IRS Turns Down Ideas to Redesign Tax Return for Foundations

The Internal Revenue Service has rejected suggestions that it redesign the informational tax return filed by private foundations and simplify the filing rules for small private foundations.

The tax agency rebuffed the ideas of the federal Taxpayer Advocacy Panel, made up of 99 “citizen volunteers” from across the country. The panel noted that all private foundations must file the return, known as the Form 990-PF.

“Form 990-PF captures a large amount of data on a variety of charitable activities,” the committee said. “The complexity of this form results in a 32-percent error rate. In addition, small foundations require professional tax support to meet the reporting requirements due to the complexity of Form 990-PF.”

The committee suggested that the IRS redesign the Form 990-PF in the same way the tax agency has revamped the Form 990 for charities for the 2008 tax year with a basic form and accompanying schedules that are “a menu of attachments as needed, depending upon the activities of the organization.”

The advisory group recommended that the IRS create a new Form 990-PFN that the smallest foundations could file annually in place of the Form 990-PF. It pointed out that the smallest charities now electronically file a Form 990-N, known as an “e-postcard.”

The committee proposed that small foundations be allowed to file a new “EZ Form 990-PF” that the IRS could create. Small charities currently submit a Form 990-EZ.

But the IRS said it was “unable to implement the recommendations” at this time.

“Having just finished redesigning [the] Form 990, we are keenly aware of the costs involved, to the agency and third parties, of major form redesigns,” the IRS said. “We have not observed sufficient support from the sector that would facilitate implementation of a redesigned Form 990-PF in the near term. Further, it would have to compete with other redesign projects, some of which are more pressing.”

The IRS said it was appropriate “to take a ‘wait and see’ approach” to changing the form for foundations. “While the redesigned Form 990 has been well-received, it has not yet been tested by the filing community,” the IRS said. “We believe it prudent to first evaluate the Form 990’s use for a few filing seasons before undertaking a massive redesign of the Form 990-PF.”

The tax agency said it believed it was “worthwhile to engage in discussion regarding whether developing a ‘PF Schedule’ to the Form 990 might be an appropriate alternative to a Form 990-PF redesign.”

The Form 990-N “e-postcard” for the smallest charities was required by a change in federal law, the IRS said. “It is unclear that we have the authority to mandate such a filing” for the smallest private foundations, the tax agency said.