In connection with its 17th annual public meeting in Washington, D.C., on June 7, the IRS Advisory Committee on Tax Exempt and Government Entities (ACT) released its 2018 Report of Recommendations. These recommendations are in line with the ACT’s history of providing useful feedback to the IRS from its tax-exempt and government constituents. The ACT was first established in 2001 with the broad purpose of fostering discussion of issues relevant to five specific Tax Exempt and Government Entities (TE/GE) functions. The ACT interacts with IRS leadership on behalf of the more than 3 million customers and entities and approximately $245 billion in federal tax expenditures represented by TE/GE constituents. These constituents are a broad and extremely diverse base of organizations, including small community organizations, major universities, hospitals, Tribal governments and numerous other organizations of all sizes.
This year, the ACT presented five reports to the IRS commissioner of the TE/GE Division. One of the recommendations by the ACT included incentives for universal electronic Form 990 filing, and a suggestion to make it mandatory.
Any organization is permitted to electronically file (e-file) its Form 990 (including related forms, schedules and attachments). Mandatory e-file is limited by Internal Revenue Code (IRC) Section 6033 to larger organizations, which are those with more than $10 million in assets and which also file at least 250 returns (including payroll and 1099 series forms). Most smaller organizations—those with gross receipts of $50,000 or less—have an option to electronically file Form 990-N, “Electronic Postcard.” More than 600,000 Form 990-Ns were e-filed for fiscal year 2017, but approximately 66,500 Form 990 and 990-EZ returns with gross receipts of $50,000 or less were paper-filed, although they may have been eligible for the simpler Form 990-N e-filing.
The ACT’s reasons for pushing so hard for electronic filing are well-founded. Although more information from the IRS and other sources is made available electronically, most is based on information from organizations that e-file their returns. Currently, the majority of exempt organizations e-file their returns (in fiscal year 2017, this number was approximately 57 percent). This left nearly 200,000 paper-filed returns, which made the information on these returns less accessible to the IRS and the public. Other countries, such as New Zealand and Australia, have had positive experiences incentivizing charities to file electronically, so there’s precedent for change.
The Aspen Institute and other organizations, which devote significant time and resources to studying the Form 990 and its data, promote many benefits of open Form 990 data available from e-filing. These benefits include increasing the transparency of not-for-profit organizations, making fraud detection by authorities easier, encouraging innovation and making the data useful for researchers and others that may not have the resources to use data from image files. In 2016, the IRS began making publicly available Form 990 filing data accessible in a machine-readable format through Amazon Web Services, but has only done so with data from 990s that were electronically filed. Paper returns are still only available as image files from the IRS, meaning approximately 43 percent of all Form 990s currently being filed aren’t available in machine-readable format.
In its 2018 report, the ACT makes the following specific recommendations to the IRS for electronic filing of Form 990s.
- Encourage Congress to amend IRC §6011(e) and §6033 to make electronic filing mandatory for all tax-exempt organizations.
- Until Congress mandates e-filing, the IRS should encourage the U.S. Department of the Treasury to eliminate the $10 million asset threshold for organizations filing at least 250 returns that would otherwise be required to e-file.
- Consider allowing organizations that e-file to be exempt from filing Schedule B, or perhaps eliminate Schedule B for all Form 990 filers.
- Similar to the Foreign Account Tax Compliance Act Online Registration System, prioritize the adoption of online accounts, allowing tax-exempt organizations to electronically file their Form 990s for free.
For all organizations currently not electronically filing Form 990, it’s important to be aware of this push to increase electronic filing and consider the pros and cons of e-filing, even when it’s not technically required. For instance, in fiscal year 2017, 77 percent of Forms 990 and 990-EZ prepared and filed by paid preparers were e-filed. Accounting firms prefer to e-file for multiple reasons that are equally applicable to exempt organizations, such as: electronically filed returns are more complete because the IRS system won’t accept incomplete e-filed 990s; e-filing 990s reduces the risk of human error; and the e-filer receives electronic acceptance or rejection by the IRS.
If you have questions, contact Adam or your trusted BKD advisor for assistance.