Since 1995, the number of individual taxpayers taking advantage of electronic filing to file their 1040 tax returns has increased as much as 30 percent each year, as people discover the convenience (and faster refunds) of e-filing. In 37 states and the District of Columbia, taxpayers can e-file their federal and state tax returns in one transmission. Yet nonprofit organizations must still mail hard copies of their Forms 990 and state registration to the Internal Revenue Service and state charity officials.
This practice will change soon, as the IRS may offer nonprofits an e-filing option as soon as 2004, for fiscal year 2003. A number of states are moving to provide e-filing for state registration, with Pennsylvania and Colorado at the forefront.
The change will benefit nonprofit organizations, their accountants, the IRS, state regulators, and charitable donors. In addition to improving accuracy and speed, e-filing will also improve the quality and usefulness of nonprofit sector data.
Form 990 Background
Form 990 is an information return that must be filed annually by almost all 501(c) tax-exempt, nonprofit organizations with incomes of more than $25,000. (The exceptions are churches, religious schools, and certain religious organizations, which are not required to file with the IRS.) In contrast to information on other tax forms, the data on Forms 990 are available to the public. The form contains more than 600 separate information items, including a balance sheet, statements of revenues and expenses, program accomplishments, board of directors list, and executive salaries.
In the past, the information on Form 990 was used primarily by the IRS and state charity regulators; most charitable donors were not aware that such a document even existed. In order to see a 990, one could either write to the IRS to request a copy or go in person to the organization's office to examine a copy of the form, which federal regulations required the nonprofit to make available for public inspection.
All of that changed in 1999, when new public disclosure laws dramatically improved public access to Form 990. All 501(c) 990 filers are now required to mail, fax, e-mail, or otherwise provide copies of their three most recent Forms 990 to anyone who requests them. Also in 1999, GuideStar began posting scanned images of Forms 990 on its Web site.
Today, anyone with Internet access can look up the most recent 990 of every filing charity in the United States—instantly and anonymously. The number of people doing so is large, and constantly growing. During the last quarter of 2001, for example, GuideStar's Web site averaged 4 million hits per week.
In the past, some nonprofits filled out their 990s carelessly—with arithmetic errors, missing data, and obvious misallocation (such as zero fundraising costs for a charity that receives the majority of its funding from contributions)—and no one was the wiser. But now that individual donors, institutional funders, and other stakeholders are taking advantage of increased access to Forms 990, nonprofits are paying more attention, filling out the form more completely and accurately.
Fortunately, improved tax preparation software that offers e-filing capability provides checks for consistency and prompts if something is omitted, ensuring better reporting.
The nonprofit sector lags behind the business sector in the sophistication of its data systems and use of technology. In part, this difference results from the unique nature of business, which generally permits profit, quality, and other indicators of success to be measured in financial terms. For-profit companies have the tools to measure their performance against industry standards and allocate resources for maximum efficiency.
The nonprofit sector is limited in this regard, in part because there are few nonprofit data standards. In the business sector, financial reporting standards set up by the Security and Exchange Commission, Financial Accounting Standards Board (FASB), and IRS require timely disclosure in a way that enables easy analysis of companies by investors, employees, and competitors.
The FASB allows nonprofit organizations wide latitude in the calculation and presentation of annual financial statements. The data presented often have unique names and definitions, preventing easy sharing or comparison of information. Nonprofits are forced to operate without useful information from similar organizations. Likewise, donors, policy makers, board members, and the media cannot get a detailed picture of the nonprofit subsector of interest.
Only one data source is mandatory and uniform for all nonprofits: IRS Form 990. Therefore it is crucial that the information on this form be easily accessible in a usable format for multiple users.
To lay the groundwork for electronic filing on a national scale, the National Center for Charitable Statistics at the Urban Institute (NCCS), in collaboration the National Association of Attorneys General/National Association of State Charity Officials (NAAG/NASCO) and GuideStar, has spearheaded an effort to expedite electronic filing of Forms 990 to the IRS and to state charity offices around the country. Twelve state charity offices have committed to building the infrastructure to allow nonprofit organizations to e-file their annual state registration forms and Forms 990. The participating states are California, Colorado, Illinois, Maryland, Massachusetts, Minnesota, New Hampshire, New Mexico, New York, Pennsylvania, Tennessee, and Washington. Find out more about this project at www.form990.org.
NCCS has developed Desktop990TM, a free software application for preparing Form 990 and state registration forms. It can be used to complete and file IRS Form 990, 990-EZ, Schedules A and B, and any of the 60 or so attachments that may accompany these forms, plus the Unified Registration Statement and any additional information required for state registration. An intermediary server handles authentication, state registration payments, and the overall e-filing process and transfers the data to the state charity offices. To download Desktop990TM, click here.
