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BLOG / 05.12.25 /Nancy Durand

Why a Critical 990 Review Could Protect Your Mission and Tax-Exempt Status

As the May 15 deadline looms for calendar-year nonprofits, filing your Form 990 may feel like just another compliance box to check. But in today’s charged political climate, this document carries far more weight than many realize. The 990 is not just a financial report, it’s a public declaration of who you are, what you stand for, and whether you still deserve the privileges of tax-exempt status.

Meanwhile, regulators and watchdogs are actively mining 990 returns for reasons to investigate certain nonprofits or revoke their tax-exempt status. If your organization works with immigrants, advocates for social justice, supports global causes, or is funded by foundations labeled “progressive,” your 990 could become the starting point for scrutiny.

This article explains why your 990 matters more than ever, highlights the red flags that raise questions, and offers practical steps to protect your organization before you click submit. Whether you’re defending your values or just aiming to stay off the IRS radar, it starts with understanding how the 990 shapes your narrative.

Your 990 Is the First Stop in Any Investigation

In today’s environment, nonprofits are increasingly targeted for who they serve and what they stand for. Public officials and political commentators have used terms like “aiding illegality,” “supporting terrorism,” or “engaging in public nuisance” to describe organizations that serve migrants, promote racial equity, support LGBTQ+ communities, or operate globally.

Recent statements from elected officials, letters from congressional committees to the IRS, and evolving regulatory guidance reflect a growing interest in redrawing the boundaries of what qualifies as charitable to justify stripping nonprofits of their tax-exempt status. This increased attention is tied to renewed interest in the “illegality doctrine,” a legal principle that allows the IRS to revoke tax-exempt status if a nonprofit engages in illegal activity or violates established public policy.

The most prominent example remains Bob Jones University v. United States, where the Supreme Court upheld the IRS’s decision to revoke the University’s tax exemption based on its racially discriminatory practices. Although this doctrine has not been widely used in recent decades, regulators are revisiting it as a tool to challenge advocacy-focused organizations.

Because the 990 offers a detailed snapshot of your mission, leadership, programs, finances, and funding sources, it is often the first place regulators look to justify further scrutiny or challenge a nonprofit’s tax-exempt status. What you choose to include (or omit) can shape a narrative that questions whether your organization continues to meet the requirements for exemption. That narrative can then trigger audits, public inquiries, or even efforts to revoke your status.

Red Flags That Trigger Deeper Review

So what exactly are regulators looking for? While no single issue guarantees scrutiny, there are common red flags that tend to raise questions:

Missing or Incomplete Schedules

When a required schedule is omitted, even inadvertently, the IRS may assume the organization is hiding risky or noncompliant activity. This can trigger an automated compliance check or open the door to a broader inquiry.

Mission Creep and Unrelated Business Activities

Maintaining mission alignment is essential to preserving tax-exempt status. The IRS expects a clear and well-documented connection between your current activities and the charitable purpose described in your Form 1023. If your organization begins operating programs that fall outside that scope or ventures into commercial activities, it may raise concerns about whether those efforts serve a charitable purpose. In some cases, it can also trigger questions about impermissible private benefit or unrelated business activity. A sustained departure from your stated mission may prompt the IRS to examine whether the organization still operates primarily for exempt purposes.

Foreign Expenditures

Schedule F requires reporting on grants and activities abroad. If your organization operates in politically sensitive or sanctioned regions, you must also comply with rules from the Office of Foreign Assets Control (OFAC), which regulates transactions involving certain countries and foreign entities. Incomplete disclosures or vague reporting may raise compliance concerns that extend well beyond the IRS.

Lobbying Activity

Organizations that engage in lobbying must carefully track and accurately report their expenditures. The 501(h) election provides a safe harbor for certain advocacy, but the protection only applies if you stay within legal limits and report your activities properly. Misreporting, underreporting, or exceeding thresholds can lead to penalties or an audit.

Lobbying is of particular interest to regulators because it blurs the line between charitable advocacy and political influence. If your organization funds grassroots coalitions or fiscally sponsored campaigns, be especially cautious. These efforts can raise red flags if not properly documented or clearly connected to your charitable purpose.

