Taxing Process

Charities urge IRS to scale back changes and delay debut of new informational tax return

Nonprofit executives and accountants are pressuring the Internal Revenue Service to slow down its efforts to overhaul the Form 990 informational tax form to make sure the revised form does not place unreasonable burdens on organizations working with limited resources.

But the tax agency cautions that even a minor delay could push back the new 990’s debut for at least three years — a move that is likely to draw criticism from lawmakers and others who believe the public needs better information about the financial inner workings of nonprofit groups.

In June, the IRS proposed a new form that would require charities to disclose more information about their financial operations than is currently required, both to inform the public and to make it easier for the tax agency to find organizations and people who violate the laws that govern tax-exempt groups.

The IRS is accepting comments from the public about the proposed form through September 14 and said it will consider recommended changes before it approves the final form.

The agency plans to require nonprofit groups to start using the form for the 2008 tax year, which most organizations would file in 2009. Charities with annual revenue of $25,000 or more are required to fill out the form each year.

But as they attempt to prepare for the Form 990’s first extensive overhaul since 1979, some nonprofit leaders and accountants say the IRS is not taking enough time to allow the public to analyze the changes and make suggestions.

“For many of my clients, the proposed changes will require increased cost of preparing the Form 990, even though many are rather simple organizations,” says Debbie Robinson, a certified public accountant in North Little Rock, Ark., who works with nonprofit clients. “Many of my clients are just now learning of the proposed changes and want to comment. They would like the comment period extended in order to perform a cost-benefit analysis of the changes.”

Some organizations would also like the IRS to push back the date when the new form would be required.

Independent Sector, a Washington coalition of charities and foundations, believes it is unrealistic to expect nonprofit groups to change their data-gathering and reporting methods so they are ready to complete the form for the 2008 fiscal year.

“Independent Sector is anxious to move forward as quickly as possible with an improved Form 990,” the nonprofit group wrote in a draft of comments it is preparing to submit to the Internal Revenue Service. “Yet we realize that organizations must have sufficient time to understand and implement the changes that will be required to provide complete, accurate reports.”

Increased Disclosure

The main part of the redesigned Form 990, which was released in late June, consists of a 10-page document — what the IRS calls the “core form” — that all nonprofit organizations would complete.

The form is accompanied by 15 supporting schedules, one or more of which charities would be required to fill out, depending on their activities. The IRS said most charities probably would have to fill out only three of the schedules.

By comparison, the current Form 990 has a nine-page main section, two schedules, and 36 possible attachments.

In outlining the proposed changes, the IRS said the new form would improve public disclosure of charity finances while reducing the amount of work required by many organizations to complete the form.

In the face of calls for delay, IRS officials say they must follow a tight schedule for getting public response if they want to put the new form into use for the 2008 tax year.

Because the agency needs to coordinate the release of the new document with its technology division, its publication office, its processing center in Utah, and its general counsel, the IRS says it cannot easily extend the period for getting the public’s reaction to the revisions.

“If we do not take advantage of this opportunity, we may not be able to implement this new form until 2012 or later,” Elizabeth Goff, an IRS tax specialist, said in a recent forum to discuss the proposed changes. “We believe 2009 would be better than five years from now.”

Meanwhile, some of those who have filed comments with the IRS say the complaints by nonprofit leaders about the proposed form are not justified. Samuel Magids, a tax lawyer from Houston, said if nonprofit groups are practicing good governance, they should be willing and able to complete the new form without complaint.

“Charitable organizations that meet all requirements of a charity should not object to the revisions to Form 990,” wrote Mr. Magids in his comments. “Such nonobjecting charitable organizations will give donors confidence in making contributions to such charitable organizations.”

But some nonprofit leaders who have filed comments with the IRS about the new form say the agency is falling short on those measures. The new form, they say, will force many nonprofit groups to spend more time and money filling out a document that does little to improve accountability.

“While we agree that exempt organizations must continue to be transparent and accountable, we do not believe it will serve the public’s interest to create reporting requirements which are unnecessarily burdensome or impossible to fulfill,” wrote Nancy B. Anthony, executive director of the Oklahoma City Community Foundation. “Also, simply collecting volumes of information will not, by itself, make exempt organizations operate more ethically and be more accountable to the public.”

