There is a fundamental reshaping of how IRS and state charity offices regulate nonprofits. The transformation of a paper-based reporting system to an electronic one is underway. Key milestones for this transformation will be achieved in 2006.
"The future is certain," says Bob Ottenhoff, president and CEO of GuideStar. "Electronic filing of Forms 990 and other regulatory compliance documents will be the way nonprofits interact with charity regulators."
Beginning in 2006, the IRS is requiring that nonprofits with $100 million or more in end-of-year (EOY) assets file their Forms 990 electronically. Next year, the electronic filing requirement will be imposed on nonprofits with $10 million or more in EOY assets and on private foundations.
Under current law, the IRS electronic filing requirement has two thresholds. Before the e-filing requirement kicks in, the nonprofit must also file 250 or more returns with the IRS on an annual basis. These returns include W-2s, 1099s, and excise tax returns. This provision of the current law ensures that only large organizations are affected by the e-filing requirement, thereby softening the compliance burden.
A nonprofit can apply for a one-time waiver if electronic filing imposes an economic hardship or if technological barriers exist to prevent electronic filing. The IRS has published a notice on how to apply for an electronic filing waiver.
Software Companies Respond to IRS Requirements"The IRS is signaling to the software industry that there will be a market for electronic filing of Forms 990," says Diana Aviv, president and CEO of Independent Sector and executive director of the Panel on the Nonprofit Sector. "The phased-in approach of e-filing requirements is allowing the private sector to develop software to meet this need."
Approximately 80 percent of Forms 990 are prepared professionally, and bundling of Form 990 electronic filing software with commercial accounting packages is seen as a key to enabling wider adoption of electronic filing. The IRS has recognized a number of new Form 990 software companies qualified to provide electronic filing in 2006; industry observers note that CCH and Intuit are important additions to that list. See a complete list of software providers
Nonprofits also have an option to use a free e-file solution, 990 Online, which was developed by the National Center for Charitable Statistics (NCCS) at the Urban Institute. "Over 8,000 nonprofits—ranging from large to very small—have already used 990 Online to prepare their returns, and more are discovering the free and easy-to-use e-filing system every day," notes NCCS director Linda Lampkin. "The e-filers know that their returns are complete and checked, and they get a receipt from IRS. And their 990s are in a format that is easy to post and review. All this with no cost to use the system!"
Fed-State Cooperation on Electronic FilingNonprofits file annual compliance reports, such as Form 990, with the IRS. But many nonprofits must also file the same or similar reports with any number of the 42 states that require annual charitable solicitation registration. The regulatory compliance burden of this paper-based reporting system falls both on the nonprofits that must file these reports and on the state charity offices that must process and analyze them.
The burden of duplicative filings, however, is not unique to nonprofits. The IRS has been working with state taxation departments to build a solution that works for individual returns, corporate returns, and nonprofit returns. This fed-state cooperation has resulted in an information-sharing system that is in place for electronic filing in 2006.
Under this system, the IRS acts like an electronic post office. The filer designates that it has a return to file with a particular state or states. The return is filed electronically with the IRS, which informs the appropriate state(s) that it has received the return. The states "come" to the IRS and "pick-up" the return. All of the communications occur electronically. It's important to note that IRS does not "open" or process a return that is intended for a state.
Industry observers hope that this single-point filing solution will lessen the regulatory compliance burdens for nonprofits that file in multiple states. One major challenge remains, however:
- Will commercial software providers incorporate state-specific filing requirements into their Form 990 software, allowing for integrated filing? Or
- Will IRS and state charity officials agree to use Form 990 as the one form to capture all federal and state data?
Dan Moore, March 2006
© 2006, Philanthropic Research, Inc. (GuideStar)
Dan Moore is GuideStar's vice president, public affairs, and an enthusiastic supporter of innovations that make it easier for nonprofits and regulators to comply with the law.