Charity Navigator, The IRS Form 990, and You
Understanding How Your Tax Form Affects Your Encompass Rating
Hundreds of thousands of nonprofits annually file the IRS Form 990, a tax form for larger nonprofits. Charity Navigator uses data from these forms to generate Accountability & Finance ratings on over 200,000 nonprofits. How do you ensure your organization’s 990 is as accurate as possible?
Types of 990
Before we dive into the form itself, let’s take a moment to review the different types of Form 990 that exist. Charity Navigator only uses the standard Form 990 in its evaluations. But other versions exist:
Standard Form 990: This is the original twelve-page form filed by organizations that have more than $200,000 in gross receipts or assets worth more than $500,000.
Form 990-EZ: This form is essentially the little brother of the standard Form 990. It’s four pages long and can be filed by organizations that have less than $200,000 in gross receipts or less than $500,000 in assets.
Form 990-N (or 990 postcard): This is the shortest form, filed by small organizations with less than $50,000 in gross receipts. It’s an eight-question form filed online.
Accountability Assessment
Next, let’s look at what Charity Navigator uses to assess a nonprofit’s adherence to best practices.
The Big Three
First, here are the Big Three metrics that are assigned the highest weight in our Accountability assessment:
Board Independence: Using Part I, lines 3-4, Charity Navigator looks to see how many independent board members an organization has and whether independent board members form a majority of the board of directors. Larger, donor-supported organizations require at least five independent members, while smaller or non-donor-supported organizations require at least three.
Material Diversion of Assets: Using Part VI line 5, Charity Navigator looks to see if there’s been a material diversion of assets during the tax year.
Financial audit, review, or compilation: Using Part XII of the 990, Charity Navigator determines whether the nonprofit has completed one of these documents. Larger organizations must complete a full audit to receive credit, while smaller organizations can receive full credit by completing any of the three options.
Policies Checklist
In addition to The Big Three, Charity Navigator also looks at whether an organization indicates it has several other important policies in place for the fiscal year. Part VI of the 990 contains these policies. If your organization lost credit for any of these metrics, consider asking your organization’s board of directors to adopt the missing policies, which will strengthen your organization’s adherence to best practices and your organization’s Encompass Rating:
Conflict of interest policy
Whistleblower policy
Records retention/Destruction policy
Loans To/From Officers
990 posted on site
CEO Compensation process
Compensates Board Members
Reports CEO and compensation on 990
Audit posted on site
Documents Board Meeting Minutes
Website Review
Finally, for organizations with greater than $50 million in revenue and 40%+ donor funding, we’ll also review your organization’s website for the following items:
Website Listed on Form 990
Form 990 distributed to the board before filing
Staff members (C-suite) listed on site
Board members listed on website
Donor Privacy policy
Financial Assessment
Charity Navigator also uses the Form 990 to generate Financial Health scores. Several metrics use three-year averages to determine the score to smooth out irregular years and mitigate single-year spending decisions. All organizations with an Accountability & Finance score are evaluated on Program Expense Percentage and Liabilities to Assets ratio, while larger, donor-funded nonprofits are also evaluated on their Working Capital Ratio and Fundraising Efficiency Ratio.
These metrics come from Parts VIII, IX, and X of the IRS Form 990. The formulas used to calculate the metrics can be found in our Rating Methodology Guide.
Program Expense
Charity Navigator’s program expense percentage target has changed over the past two decades. Previously, we evaluated organizations to see whether they outperformed other nonprofits with a passing threshold of 85% or higher or most organizations. Over the past few years, new evidence has revealed that a higher program expense does not always lead to greater programmatic impact. With Encompass, we now evaluate organizations based on whether their expenditure on programs and services is similar to how all other nonprofits operate and have set the threshold at 70%. This better reflects that these charities are performing as expected financially, which is the goal of the Accountability & Finance beacon.
What does the Accountability & Finance Beacon Evaluate?
Putting it all together, the Accountability & Finance beacons’ metrics work together to evaluate whether a nonprofit has the capacity, financial structure, and best practices in place to act on its mission effectively. An organization with a high score in Accountability & Finance is likely to have the ability to convert donor dollars into mission-related programs and services.
Using the Accountability & Finance Beacon to Ensure 990 Accuracy
The Form 990 is a public document used by multiple groups to understand your nonprofit, so it is vital to ensure its accuracy. For Charity Navigator-rated organizations, our Accountability and Finance beacon can be a powerful tool to aid in the review of your 990 to make sure key policies and procedures are accurately reflected. Before filing, we recommend you review the key Accountability & Finance metrics for consistency and accuracy. This will help ensure that your organization's information is clear and up-to-date, giving donors a better understanding of your organization.
In conclusion, understanding the relationship between the IRS Form 990 and Charity Navigator's Encompass Rating system is important for nonprofits striving to showcase their accountability and financial health. By understanding this relationship, organizations can strategically enhance their scores across the Big Three metrics, policies checklist, and financial assessments. Ultimately, a high score in Accountability & Finance not only signifies sound financial management but also underscores an organization's commitment to effectively fulfilling its mission and positively impacting society.