Key Takeaways
- The costliest mistakes are structural: Missing schedules, a failed public support test, and unreported unrelated business income can bring penalties or put your public charity status at risk.
- Insider dealings get scrutiny beyond compensation: Schedule L transactions and the expanded 2026 excise tax on pay over $1 million both depend on tracking related parties and related organizations.
- Event and donor reporting now affects your donors too: With 2026’s new charitable deduction rules, unclear gala acknowledgments create problems on donors’ returns as well as yours.
- California adds its own exposure: Form 109 for unrelated income and AB5’s stricter contractor rules can create problems even when the federal return is clean.
Most Form 990 problems are the product of a lean finance team answering hundreds of yes-or-no questions under deadline, often while closing the year and preparing for the audit.
The IRS doesn’t review those answers one at a time. Because e-filing is required for exempt organizations, your 990 arrives as structured data.
That changes what counts as a serious mistake. A rounding error rarely matters. What matters is whether your answers agree with each other, with the W-2s and 1099s you filed, with your prior-year return, and with the exempt status you claimed.
Below are the mistakes that tend to draw IRS follow-up on 990 forms for nonprofit organizations, why each one matters, and where California nonprofits face an extra layer of exposure.
Mistake 1: Answering “Yes” in Part IV Without Filing the Schedule
Part IV is a checklist. Each “yes” tells the IRS a specific schedule is coming. When the schedule isn’t there, the return is incomplete.
That’s more serious than it sounds. The IRS treats an incomplete return the same as a late one, with the same daily penalties. It also sends incomplete returns back with a letter and a short window, typically 10 days, to fix them before penalties apply.
This often shows up in a few predictable places:
- Schedule B: Contributor information is missing, or the organization never certified that it wasn’t required to file one.
- Schedule C: Lobbying wasn’t reported. In California, this includes ballot measure advocacy, which the IRS treats as lobbying for 501(c)(3)s.
- Schedule D or R: A new endowment fund, donor-advised fund, or affiliated entity was added during the year, and nobody revisited the Part IV answers.
A related version of this mistake is filing the wrong form. An organization that grows past the 990-EZ thresholds but keeps filing the short form skips every schedule the full 990 would have required. Check gross receipts and total assets against the thresholds every year, not just when someone remembers to.
Mistake 2: Losing Track of the Public Support Test on Schedule A
This is the mistake with the biggest downside because Schedule A is where a public charity proves it’s still a public charity.
For most charities that rely on donations and grants, the test looks at a rolling five-year period. Generally, at least one-third of total support has to come from the public, or the organization has to meet a lower 10% threshold plus a facts-and-circumstances showing.
Where pressure builds is when one source starts to dominate. Contributions from a single donor count as public support only up to 2% of total support for the period. So a generous founder, a family foundation, or one transformational gift can pull your percentage down even while revenue goes up.
The consequence is significant. An organization that fails the test for two consecutive years can be reclassified as a private foundation. That brings excise tax on investment income, stricter rules on dealings with insiders, and less appeal to donors, who get smaller deduction limits for gifts to private foundations.
The fix is simple: recalculate the test every year, and model it before accepting a gift large enough to shift the mix. A big check is good news. It shouldn’t be a surprise on Schedule A eighteen months later.
Mistake 3: Reporting Unrelated Revenue Without Filing a 990-T
Part V asks two questions back to back:
- Did you have $1,000 or more in gross income from an unrelated business
- Did you file Form 990-T?
A “yes” followed by a “no” is one of the easiest mismatches the IRS can catch.
The harder problem is that many organizations don’t recognize unrelated income when they have it. As nonprofits look for earned revenue, this tends to come from activities that feel connected to the mission but aren’t, for tax purposes. Common examples in Southern California include:
- Parking: Charging the public to use your lot on weekends or event nights.
- Space rentals: Renting a hall, theater, or courtyard to outside groups with services included.
- Advertising: Selling sponsor ads in an event program or newsletter, as opposed to a simple acknowledgment.
- Retail and licensing: Selling merchandise unrelated to your programs, or licensing your name and list.
