Universal E-File Key to Transparency

Universal E-File Key to Transparency

Article posted in Compliance on 12 April 2012| comments
audience: National Publication, Dennis Walsh, CPA | last updated: 18 June 2013


Current law permitts the filing of Form 990 by paper or electronic means. In this article, Dennis Walsh, CPA makes the argument for requiring that e-filing of Form 990 be made mandatory.

By Dennis Walsh, CPA

Substantial government and nonprofit sector resources went into development and implementation of the revised IRS Form 990, rolled out in 2008. With all the fanfare about improvements in governance, transparency, and accountability through collection and better organization of more meaningful nonprofit data, what has Congress done since to assure that all of this information is readily available to the public?

Answering this question requires a look at what is currently in place.

Despite gradual improvement in e-file participation, the Government Accountability Office (GAO) reports that less than 40% of 990’s filed in 2010 were submitted electronically.  According to the National Center for Charitable Statistics (NCCS) at the Urban Institute, in 2008 the IRS manually scanned nearly 656,000 paper 990 returns, a staggering 12.5 million pages–a volume that would stack up to a height of more than three Empire State buildings.

IRS handling of a paper Form 990 involves a labor-intensive process of receiving, batching, coding, redacting non-public information, scanning, and data processing. The work takes, on average, 90 days for a return to move through the system from start to finish. Adding to this time and cost, about 30% of paper 990’s contain errors, compared to about 3% of those submitted electronically.

As mandated by the Pension Protection Act of 2006, small nonprofits eligible to file the Form 990-N “e-Postcard” must, as the name implies, submit this annual update electronically.

For other nonprofits, however, under current law only an organization with $10 million or more in total assets, or a private foundation and non-exempt charitable trust (regardless of asset size), must e-file if it files at least 250 returns. For this purpose, “returns” includes all federal income, employment, information, and excise tax returns filed each year, including individual Forms W-2 and 1099.

The majority of Form 990’s are professionally prepared and virtually all of these are done using computer software. For nonprofits that choose to self-prepare, “Form 990 Online,” developed and hosted by the NCCS, provides a user-friendly alternative to commercial software with convenient e-file capability. Form 990 Online is free to nonprofits with income of less than $100,000 and costs a very modest fee for larger organizations.

It makes no sense to convert electronic data to paper to be manually scanned and transcribed by IRS personnel. Organizations such as GuideStar and other users of Form 990 information must then assume the added cost and delay associated with compiling or digitizing data as needed from scanned images provided by the IRS. It takes an additional two to six months for GuideStar to make a Form 990 available to its subscribers.

Kudos to GuideStar and its consortium of foundation funders for recognizing the value of easy access to Form 990 data and enhancing its value by developing a suite of search and report options in addition to basic 990 access.  With over six million visits per year, GuideStar has a continuing opportunity to innovate and add value to Form 990 information as it completes its migration to a self-supporting model.

GuideStar visitors can still download 990’s by establishing a free member account.  But the substantial cost of maintaining and improving a searchable 990 database is currently borne by GuideStar’s minority of paying users and by its shrinking foundation support.

The public should have prompt and complete access to this government collected information, without depending on the business model of an independent source such as GuideStar or through time consuming public inspection requests that lag behind current technology.

The solution?

As stated by the NCCS, “… the dramatic reduction in the cost of collecting and analyzing Form 990 information made possible through e-filing will lead to an information-rich sector that will meet the diverse needs of nonprofit managers, foundations, donors, regulators, and policy-makers.”  However, incomplete e-file participation is a barrier to improving sector transparency and wastes IRS resources, adding to taxpayer burden.

Savings from the elimination of paper processing could be applied to the cost of systems needed to support direct public access to individual 990’s, along with tools for extracting user-selected information from across the 990 database. And a funding stream realized through cost reduction is vital for the Exempt Organizations Division, which otherwise generates little revenue to fund its mission of EO tax law administration.

Form 990 access through the recently introduced IRS “Select Check” web portal would complete a comprehensive one-stop resource for the most up to date information about an exempt organization and its status with the IRS

Individual nonprofits stand to benefit by having their 990 data made available to current and prospective funders in the most timely and accessible manner possible.  And since nearly one in three paper 990’s have errors that must be resolved through time consuming correspondence, savings in administrative costs would be realized as well.

Adding 990 access to Select Check would also facilitate modernization of the public inspection rules of IRC Section 6104 by making all 990’s widely available within days of electronic submission. Organizations could be freed of outdated and burdensome paper copy and principal office inspection requests.

The President’s budget proposal for fiscal year 2013 would grant authority to the Treasury Department to require additional electronic filing by lowering the 250 return threshold by an unspecified amount. As presently framed, however, this provision creates potential for indefinite delay in the implementation of universal e-filing.

Accordingly, Congress should build on the President’s proposal by promptly amending IRC Section 6011(e) to phase-in mandatory e-filing for all nonprofits in a manner similar to the implementation of the revised Form 990. In addition, Congress should make appropriation as needed to ready IRS systems for direct public access to Form 990 information by the end of the phase-in period.

Let’s finish the job started in 2006.  If you agree, forward this op-ed to your federal representatives along with your additional thoughts and suggestions.  And let other readers know what you think regardless by adding a comment below.

About the Author

Through The Micah Project, Dennis Walsh, CPA serves as a volunteer consultant to religious workers and exempt organizations, focusing on financial management, legal compliance, and organizational development. A graduate of the University of Wisconsin, he completed the Duke University certificate program in nonprofit management and is a member of the North Carolina Association of CPAs and the American Institute of CPAs.

Dennis is the author of “Legal & Tax Issues for North Carolina Nonprofits” and has written for various nonprofit publications. He actively volunteers with the Guilford Nonprofit Consortium, the Not-for-Profit Committee of the NCACPA, and for the accounting assistance program of the North Carolina Center for Nonprofits.

Mr. Walsh can be reached at nonprofitcpa365@gmail.com.

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