theorganization. The information about the financial condition isprovided in the balance sheet, which is also referred to as thestatement of the financial position. However, Form 990 lists assetsin the order of their respective degree of liquidity, instead ofseparating them as current and fixed assets (HRW, 2015).

Inaddition, the two documents contain the statement of functionalexpenses. The Human Rights Watch used this statement to report on thedistribution of costs in between its functional and naturalcategories, including occupational costs, salaries, and depreciation.Although the statement of functional expenses is optional for manyorganizations, it is mandatory for voluntary health as well aswelfare organizations (such as the Human Rights Watch) to present thestatement (Keating &amp Frumkin, 2011).

BothForm 990 and the annual report present a statement of activities. Thestatement provides information about the operating activities thatoccurred in between dates (Keating &amp Frumkin, 2011). However, thestatement of activities in both documents was quite limited since itcould not capture or present separate categories for long-termoutcomes, short-term outputs, and program service inputs. HumanRights Watch, Inc. divided operating activities into threecategories, including temporarily restricted, restricted, andpermanently restricted. This classification was done in both Form 990and the annual report. Recoding of revenue into the three categorieswas determined by the underlying intent of donors. The organizationrecorded funds generated from fundraising activities separately fromother forms sources, such as contributions. However, tax-exemptentities are required to record associated costs as a reduction inrevenues in Form 990, instead of fundraising expenses. This explainswhy the fundraising expense figure was $ 11,590,017 in Form 990 and $14,116,772 in the annual report (HRW, 2015).

Thestatement of cash flows was only included in the annual report andexcluded in the Form 990. The purpose of including the cash flowstatement in the annual report was to provide information about cashpayments, receipts, and the net change in cash, which might haveresulted from investing, operating, or financing activities duringthe fiscal period 2015 (Keating &amp Frumkin, 2011).

Moreover,Form 990 differs significantly from the annual report in terms ofsupplemental information. For example, Human Rights Watch recordedinformation about its directors, officers, and their compensation (atotal of $ 2,247,994 for the year 2015), but this information was notrequired in the annual report (HRW, 2015). Form 990 also emphasizedon legal compliance, where the Human Rights Watch was required torespond to compliance questions with a “yes” or “no” answers.For an instant, the organization marked “no” to indicate that itsfinancial statements had not been compiled by an independentaccountant and gave a “yes” answer to inform the stakeholdersthat an independent accountant had audited the financial statements(HRW, 2015).

Additionally,different disclosure requirements were observed in Form 990 ascompared to the annual report. This fact is confirmed by thedisclosure of the accounting method in the form (accrual basis), butthe organization was not required to disclose the accounting approachused in preparing financial statements (HRW, 2015).

Similarly,there were some pieces of information that are found in the annualreport, but they were not required in Form 990. Human Rights Watchwas required to indicate whether its financial statements wereaudited, the type of opinion issued by an independent auditor,accounting principles used by accountants, and conditions that wereassociated with the restricted funds (HRW, 2015). However, the usersof Form 990 did not require this information, which justifies itsexclusion from the form.

Audience,needs, users, and the purpose of Form 990 and the annual report

Thetwo documents, annual report and Form 990, differ in terms ofpurpose. The main purpose of preparing the annual report is todisplay financial performance as well as financial goals of theorganization (Ghazali, 2011). The purpose of From 990, on the otherhand, is to provide information about organization’s taxcompliance. These documents have the same categories of audience andusers. The Human Right Watch’s annual report and Form 990 has fivecommon categories of users. First, prospective donors need to knowthe financial performance of the organization, and this informationcan be found in its annual report. In addition, donors need todetermine whether Human Rights Watch complies with the tax laws.Prospective donors are likely to give more funds when theorganization makes the best use of its funds and obeys the law bypaying the necessary taxes or making adequate disclosure to justifyits tax exemption status (HRW, 2015). The information provided in thetwo documents gives an assurance to prospective donors that theirfunds will be used for intended work without the risk of beingembezzled by the management of the non-profit organization.

Thesecond category of users is the government agencies. The governmentneeds to know whether the Human Rights Watch has been operating asper the laws. This need can be satisfied by the information providedin Form 990, where the organization was required to indicate itslevel of compliance by answering questions with a “yes” or “no”responses (HRW, 2015). Although Human Rights Watch is not required topay taxes, the government uses Form 990 each year to determinewhether the organization still qualifies for exemption in thesubsequent financial periods. Cases of ultra vires, an engagement inprofit making activities, and illegal operations can lead to thedisqualification for tax exemption. The IRS is a government agencythat acts as the main audience and user of Form 990. The form wasaddressed to the IRS, which is the government agency given theresponsibility of ensuring that all organizations comply with the taxlaws. The IRS may also use the annual report, but it mainly focuseson the information provided in Form 990.

Third,the management of Human Rights Watch can use the annual report andthe form to assess the financial soundness of their organization aswell as the status of its tax compliance. Although the managementtakes part in the process of preparing the two documents, it can usethem to make critical decisions, such as the applicant of funds frompotential donors (HRW, 2015). Managers could also be interested inensuring that the organization is tax compliant by filing Form 990 asrequired by the law. The purpose of ensuring that Human Rights Watchhas complied with the law is to reduce conflicts with the government.

Fourth,employees of Human Rights Watch may need to know the financialstrength of their employer in order to assess their job security. Byreviewing the annual report, employees can determine whether theorganization has a safe going concern or it is likely to collapse inthe near future depending on its current financial performance(Ghazali, 2011). Similarly, employees can determine the possibilityof a conflict between the government and their employer by assessingthe level of compliance with the tax laws.

Althoughbeneficiaries of non-profit organizations rarely access the twodocuments, some of them may be able to determine whether Human RightsWatch will be able to continue supporting them by assessing itsfinancial performance. A sound financial performance implies that theorganization has adequate resources to deliver services to itsbeneficiaries (Ghazali, 2011).

Conclusion

Non-profitorganizations follow a slightly different set of rules when preparingtheir financial reports and filing taxes. These organizations filetheir taxes using Form 990. The main purpose of this form is toindicate the level of the organization’s compliance with the taxlaws, which determines whether the entity will continue beingclassified as a tax-exempt firm. Although IRS is the main user ofForm 990, the document may be used by other stakeholders, includingprospective donors and investigative reporters. Some of the keysimilarities between Form 990 and annual report include the fact thatboth of them indicate the financial condition of the organization,contain information about functional expenses, and a statement ofactivities. The key differences between the two documents include thelack of cash flow statement in Form 990 and the presence of certaindisclosures as well as supplemental information that is not needed inthe annual report.

References

Ghazali,N. (2011). The importance and usefulness of corporate annual reportsin Malaysia. GadjahMada International Journal of Business,12 (1), 31-54.

HumanRights Watch (2016). U.S: Don’t fund child soldiers abroad. HRW.Retrieved July 1, 2016, from https://www.hrw.org/

HumanRights Watch (2015). Returnof organization exempt from income tax.New York, NY: Human Rights Watch.

HumanRights Watch (2015). HumanRights Watch: Annual Report 2015, Seeking Safety.New York, NY: HRW.

IntuitIncorporation (2016). What is the IRS Form 990? IntuitIncorporation.Retrieved July 1, 2016, fromhttps://turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Forms/What-Is-the-IRS-Form-990-/INF14515.html

Keating,K. &amp Frumkin, P. (2011). Howto assess non-profit financial performance.Evanston, IL: Northwestern University.