IRS Seeks Ideas For Form 990

August 1, 2006       Mark Hrywna      

The Internal Revenue Service (IRS) should follow the airline industry’s e-ticket incentives as a model for future electronic filing of Form 990, according to an IRS committee’s recommendations.

More and more nonprofits, even small ones, are filing Form 990 electronically even though they don’t have to do so. As an incentive, airlines waived fees for electronic tickets but continued charging a fee for paper tickets. And while that approach might not be feasible for a government agency, it “illustrates the role that effective incentives can play,” according to the report released by the Advisory Committee on Tax Exempt and Government Entities (ACT).

The ACT presented its fifth annual report that included seven guidelines for revisions to Form 990 during a public hearing in Washington, D.C.:

* Form 990 should be designed primarily to assess whether the filer is complying with federal tax requirements;

* IRS should continue to accommodate the needs of states as long as they don’t adversely affect the IRS’s primary mission or unduly burden filers;

* Form 990 and its instructions should be as understandable to a person unschooled in the law of tax-exempt organizations as possible without compromising its primary purpose;

* Form 990 should consist of a core form with schedules organized by topic and type of organization;

* Questions on Form 990 should be formulated to obtain evidence or facts which reveal whether the filer has complied with federal tax law;

* Statutory limits on mandatory electronic filing should be removed and mandatory electronic filing should be phased in;

* Form 990 should be redesigned in its entirety and implemented as quickly as possible.

Those recommendations will be phased in after a draft of a revised Form 990 is made available for comment in May, 2007, for tax year 2008.

“E-filing presents tremendous potential and challenges,” said Suzanne Ross McDowell, project leader for the ACT’s 990 revision recommendations.

Ideally, new changes to the form would be introduced in one year, she said, but budget restraints and annual appropriations make it necessary to introduce a new form incrementally.  And at least for now, and the foreseeable future, paper forms will continue to be used as well.

“Cost considerations will likely compel the IRS to introduce a new Form 990 incrementally to accomplish its goal within the budgetary realities of annual appropriations and the anticipated reluctance of contracting software designers to assume the economic risks of a single comprehensive revision,” according to the report.

But the incremental approach also would allow the IRS to test a new core Form 990 and new schedules.

A core form, one of the committee’s seven recommendations, would be filed by all section 501(c) organizations, including those below the $25,000 threshold, and include basic information about the organization, its purpose and finances.  A core form with schedules might make Form 990EZ unnecessary, according to the report. Separate schedules would be designed to deal with specific issues such as compensation and lobbying.

“The sheer size of the nonprofit sector only hints at what may be the greatest challenge in designing and implementing a new Form 990 — its diversity,” according to the report. “The nonprofits often feature dramatically different structures, revenue streams, asset management, compensation practices, and other characteristics that make capturing critical information on a single form a formidable proposition.”

There are more than 1.3 million organizations in the IRS Master File, twice as many as a decade ago, according to the report, with about 317,000 having filed Form 990 or Form 990EZ.

The last time there was a major revision of Form 990 was 1979. The forms were not used like they are today, by organizations like GuideStar, media and donors who access them online to learn more about specific tax-exempt organizations. Its primary purpose is not to communicate or explain themselves to the public, the report stated, but “to assess whether the filer is complying with federal tax requirements.” Still, not all those who file Form 990 are necessarily tax experts. McDowell said that 28 percent of nonprofits prepare their forms without the help of professional expertise yet the “touchstone” for each question should be whether the filer is complying with tax law.

The Internal Revenue Restructuring and Reform Act of 1998 requires that the IRS be prepared to receive 80 percent of all filed returns electronically by 2007. Almost 20 percent of the returns filed by exempt organizations for the year ended Dec. 22, 2005 were Forms 990-EZ.

The report presented two options for phasing in a new Form 990:  “Redesign the core form and introduce new schedules as budgetary and other considerations allow,” or “leave the existing form intact and introduce new schedules.”

Schedules for compensation, related party transactions, international activities and non-cash contributions will be given the highest priority.

Introduction of the redesigned form in a single tax year is preferable if the IRS can meet budgetary challenges.

Steven Miller, commissioner of the Tax Exempt & Government Entities Division, asked whether the ACT looked into changing the $25,000 minimum threshold for organizations to file 990s, or merging the EZ form with others. McDowell said it might make sense given inflation, but it’s not something the committee examined. The ACT’s “recommendations” were more like guidelines for the Form 990 revision, said Steve Pyrek, director of communications for the Tax Exempt & Government Entities Division.

“That’s going to be a very long process, to take that form and make a thorough revision of it,” he said. The committee did a good job of describing “how we got to where we are, and what our guiding principles ought to be,” Pyrek said. “As we work to revise the form in the upcoming months and years, we’ll go back to those guidelines and to the extent we agree with them, use that as a foundation for our revision.” For example, the concept of a core form with attached schedules, he said, is “one that we would seriously consider.

“Sometimes we can agree that they’re good ideas, but we do them when we can.”   NPT