Reporting Diversions of Nonprofit Assets [2026]

The Washington Post has identified over 1,000 nonprofit organizations that have reported a significant diversion of nonprofit assets.

You may suspect or find that someone took nonprofit assets without permission. That theft can hide in budgets, donations, or payroll. Reporting Diversions Of Nonprofit Assets feels urgent and confusing.

Many groups do not know when or how to report embezzlement to the IRS, donors, or the state.

The IRS asks nonprofits to disclose significant diversions on Form 990, including the nature and amount of the loss. This post will explain the reporting thresholds, what to put on Form 990, and steps boards should take during an investigation.

It will also cover state reporting, tax implications, and how to strengthen controls to prevent future asset misappropriation. Read on.

Key Takeaways

• Report diversions on Form 990 (Part VI, Section A, Line 5) and describe them on Schedule O when thresholds meet $250,000 or 5% of receipts/assets.
• Use Schedule L for diversions by disqualified persons and Form 990-PF for private foundations reporting self‑dealing and related excise taxes.
• File Form 990 updates for diversions discovered later and assess thresholds using the original amount diverted, not post‑recovery figures.
• Meet state rules, notify Attorneys General where required (e.g., New York) and file California’s RRF‑1 when state thresholds or timelines apply.
• Boards must launch independent investigations, notify insurers and law enforcement, strengthen controls, and keep detailed documentation for audits and recovery.

Overview of Reporting Diversions of Nonprofit Assets

Reporting Diversions Of Nonprofit Assets means telling donors, boards, and the IRS about serious asset misappropriation or embezzlement. Nonprofit leaders must follow Form 990 rules, meet state disclosure duties, and weigh tax implications and investigation steps.

Definition of significant diversion

A significant diversion occurs when someone uses or converts organizational assets without authorization for purposes the organization did not approve. Examples include embezzlement, theft, vendor fraud, malfeasance, and other forms of misappropriation or asset mismanagement.

Significant diversions require reporting when the amount or property meets established reporting thresholds for financial misconduct. Organizations must report the initial amount diverted on required forms even if they later recover funds through restitution or insurance.

The diversion remains reportable even if the responsible party is not an officer, director, or employee, and oversight and accountability duties demand prompt action.

Reporting thresholds

Reporting thresholds set the line for when nonprofit asset diversions must be reported.

Threshold Type	Value	Summary Point
Fixed Dollar	$250,000	Report if the original diverted sum equals or exceeds $250,000.
Gross Receipts Percent	5%	Report when the initial diversion equals or exceeds 5% of gross receipts for the tax year.
Total Assets Percent	5%	Report if the first amount taken is 5% or more of total assets at year end.
Property Value	Dollar or Percent	Include the fair market value of property when measuring whether a threshold is met.
Original Sum Rule	N/A	Assess thresholds using the original amount diverted, not after recoveries.
Reporting Trigger	Any one threshold	Meet any single threshold and the diversion becomes reportable.

Reporting requirements

Nonprofits must follow strict reporting requirements for any significant diversion of assets. File accurate disclosures and take corrective actions promptly.

1. Mark Yes on Form 990, Part VI, Section A, Line 5 if a significant diversion occurred, and ensure the organization meets filing thresholds of $200,000 gross receipts or $500,000 in assets.
2. Use Schedule O to describe the nature of the diversion, the amounts or property involved, and the corrective actions taken, so public financial disclosure shows the response.
3. Do not list the individual’s name on the public Form 990; the form does not require the responsible person’s name to appear in public records.
4. If a disqualified person caused the diversion, report the event as an excess benefit transaction on Schedule L and document steps to correct any excess benefit.
5. Private foundations under 501(c)(3) must report diversions by disqualified persons as selfdealing on Form 990-PF and follow excise tax and correction rules.
6. Report diversions even if discovered after the year they occurred, and update the relevant tax year’s Form 990 with Schedule O explanations and corrective actions.
7. Keep robust financial disclosure and records to support filings, show corrective actions, and aid state or local reporting that may require separate notification.

Practical Considerations for Reporting Diversions

Practical steps cover IRS Form 990 entries, state reporting, and swift investigation of asset misappropriation. Board members must act fast to strengthen internal controls, document embezzlement, and meet reporting and tax regulations.