Hospitals Raise Concerns

Some of the most pointed criticism about the new form has come from those representing nonprofit hospitals, which are facing a much more complex level of reporting than they have in the past.

The proposed changes would require hospitals to complete a separate schedule — Schedule H — which would ask for detailed information about the amount of benefit they provide to their communities. Nonprofit hospitals have come under attack from lawmakers and others who say they worry that many institutions receive tax-exempt status even though they do not provide a significant amount of free care to poor people or other services to the public.

The new Schedule H aims to force nonprofit hospitals to better define the contributions they provide to the public, although many nonprofit hospital leaders say the form doesn’t achieve that goal.

“In too many instances, hospitals would experience extraordinary burdens gathering and reporting the requested information — information that is often unrelated to compliance,” wrote Melinda Hatton, senior vice president and general counsel for the American Hospital Association, in Washington. “At the same time, the information requested would fail to provide reviewers with a comprehensive view of the filing organization, particularly hospital systems, and thereby increase the risk that the IRS would suspect noncompliance when none was present.”

The American Hospital Association’s concerns have been echoed by more than 60 nonprofit hospitals that have written letters to the IRS saying Schedule H includes a number of questions that are burdensome and confusing and fail to provide meaningful information.

The hospitals also ask the agency to delay use of Schedule H until 2010 so that they have time to adjust their accounting procedures to comply with the changes.

Some groups, such as Independent Sector, are also asking the IRS to reconsider its proposal to ask nonprofit groups to calculate the percentage of their revenue that is spent on the compensation of top officials and the percentage of revenue spent on fund-raising expenses. In its draft comments, Independent Sector said that such calculations do not provide an accurate measure of a nonprofit group’s efficiency and that the percentages vary widely depending on an organization’s size and activities.

“Inclusion of these percentages gives the impression that the IRS believes there is a ‘right’ percentage for each calculation and that these are important factors for readers of the forms to consider,” Independent Sector said in its draft comments. “We are not aware of any research that supports the view that a high or low percentage in any of the indicators included in the draft provides valid information about an organization’s effectiveness.”

A Call for Tough Rules

But while some organizations are calling for the IRS to scale back the scope of the overhaul, some observers argue that the proposed changes in the Form 990 do not go far enough.

Robert A. Blumenthal, a mathematics professor at Oglethorpe University, in Atlanta, who regularly studies the finances of for-profit and nonprofit colleges, wrote the IRS to say that the proposed form falls short in establishing a uniform definition for endowments and in setting parameters for executive-compensation agreements. Mr. Blumenthal also said the new form should require nonprofit institutions to publicly file their audited financial statements and to provide their financial information to the government in a more timely manner.

Such documents are required for publicly traded companies and offer a much clearer picture of an entity’s balance sheet, he said.

“The tax-exempt status enjoyed by nonprofits is a privilege that carries with it certain responsibilities,” Mr. Blumenthal wrote. “Among these responsibilities should be the requirement to provide, in a timely fashion and on a regular basis, a transparent picture of the financial position of the organization.”

Gregg Schulte, chief financial officer of Jefferson Community & Technical College, in Louisville, Ky., said public financial disclosures should include audit-report footnotes, a statement of cash flow, and a breakdown of unrestricted, temporarily restricted, and permanently restricted assets and expenditures.

Such elements are standard in the required financial filings for public companies and should be included in the filings of organizations that receive tax-exempt status, Mr. Schulte said.

The suggestions are among the more than 300 pages of comments the IRS had received about the new form through August 21, when it released all the responses received so far. The agency expects that number to swell significantly before the September 14 deadline.

Several large nonprofit and accounting associations, including Independent Sector, the Council on Foundations, and the American Institute of Certified Public Accountants, say they are still preparing lengthy comments on the proposed form.

Comments that have been filed on the Form 990 are available through the IRS Web site.

Organizations still wishing to comment can send their views to Form990Revision@irs.gov.