Here are some parts of the 990 to pay particular attention to:
- Part III, mission and accomplishments. The IRS has detailed guidance for what organizations must report in this section, says Mr. McLean: “If the statement is sloppy or terse, I think it shows the group isn’t taking its reporting seriously.”
- Part IV, line 17, professional fundraising. If a nonprofit spent more than $15,000 on outside professional fundraising services, it must report details on Schedule G. Despite the requirements, says Mr. McLean, “It can be hard to tell exactly what the money was spent on.”
- Part IV, lines 25-28, related-party transactions. Here, nonprofits have to disclose financial transactions between certain members of the group or their family members and the organization itself. “If a group checks ‘yes’ to these boxes, I want to know more,” says Mr. McLean. Details are available on Schedules L and O.
- Part V, line 5, significant diversion of assets. In plain English: Did anyone steal a large amount from the group? “Yes” answers aren’t common, says Mr. McLean, but often they are important.
- Part VII, compensation of officers, directors, key employees, highly-paid employees, and independent contractors. Nonprofits must report total compensation, including benefits, deferred compensation, and auto and housing allowances, among other things. It’s hard for a nonprofit to omit significant items, says Mr. McLean.
- Part VIII, revenue. This section shows where groups get their money from—usually either donations or charging for a service.
- Part IX, “functional expenses.” This information is supposed to break down how a nonprofit spends money to pursue its mission, but Mr. McLean says that often it isn’t very revealing, because reporting requirements are flexible. A multiyear analysis of how expenses have changed over time can shed more light, he adds.
- Part X, balance sheet. Mr. McLean advises “looking at the big numbers” and trying to determine whether the group is sustainable. One red flag is if assets shrink over time while liabilities rise or stay the same. “Anomalies occur, but groups can’t survive if they keep spending more than they take in,” he says.