Internal IRS Requirements (Form 990)

Nonprofits must report significant diversions of assets on Form 990. Report cases discovered or occurring during the tax year.

1. List the diversion in Schedule O with the nature, amount, dates, and corrective actions; disclose who discovered it and any internal controls changed to prevent recurrence.
2. Complete Schedule L when the diversion involves an excess benefit transaction with a disqualified person, and state the amount, benefit recipient, and any excise taxes assessed.
3. Use Form 990-PF for private foundations that identify self-dealing; report transaction details, corrective steps, and any repayments or penalties paid to the IRS.
4. File disclosure regardless of the perpetrator’s relationship to the organization, and note whether the actor was a director, officer, employee, vendor, or unrelated party.
5. Explain corrective actions taken, such as restitution, board discipline, policy changes, and reimbursements, and attach documentation on Schedule O to support the disclosure.
6. Note that diversions by disqualified persons can threaten tax-exempt status through private inurement or excess benefit findings, and document any legal or tax counsel consulted.

State and Local Reporting

After Form 990 steps, organizations must meet state and local reporting rules.

Topic	Summary Points
Immediate Attorney General Notice	State Attorneys General may require immediate notification upon discovery of substantial loss of charitable assets.
New York Specifics	Report diversions to the New York Attorney General Charities Bureau.
California Specifics	Submit reports to the California Department of Justice using Form RRF-1.
Regulatory Variance	State charity regulators can impose stricter or additional rules beyond IRS requirements.
Theft and Embezzlement	File a police report for theft or embezzlement to help secure restitution and support insurance claims.
Timing and Thresholds	Check state deadlines and dollar thresholds. Meet each regulator’s timelines to avoid penalties.
Coordination	Coordinate filings with legal counsel, auditors, and the board.
Documentation	Keep incident logs, police reports, and copies of all filings for audits and recovery efforts.

Related Post: Top Tips for Preventing Embezzlement and Theft

Fiduciary Responsibilities and Best Practices

Board members have a fiduciary duty to act in the organization’s best interests. They must balance moral dilemmas while choosing accountability and transparency. The board should order a thorough, independent investigation, often hiring an outside CPA or legal counsel.

Notify insurance carriers immediately to start claims under crime or fidelity bond policies.

Corrective measures include revising policies, increasing segregation of duties, and enhancing background checks. Implement multiple approvals for large expenditures to strengthen internal controls and governance.

Reporting the crime to law enforcement and regulators helps with insurance collection and legal compliance. Stewardship, oversight, risk management, and integrity should guide each action.

Next, cover practical reporting steps on Form 990 and state filings.

Related post: Who Investigates Non-profit Organizations?

Conclusion

You learned the core rules for Reporting Diversions of Nonprofit Assets and when to file. The post defined significant diversion and reporting thresholds for nonprofit assets. Organizations must disclose the nature, amounts, corrective actions, and IRS Form 990 entries for diversions and embezzlement.

Governance teams should investigate independently, notify insurers, strengthen controls, and file police reports. States may demand prompt notice to Attorneys General, and Schedule L or Form 990-PF can apply for disqualified persons.

Use the Washington Post database and consult counsel to boost financial accountability, transparency, and nonprofit compliance.

FAQs

1. What counts as a diversion of nonprofit assets?

A diversion happens when money or property meant for the nonprofit goes to the wrong person or use. This includes theft, unauthorized transfers, or using funds for personal gain. If gifts, grants, or program funds disappear or get misused, you likely face a diversion of nonprofit assets.

2. Who must report a diversion of nonprofit assets?

Board members, staff, volunteers, and donors should report suspected diversion. A whistleblower can tell the board, a state official, the tax agency, law enforcement, or a financial reviewer. Reporting is often a legal obligation for leaders.

3. How do I report a diversion?

First, gather facts and keep records safe. Tell the board and file a written report with a state official and the tax agency if needed. Ask a financial reviewer to check the books. Keep clear notes and copies of all messages and documents.

4. What happens after a report is filed?

The nonprofit may freeze suspect accounts and start an investigation. A financial review can find gaps in internal controls. The result may include recovery of assets, restitution, discipline, policy changes, or legal action. Donors and stakeholders often get notified if the matter affects trust.