Ready, Set, Revise

The Internal Revenue Service — in a scramble to finish its proposed overhaul of the primary informational tax form nonprofit groups file each year — has

rewritten parts of its draft in an effort to quell critics who said it was pockmarked with meaningless information and unnecessary comparisons.

But as the tax agency attempts to complete a final version of the Form 990 by the end of the year, it faces a fresh round of criticism from charity watchdogs who worry that changes announced this month will water down the document’s intent, and from nonprofit officials who worry that they will not have enough time to prepare for the changes.

Ronald J. Schultz, a senior technical adviser for the IRS’s tax-exempt division, said in an interview that the tax agency is eliminating several questions that had originally been included on the proposed form.

Gone is a controversial question that would have required charities to tally the total compensation of their officers, directors, trustees, and other key employees — and then compute that total as a percentage of their total expenses.

In addition, the tax agency has shelved plans to require nonprofit organizations to calculate their fund-raising expenses as a percentage of total contributions and questions that would have compared operating expenses to an organization’s net assets.

Listening to the Public

Those changes — and several others — are the product of more than 650 public comments that were submitted to the IRS about the proposed form, copies of which were released in June. IRS officials have been reviewing the comments since they began arriving at the agency’s Washington office this summer and have been incorporating some of the suggestions received into the latest draft.

Officials plan to make further adjustments to the form over the coming weeks.

The main part of the redesigned Form 990 consists of a 10-page document — what the IRS calls the “core form” — that all nonprofit organizations currently required to file a 990 would have to complete.

The core form is accompanied by 15 supporting forms (or schedules), one or more of which charities would be required to fill out, depending on their activities.

The proposed document — the first extensive overhaul of the Form 990 since 1979 — is designed to provide the public with more information about the financial operations of nonprofit organizations and to make it easier for the tax agency to find organizations and people who violate the laws that govern tax-exempt groups.

But the proposed form has drawn criticism from many in the nonprofit world who argue that it will place heavy administrative burdens on charities without improving the type of information available to the public.

Several prominent associations representing nonprofit organizations, including Independent Sector and the Association of Fundraising Professionals, opposed the inclusion of the fund-raising and compensation ratios. The ratios drew the ire of some lawyers and accountants, who say the calculations would have led the public to improper conclusions about the financial health of some charities.

In its comments, Independent Sector said such ratios 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 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.”

Mr. Schultz said the IRS took those comments seriously as it made its most recent round of changes in the form.

“We were implicitly making statements about what was important,” Mr. Schultz said. “That’s not the kind of message we want to be sending.”

But some charity watchdog groups say the latest changes take away measurements that would help potential donors gain a better understanding of how they are spending their money.

The ratios were a way for donors “to cut through some of the nonsense and figure out how efficient and effective these groups can be. It’s not revolutionary information,” said Trent Stamp, president of Charity Navigator, in Mahwah, N.J., which uses similar ratios to rate the financial performance of charities and provides those ratings to prospective donors. “Having them on there was a very nice step by the IRS to try to make an impenetrable tax document a little more friendly.”

Call for More Time

The tax agency is also facing continued criticism from charity leaders who worry that they will not have enough time to properly prepare for the new reporting requirements.

The IRS, which is pushing to complete the form so that it can be put into use by charities by the beginning of 2009, allowed three months for public comment and left itself only about three months to review those comments and make changes in the form.

Many of the groups that have filed comments with the IRS say that is not nearly enough time. Because the form represents a significant change from the current version, many lawyers and accountants say it is impractical for nonprofit groups to properly evaluate the proposed form, recommend changes, and prepare for the new requirements in such a short time.

“In fairness to the IRS, they are working with some budget constraints and personnel constraints,” said Jack Siegel, a lawyer and accountant who is chief executive officer of Auto Didactix, a Chicago company that publishes instructional software on legal and accounting issues. “In a perfect world, this should have gone through a six- or eight-month comment period. But this is not a perfect world and they are going to move ahead regardless. This train has sort of left the station.”

The IRS contends that it is on target to meet its deadline and to prepare charities for the changes.

The agency is, however, considering a plan to give nonprofit groups a grace period on filling out some parts of the form, Mr. Schultz said.

“Though we acknowledge that a number of folks said they want us to delay implementation of the whole form, that date remains feasible for us,” Mr. Schultz said. “But that assumes that we’ll be looking very seriously at some targeted transition relief for some parts of it.”

Such relief will be necessary, experts say, because many charities will have little time to change their financial reporting procedures to meet the new IRS requirements.

That is especially true in light of the fact that the tax agency is unlikely to have instructions for the form until later in 2008, said Michael Clark, a Chicago lawyer who is the chairman of the exempt-organizations committee of the American Bar Association’s taxation section.

“A lot of organizations are going to have a learning curve for the first year,”said Mr.Clark. “If you’re a calendar-year organization, you can’t just flip a switch on January 1.”

‘Taken to Heart’

Still, the IRS is earning high marks from some observers who say the tax agency is being receptive to the suggestions raised through public comments about the form.

“I certainly like what I’m hearing so far with the direction they are taking in response to the comments,” Mr. Clark said. “They’ve taken to heart a lot of the comments they’ve received.”

And Mr. Schultz said the IRS is not yet finished tweaking the form. The agency continues to review comments from the public, and its officials have been meeting regularly with tax lawyers and accountants who have scrutinized the proposed form.

IRS officials, for instance, are already considering making additional changes in how information is ordered in sections of the form that deal with executive compensation and governance.

Many of those who have commented on the form also have criticized the level of detail required the schedules — most notably schedules that would be required for nonprofit hospitals and groups that distribute money overseas.

“Did they just throw us a bone, or are they going to take the rest of the 650 comments seriously?” asked Mr. Siegel. “We won’t know until the end of the day. But I am optimistic.”