- Debt-financed property: Debt can convert otherwise excluded investment income, especially real estate rent and gain, into UBI.
California has its own version, too. An organization with unrelated business income generally files FTB Form 109 alongside the federal 990-T. Missing one usually means missing both.
Unrelated business income is taxed like business income, and it should be planned like business income. If your earned revenue is growing, it’s worth bringing in business tax expertise before the activity scales.
Mistake 4: Payroll and Contractor Numbers That Don’t Tie Out
Part V asks how many 1099s you filed and how many employees appeared on your W-3. The IRS already has both of those filings. If the numbers on your 990 don’t match, the question becomes which one is wrong.
This often shows up after staff turnover in the finance role, a payroll provider change, or a year where some 1099s were filed late or not at all. Each one is minor on its own. Together, they suggest weak controls over the same payroll data that drives your compensation reporting.
California raises the stakes on contractors. Under AB5, the state’s ABC test for worker classification is stricter than the federal standard. Nonprofits that rely on contract teaching artists, program facilitators, or part-time coordinators can be compliant on the federal side and still exposed with the state.
Mistake 5: Underreporting Insider Transactions and Compensation
Compensation gets the most public attention on a 990. The IRS cares just as much about the transactions around it: who did business with the organization, and whether the organization got fair value.
Schedule L is where those show up. Loans to or from board members, grants to a director’s family, and contracts with a business a trustee owns all belong there.
The risk isn’t only disclosure. If an insider received more than they gave back, it can be an excess benefit transaction. That triggers penalty taxes on the person who benefited, and on the managers who approved it. A documented approval process with comparable data is your best defense.
For 2026, there’s one new item to track. The One Big Beautiful Bill Act expanded the 21% excise tax on compensation over $1 million to any employee of a tax-exempt organization, not just the five highest paid. That applies to tax years beginning after December 31, 2025.
Most mid-size organizations won’t pay anyone $1 million. The reason to care is that the threshold counts pay from related organizations too. If you have an affiliate, a supporting foundation, or a management company, make sure someone is adding those figures together.
Mistake 6: Mishandling Gala, Event, and Donor Reporting
Fundraising events create more 990 exposure than almost anything else a nonprofit does in a year. A single gala can touch Part V, Schedule G, and Schedule M at once.
The most common gap is the quid pro quo disclosure. When a donor pays more than $75 and gets something back, like dinner, a hotel stay, or an auction package, you have to tell them in writing how much of the payment is deductible. Part V asks whether you did. Missing it carries a per-contribution penalty that adds up quickly at a large event.
The rest of the event follows a similar pattern:
- Schedule G: Events with significant gross receipts need to show revenue and direct expenses separately, not as one net number.
- Schedule M: Donated auction items, wine, travel, and services count as noncash contributions once they cross the reporting threshold.
- Fair market value: Auction items need a reasonable value assigned at the time of the gift, not a guess made when the return is due.
This matters more for donors in 2026 than it used to. New federal tax rules add a 0.5% of AGI floor for itemizers and bring back a deduction for non-itemizers who give cash. Donors and their advisors are paying closer attention to what’s actually deductible, so an unclear acknowledgment now creates a problem on their return as well as yours.
When It’s Time to Bring in Outside Support
Many organizations can prepare a clean 990 in-house. The trouble starts when the organization changes and the filing process doesn’t.
As organizations grow, this tends to happen at predictable moments. It may be time for outside support if:
- You crossed a threshold: You moved from the 990-EZ to the full 990.
- Your revenue mix shifted: A large gift, a new government grant, or growing earned revenue changed where your money comes from.
- Your structure changed: You added an affiliate, a supporting foundation, or a for-profit subsidiary.
- Your team changed: The person who knew how last year’s return was built has left.
- You’ve extended two years running: The deadline keeps arriving before the information does.
Duffy Kruspodin’s not-for-profit team works with Southern California nonprofits on 990 preparation, audits, and the state filings that have to match them.
Book a consultation with our not-for-profit team to review your next filing and find the gaps while they’re still easy to fix.