Political Activity

501(c)(3) organizations are strictly prohibited from supporting or opposing candidates for public office. Even a speaker’s comments at an event or a social media post that appears partisan can draw scrutiny. On the Form 990, Part IV, Question 3 asks whether your organization engaged in any political activity. A “yes” answer may put your status at risk, but an inaccurate “no” answer could be seen as a false statement, carrying its own consequences.

Grantmaking Practices

All grants must support your exempt purpose. Whether you’re funding a grassroots initiative, fiscally sponsored project, or international partner, you need to document the relationship, require reports, and demonstrate alignment with your mission. Grants that are vague, undocumented, or off-mission can invite IRS scrutiny, and in serious cases, may result in sanctions or jeopardize your exemption.

Funder Exposure

Some private foundations and funders have become lightning rods for political criticism. If your organization receives support from any of them, it’s important that your 990 shows a clear, independent narrative about your charitable work. Your grant agreements should confirm that the funds advance your mission, and that your organization (not the funder) retains control over how they’re used.

Conduct a Legal and Governance Review Before Filing

A meaningful review of the 990 involves more than proofreading for errors or reconciling financial figures. It’s an opportunity to assess how your organization is positioned in today’s regulatory environment, and to make strategic adjustments before the return becomes part of the public record. This includes reviewing how your programs are framed, how your funding relationships are documented, and whether your disclosures are consistent with your stated exempt purpose.

For example, if your organization has expanded into new areas that aren’t clearly linked to your original mission, you may need to reframe those activities, clarify how they advance charitable goals, or update your mission. If you’re engaging in advocacy or coalition work, make sure your expenditures are properly categorized, that your 501(h) election (if applicable) is accurately reflected, and that narrative descriptions do not overstate or mischaracterize your role. For international work, it’s critical to confirm that documentation and oversight meet IRS and OFAC expectations, particularly when operating in high-risk jurisdictions.

A governance review should also include confirming that key policies (i.e., conflicts of interest, compensation, document retention, etc.) exist in writing and are aligned with what’s reported on the return. When these elements are inconsistent, incomplete, or outdated, they may invite additional questions.

Once filed, your Form 990 becomes part of the official record. At that point, even well-intentioned corrections may not prevent further scrutiny.

A critical review helps ensure your return is complete, accurate, and consistent with your charitable mission. It also allows your organization to catch and correct issues before they become concerns or form the basis to make your organization a political target.

The Board Must Review the 990 and Document That Review

Part VI, Question 11 of the Form 990 asks whether the board reviewed the return before it was filed. A “no” answer suggests weak governance. A “yes” without proof can be just as problematic.

The board has a fiduciary duty to oversee the organization’s operations and ensure compliance with the law. Reviewing the 990 is part of that duty. It allows directors to verify that the return accurately reflects the mission, discloses any legal or financial risks, and aligns with the organization’s public messaging.

Best practice is to add the 990 review to the board’s agenda, circulate the draft ahead of time, allow for questions and discussion, and document the review and approval process in the minutes.

Best Practices for Smarter 990 Filings

• Start early and allow time for legal and board review. Request an extension if necessary because rushed filings increase the risk of omissions or inconsistencies.
• Clarify your mission to ensure it reflects your current programs, partnerships, and funding priorities. Consider whether reframing your exempt purpose could reduce exposure to regulatory scrutiny.
• Review disclosures related to grants, foreign operations, lobbying, and advocacy to confirm they are complete, accurate, and supported by documentation.
• Use Part VI as a governance checklist and ensure that written policies (e.g., conflicts of interest, compensation, whistleblower, and document retention) align with what is reported.

• Amend if material errors are found after filing. Silence or inaction may raise more concern than transparency. Consult legal counsel before filing an amended return, particularly if your organization has received any IRS correspondence or is under review.

Final Thought: Protecting Mission and Status

A thoughtful, well-documented review of your 990 supports your organization’s ability to fulfill its mission and maintain tax-exempt status. It provides an opportunity to confirm that your disclosures comply with IRS requirements, reflect your actual operations, and demonstrate sound governance. In a climate of increased regulatory attention, investing the time to review your 990 carefully is a practical step to help your organization stay focused on its purpose without unnecessary disruption.

If a regulator contacts your organization, acknowledge the request but do not respond substantively until you have consulted legal counsel. How you handle that first communication can affect the scope and direction of any inquiry.