Form 990: the good and the bad

LETTERS TO THE EDITOR

To the Editor:

It was with some interest that I read the “My View” article by Dan Prives (“Accountability Web Site: More Harm Than Good?,” July 27).

I recently left the Internal Revenue Service after nearly 25 years dealing with tax-exempt organizations, the last 10 of which I spent as director of the Exempt Organizations Division. I also happen to be the lawyer who represents Philanthropic Research, better known as the parent of GuideStar. That having been said, I both agree and disagree with Dan Prives on the Form 990.

Dan is absolutely on point with his criticisms of the Form 990 return. It is the result of a genetic-engineering effort, spanning years, to produce a paper reporting document that reflects compliance with federal tax laws, state charities rules, and, from time to time, the needs of academic researchers.

It began its “life” in 1942 as a two-page form for tax years ending in 1941. It was married to the application process to enable the Bureau of Internal Revenue to, as Treasury regulations put it, “keep a list of all organizations held to be exempt to the end that they may occasionally inquire into their status and ascertain whether or not they are observing the conditions upon which their exemption is predicated.”

It was not designed as a public-information document or anything like a complete record of the reporting organization’s activities and finances. It certainly was not conceived of as a tool for measuring the efficacy or efficiency of an organization’s activities, much less a guide for donors. In fact, it wasn’t even a publicly available document for nearly a decade.

The Form 990’s limitations, however, are not within the power of GuideStar to address.

The Internal Revenue Service and the various state charities officials recognize the limitations of the current Form 990 and meet regularly to identify ways to improve the document. That task is not an easy one given the often conflicting pressures of statutorily mandated reporting, the needs of tax administration, and the constraints of the federal Paperwork Reduction Act, not to mention the clearance process involving other offices within the Internal Revenue Service, the Department of Treasury, and the Office of Management and Budget.

Despite its inauspicious beginnings and the multiple reporting tasks that it has been called on to perform, the Form 990 nevertheless does provide a window into the operations of a tax-exempt organization, and it is filed with the Internal Revenue Service “under penalties of perjury” unlike the other reporting documents that have been bandied about as more complete and useful to donors and the general public.

While that aspect of the Form 990 is often overlooked in lay discussions of its merits as a communication vehicle, it can suddenly loom ominously over those who seemingly have dismissed the document as irrelevant and caused a tax-exempt organization’s funds to be misused and misreported.

A donor will be well-served reviewing organizations’ Forms 990. A donor would be better served by reviewing more reports and descriptions generated by the organizations and by third parties who develop methodologies of financial and administrative evaluation. A donor would be even better served by aligning those materials with the public records of enforcement actions taken by state charities regulators.

As the amount of public information about tax-exempt organizations increases, evaluative tools will become more useful as donor screening devices. Ultimately, however, the decision to contribute one’s money to an organization will be a personal and subjective one.

At least with the information currently on the GuideStar Web site, together with the information that will be there in the future, the subjective decision will be an informed one. And the Form 990, with all its limitations, will be a key piece of information, but not the only piece.

Marcus S. Owens
Member, Caplin & Drysdale
Washington

To the Editor:

We believe that the article by Dan Prives requires clarification.

The National Center on Charitable Statistics, a program of the Center on Nonprofits and Philanthropy at the Urban Institute, has worked with Form 990 data for years and created a Form 990 research database and made it available to researchers, policymakers, practitioners, and the public. We also collaborate with GuideStar to make Form 990 information widely available.

We understand the limitations of Form 990 and we appreciate its strengths. The I.R.S. Forms 990, filed annually by tax-exempt organizations, provide the only comprehensive, standardized data over time and across varied types of non-profit organizations. Organizations with more than $25,000 in revenues are required to file these forms and to make them available to the public.

We have worked with the I.R.S. and state charity officials to improve the Form 990 and to clarify the instructions, and we are involved in collaborative efforts with accountants and non-profit organizations to provide more accurate information on the forms. Over the years the quality of the information has improved markedly.

A recent analysis published in the June 2000 issue of Nonprofit and Voluntary Sector Quarterly has confirmed that the Form 990 is a reliable source of information for basic income-statement and balance-sheet entries, and that over time Form 990 information has come to mirror more closely the audited financial statements. Some of the concerns expressed about Form 990 reporting — for example, on areas such as overhead costs and fund-raising expenses — are also problematic on financial statements.

The Form 990 was not developed to answer all the questions donors or researchers might wish to know about a charity, nor is it user-friendly. It does, however, provide a useful starting point for research, and it is generally more accessible and comparable than other sources of financial information.

After N.C.C.S. and its partner GuideStar posted the Forms 990 on the Internet, the demand for this information became obvious, as indicated by the number of people visiting the site. With this increased visibility, charities have begun to pay much more attention to the Forms 990 and many are posting additional information on the GuideStar Web site.

We believe that the public response indicates a desire for information and that non-profits will benefit from the public trust that transparency generates.

Elizabeth T. Boris
Director
Center for Nonprofits and Philanthropy
Linda M. Lampkin
Program Director
National Center for Charitable Statistics
The Urban Institute
Washington