Electronic filing will benefit many audiences:
- The free Desktop 990 software can help charities file their own returns accurately and completely. Its features include an easy-to-use, intuitive interface with checks to reduce errors, references to line-by-line IRS instructions and expert tips, the ability to create structured and unstructured attachments, and automatic creation of a PDF file for internal records.
- Greater ease in multi-state filing awaits regional and national charities, which will be spared the burden of filling out individual registrations to solicit in each state that requires registration. Desktop990TM has been designed to elicit all the information required to file state registration forms as well as the 990. Eventually, registration will occur with one transmission and one payment for registration fees.
- No critical documents "get lost in the mail"; the e-filing interface generates a receipt that confirms transmission.
- The public is more aware of the 990 than ever before. The nonprofit sector will be able to strengthen public trust by increasing its own credibility and competence with timely, accurate, and complete 990 data.
- An electronic database of collected 990 data elements will be a source of valuable management information that will lead to greater sophistication and progress in many aspects of operations—program outcomes and evaluation, gaps in local program service, salary and other expense comparison figures, and best practices. Nonprofits will be able to benchmark their performance for Form 990 variables against that of other organizations. Analysis on a program-by-program level will be possible. NCCS has developed a Nonprofit Program Classification System for classifying the activities of nonprofit organizations as described on Part III—Program Service Accomplishments of Form 990. Excellent charities will finally have the data to back up their claims, and charities that need to improve will have concrete measures for evaluating their performance.
Donors and Funders
Electronic filing will improve the timeliness of charity information. The time between the IRS's receipt of an organization's 990 and its posting on GuideStar will be much shorter. Digitized returns will also expedite quantitative research on nonprofits, allowing funders to make more sophisticated giving decisions. Major donors and funders will thus feel more confidence in their choices to give.
Large, sophisticated funders, such as government, foundations, and United Ways, will benefit from electronic data on nonprofits. They will be able to identify easily organizations that do not fit their criteria and thus make more informed funding decisions. They will also be able to measure indirectly their own performance through objective data from their grantees.
Internal Revenue Service
E-filing will save the IRS a great deal of time and money.
- It will reduce staff time spent keypunching and scanning 990s.
- It will reduce the physical space required to warehouse paper copies of the returns.
- It will eliminate the lag time between receipt of a return and its availability on the Web in databases (currently over three months).
- It will improve customer service through increased filer choice.
- It will enhance the IRS's capacity to monitor fraud and other issues for the sector. Electronic 990 information will allow the IRS to focus efforts on organizations abusing their tax-exempt status, rather than on data collection and administration.
State Charity Officials
There are charity offices in most states that monitor and regulate charitable activities. These state officials protect their citizens (and ethical charities) by enforcing charity laws and pursuing legal action against offenders. The primary method of regulating nonprofit organizations within a state's borders is through mandatory annual registration.
Currently, about 40 states require registration, a costly and time-intensive process of document and data gathering, file storage, and creation of databases by keypunching required data variables, many from Form 990. Roughly 50 percent of the budgets of each state charity office are dedicated to registration management, leaving only half the budget to pursue enforcement, public education, and other regulatory duties. Dan Moore, former NASCO president, explained in Foundation New & Commentary, "We want to make a shift from data entry to data analysis. We want to move from clerical work to investigative and analytical work."1 Electronic data will help regulators better utilize their limited resources.
Some 81 percent of nonprofit returns in 2000 were completed by paid preparers—often CPAs and tax attorneys. Preparers who switch to Desktop990TM and electronic filing will save time and money.
- They will use less paper and require less photocopying.
- They will spend less time reentering data from the previous year's return. (The program will import data from one year's return to the next.)
- They will be able to e-mail data files to clients for approval and electronic signature.
- NCCS is working with software developers to add an e-filing option that will import accounting information from existing systems into the Form 990 software to ease the preparation burden.
- State associations and nonprofit umbrella groups rely on data in planning and conducting their membership and public policy programs and sector research. More accessible data will allow them to influence legislation more effectively and easily complete research on nonprofit salaries, outcomes, and other information useful to nonprofits. Chapters or franchises will be able to exchange and standardize the information they provide to each other.
- Policy makers will be able to evaluate the impact of proposed changes with more easily available and more comprehensive data.
- Scholars and other researchers will find nonprofit sector research easier and more reliable. Standard definitions and formats will lead to more accurate research findings.
- Media and investigative reporters will no longer need to rely on researchers' and umbrella groups' educated guesses about aggregate 990 information. Having the research in an electronic format will facilitate reporting on the state of the sector.
1Dan Moore, "It's a New Age of Accountability," Foundation News & Commentary 42, no. 2 (March/April 2001): 28.
The preceding is a guest post by Zina Poletz, a research associate with the Urban Institute's National Center for Charitable Statistics in Washington, D.C.