Return of the Future

Disclosure law and Internet access spur new focus on charity tax forms

Charities nationwide are gearing up for a new era of public scrutiny.

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The Internet revolution, and a recent change in federal charity-disclosure laws, mean that millions of Americans are about to have quick and unprecedented access to information about non-profit groups: what they spend on fund raising, how much money they devote to lobbying, and how they compensate their top executives. Regulators, too, will find it easier to analyze the ways that charities use — or misuse — their money.

Some charities and foundations are apprehensive about the new openness. They fear that the information, reported by organizations with annual gross receipts of more than $25,000 on a highly detailed tax return known as Form 990, may be confusing to most Americans, or may be taken out of context.

But other charities see the changes as an opportunity to promote themselves to a giving public that is flush with stock-market gains and to a baby-boom generation that is poised to inherit trillions of dollars from their parents.

Either way, charities are being urged to prepare for the legal and technological changes. Regulators and umbrella groups representing non-profit interests are calling on charities to:

* Make sure their board members and senior executives look over the tax forms, both to be certain that they are accurate and to be prepared to answer questions about them from the public.

* Add information to their Forms 990 to elaborate on their charitable programs and tout their achievements to would-be donors.

* Consider posting their Forms 990 on their World-Wide Web sites as a low-cost way to comply with the new disclosure law, which otherwise will require non-profit groups for the first time to mail out copies of their returns in response to written requests. At least one organization, Philanthropic Research, has posted limited financial information about hundreds of thousands of charities on its GuideStar Web site and hopes to post all charity 990s in coming years.

“The 990 is not going to be disappearing into any filing cabinet or vault anymore,” says Matthew Hamill, vice-president for government relations at Independent Sector, a national coalition of major grant makers and charities. “It’s going to be seen by a lot of people — whether we like it or not and whether we know it or not.”

It may be some time until large numbers of people can gain ready access to the forms. Still, federal and state regulators are already excited about the possibilities for how such widespread access could improve the way they monitor charities. Prospective donors and others who look at the forms might discover questionable financial data and point out potential problems that have previously gone unnoticed. What’s more, charities are likely to be more careful to report their activities accurately.

And as charities’ financial information becomes computerized, regulators will be able to spend less time shuffling paper and more time actually analyzing the numbers and taking action when appropriate.

The growing importance of charity tax returns has prompted some organizations to make sure that their top volunteers and employees are familiar with what is on the forms.

The Hoag Hospital Foundation, in Newport Beach, Cal., now makes sure that each of its 11 board members carefully look over its Form 990 before it is sent to the Internal Revenue Service. Starting early next year, the foundation’s parent, Hoag Memorial Hospital Presbyterian, will follow a similar procedure with its 24 board members.

At any charity or foundation, “board members should be aware that this is increasingly going to be the document” that the public uses to understand an organization, says James M. Greenfield, the hospital’s senior vice-president for development and community relations. “Someone may walk up to them and say, ‘Hey, I see your name here, tell me about this organization. Can you answer a question about this item here that I’ve marked?’ And the person is looking at a copy of the 990 itself.”

Charities are also starting to make sure that top executives, including fund raisers, pay more attention to the tax forms. Paulette Maehara, president of the National Society of Fund Raising Executives, in Alexandria, Va., says charities need to be prepared for potential donors to use the forms to calculate the percentage of money a group spends on fund raising or on charitable programs.

“In many cases the fund raisers have no knowledge of what goes into the 990,” says Ms. Maehara. “Charities need to make sure the numbers make sense and provide an accurate picture of their work.”

Accuracy has often been a problem on the forms. Research groups, including the Urban Institute in Washington, have done numerous studies detailing problems with incomplete or inaccurate forms. The Urban Institute — under the guidance of Wilson C. Levis, a senior associate there — has taken a lead role in bringing together charity leaders and state and federal regulators to discuss ways to improve the forms in anticipation of an expanded audience for them.

Margaret DeBoe, a certified public accountant in Bethesda, Md., who has long worked with non-profit groups, says charities and accountants have had little incentive until now to spend much effort perfecting their Forms 990.

“I don’t think that anybody has cared, and I mean that across the board,” she says. “The accountant has been hard pressed to justify putting in an extra hour or two making the 990 perfect when he or she knows that the non-profit is not going to really look at it.”

Ms. DeBoe estimates that only 10 of the 200 or so non-profit returns she prepares each year ever come back to her with any comments. “Most 990s go to a controller, who signs it and mails it to the I.R.S.,” she says. “The executive director never looks at it; the board never looks at it.”

Competition for donors may ultimately be what drives charities to pay more attention to their tax forms.

James Caputo, a certified public accountant who has had numerous non-profit clients, says that just as charities now spend time and money on their annual reports, they may do the same with their tax returns if potential donors start reading them. “Once people realize that this data is starting to be available on the Web and can be searched,” he says, “they will realize the value to their organizations of having the kind of information that makes them look good and makes sense.”

Marc Owens, director of the I.R.S.’s Exempt Organizations Division, says he is encouraged to hear charities talk about giving their tax returns increased attention. But he worries that some organizations may be tempted to fudge their numbers to make themselves look better. He cautions charities to keep in mind that it is a crime to file false information on federal forms.

In addition to taking steps to improve the accuracy of the tax forms, some non-profit groups are also considering whether to add new information to their Forms 990. One area drawing particular attention: the section of the form that asks charities to spell out their mission and programs. Now those sections are often filled out with a vague sentence or two that was written by a financial officer or accountant.

T. J. Sullivan, general counsel at the Coalition for Nonprofit Health Care, in Washington, says donors should be able to read a Form 990 and gain a good understanding of what an organization does in exchange for its tax-exempt status.

