ANNUAL REPORTING REQUIREMENTS ON INTERNET

Nearly all nonprofit organizations that are tax-exempt are required to file an annual information return with the IRS. For most exempt organizations, the return is Form 990. Churches, small organizations, and certain other entities are not required to file. This return requires filing organizations to report a considerable amount of information, including gross revenues and expenses, assets and liabilities, expenses on a functional accounting basis, program service accomplishments, expenditures for political purposes, income-producing activities, and relationships with certain other organizations. Charitable organizations must also report information about compensation paid and any expenditures for lobbying. Thus, Internet activities are, as discussed in previous chapters, implicated here. For example, amounts expended for business, lobbying, and/or political activities conducted by means of the Internet must be calculated and reported.

One of the principal difficulties is the assigning of amounts of expenses to, or allocating expenses among, these activities. The IRS is in the process of determining whether there is sufficient interest in the nonprofit community in an electronic filing system (e-filing) for the annual information returns of tax-exempt organizations. Public comment on this subject has been sought.

The IRS observed that the information available to it suggests that the ability to file exempt organization returns electronically would reduce the filing burden of these organizations as well as provide easier and quicker access to information for users of return data. Studies show that 80 percent of these returns filed are prepared using software. The IRS manually inputs a large amount of return data that it and others use. The IRS noted that the returns filed by tax-exempt organizations are unique in several respects. They are filed by diverse organizations, ranging from volunteer membership organizations to complex hospital systems. In addition, they are primarily information returns rather than tax returns. As such, they typically include a significant amount of narrative text in addition to financial data. Another unique aspect of these returns is that most exempt organization information returns are subject to public disclosure. Finally, the returns assist with federal tax administration, state regulation, and public oversight of exempt organizations. The agency stated that the success of an e-filing system for tax-exempt organizations will depend on the extent to which these organizations can use it to fulfill reporting requirements and the extent to which various stakeholders can use it to satisfy their information needs. Accordingly, the IRS has requested comments from exempt organizations and all interested stakeholders on factors to be considered in developing an e-filing system.

The following questions were posed:
• Which Form 990 series returns should be introduced first, and why?
• What factors or concerns would encourage exempt organizations to file electronically?
• What factors or concerns would discourage exempt organizations from filing electronically?
• What could be done to address concerns that would discourage exempt organizations from filing electronically?
• How will your experience with any other IRS e-file program affect your decision to file your exempt organization returns electronically?
• Should the system be designed so organizations can use it to satisfy multiple filing or reporting requirements (such as state reporting requirements or grant reports)?
• What specific changes to the current Form 990 series of returns would facilitate e-filing of these forms?

Tax-exempt organizations and individuals authorized to submit comments on behalf of a specific organization were encouraged to include the following information to help ensure that the needs of various types of exempt organizations were met:
• The organization’s gross receipts and net assets
• Who (lawyer, accountant, employee, volunteer) prepares the organization’s returns • Form filed (such as 990, 990-EZ, or 990-PF)
• How the returns are prepared (tax return software, forms software, spreadsheets, and the like)
Practitioners were encouraged to provide the following information:
• Size of their organization (such as law firm, accounting firm, or sole practitioner)
• Reports prepared (such as Form 990, charitable solicitation, or grant request)
• Volume of reports prepared on an annual basis All other interested parties were encouraged to provide a statement explaining their interest in an e-filing system for exempt organization returns and any other information that would be useful in the development of such a system.

At a briefing on this development on March 13, 2002, the IRS said that, in the short term, the only alterations to be made to the Form 990 will be those necessary to convert the returns to an electronic format. Yet it was also noted that market research and analysis of the information currently requested on the returns may lead to substantive changes. As the IRS Director of Exempt Organizations exclaimed, the “information we’re gathering may be fabulously useful for revising the form down the road.”

Source: The Nonprofits’ Guide to Internet Communications Law. Bruce C. Hopkins. New Jersey: John Wiley & Sons. Inc