“It’s not necessarily going to be people in your own communities who will be reviewing or analyzing or using the information on the Forms 990,” he says. “It could very well be people from far away — elsewhere in the nation or even internationally — drawing conclusions about what not-for-profit organizations are doing. And you want to make sure they get the full story.”

The health-care coalition Mr. Sullivan represents sent out an alert to its members this summer telling them to use their tax forms to explain the “community benefits” they provide, such as free care to the poor.

Still, expanding the narrative section could have drawbacks, some experts warn.

The Form 990 has become “very effective” as a quantitative tool for spotting excessive compensation and other improper acts by charity managers, says Peter Swords, president of the Nonprofit Coordinating Committee of New York. But he expresses reservations about using the form to illuminate the “qualitative” results of charities’ work, such as their success in meeting clients’ needs.

“That’s exceedingly hard to do if you’re relying on a text-based disclosure instrument like the 990,” Mr. Swords says. “I don’t want to see it mucked up by trying to do too much.”

Federal and state regulators agree that the emphasis of the 990 must remain on the numbers. But they say any steps to make it easier for their offices and the public to understand how charities work will carry many benefits.

The revenue service is in the process of scanning electronically all charity and foundation Forms 990 and, in coming months, will make the electronic images available on CD-ROM’s for purchase by anyone. Organizations such as Philanthropic Research hope to take the I.R.S. files and make them available on Web sites.

State regulators hope that they and charities can both save a lot of time and money when 990s are all posted on a single Web site or made available as part of a national electronic data base.

Says Michael S. DeLucia, director of charitable trusts at the New Hampshire Attorney General’s Office: “The vision is to have the charity file once. Right now some of the larger national charities must file 990s with the I.R.S. and then with 38 states that also require it. That’s 39 filings and is tremendously costly.”

If charities could eventually file once, and then that information could be shared with states and the public, “you’ve reduced the cost and the burden upon charities and you’ve cut back enormously on the paperwork that the state attorneys general have to grapple with,” says Mr. DeLucia, who is also president of the National Association of State Charity Officials.

State regulators say they would be able to do a better job cracking down on charity abuse — and educating the public and charities — if they didn’t have to spend so much time collecting the Forms 990.

“Access to digital information will allow for computerized audit checks and will increase the quality of information filed with state charity offices,” says Dan Moore, charities registrar in the New Mexico Attorney General’s Office.

Many state regulators now feel snowed under with paper copies of charity forms that they must collect and keep track of. Mr. DeLucia says such administrative work has interfered with enforcement.

When charity scandals arise, he says, “I ask myself, where were the attorneys general? Why do they always come in at the end and not in the middle or at the beginning of the process? And one of the answers is, We don’t have the data. And the way to get the data is, in the long run, to use some type of electronic filing process.”

Some observers believe that electronic filing will be most useful if the Form 990 itself is updated to reflect emerging trends in the way charities raise and spend money. One suggestion is to increase the amount of financial information that charities must disclose about their affiliates, including a more in-depth report on profit-making arms that market products or services to the public.

Another suggestion is to change the form so that it itemizes the amount of money that charities pay to professional fund raisers who help run special events such as walkathons, telethons, and benefit balls.

“Special events used not to be as professionalized, and folks would like to see the expenses attached to it,” says Angela Bies, director of the Charities Review Council, in Minnesota.

Despite the hopes of regulators and some non-profit leaders that expanded access to the Forms 990 will benefit charities, doubts remain about the wisdom of making such complex documents widely available for public consumption.

Some states have taken steps to help donors and others glean key data from the forms. Tennessee, for example, produces a pair of summary forms on charities that operate within its borders: a two-page distillation of financial data, including the total amount paid to professional solicitors; and, beginning this year, a one-page document that shows charities’ revenue and expense breakdowns and their fund balances.

“Donors have difficulty reading a 990,” says Barbara Toms, director of Tennessee’s Division of Charitable Solicitations. “When you can give them something in user-friendly language showing them who these charities are, what they said they were going to do with the money, and how they spent it, then you’ve pretty much given them what they want.”

But many non-profit organizations still feel squeamish about having the public rely too heavily on tax documents.

Many non-profit officials worry that widely circulated Forms 990 will confuse people who do not have strong accounting skills. Some charity and foundation officials make it a policy to sit down with those who request their forms to offer explanations of the numbers.

Ani Hurwitz, a top official at the New York Community Trust, notes that a non-profit organization’s audited financial statements often present very different numbers than its Forms 990 because different rules apply to the way each is compiled.

If someone obtains an organization’s Form 990 through the Internet and then picks up its audited financial statements published in an annual report, “the numbers won’t track,” says Ms. Hurwitz, who adds that this leads to more confusion for the reader. “Our audited statements give a far more accurate picture than the 990 does.”

Other charity officials fear that the widespread availability of salaries and benefits could lead to resentment among their own employees and prompt an outcry from Americans who are not aware that some non-profit officials may earn six-figure salaries.

While most charity leaders say they support greater accountability, many struggle to balance personal privacy with public openness.

Steve Snyderman, manager of Goodwill Industries of Eastern North Carolina, says “it just felt bad” when his salary, which appeared on a charity tax form, was published in The Chronicle several years ago as part of a salary survey.

“I never ask anybody what they make,” he says. “It’s none of my business.”

Still, Mr. Snyderman says, his organization makes its Form 990 information readily available. Last year, for example, it put 1,000 copies of a one-page summary of financial figures taken from the form, including several of the salaries paid to top officials, in each of its thrift stores.

“Times are changing, and we have to get used to public inquiry and openness,” says Mr. Snyderman. “It’s just a tide that you can’t turn back, and you’re just going to have to deal with it.”

Thomas J. Billitteri contributed to this article.