What the New IRS Nonprofit Tax Form Policies will Mean for Your Nonprofit

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As the curtains lift on the new IRS rules regarding tax form 990 data — the tax return form for tax-exempt organizations — a whole new playing field has been introduced for nonprofits, their donors, and those who monitor the activities of nonprofit organizations.

All 990 nonprofit tax forms have been public record for quite some time now, but as of June 15, 2016, these tax records will now be made available in machine-readable format for tools like Amazon Web Services. For years, these records have been available for public view through scanned images, but these new rule changes take the data on these tax forms and store them in an easily accessible machine-readable format, leaving the information ripe for easy collection and quantification.

Nonprofit Tax Forms

Some herald this move as a victory for transparency, while others voice their concerns over privacy and bad PR. In order to put your concerns to rest, here is everything you need to know about the form 990 rules and what they will mean for your nonprofit.

The data floodgates have opened

Up until this rule change, all form 990 nonprofit tax forms data had to be tediously reviewed one document at a time. Now that this information will have to be stored in a machine-readable format, this data can be collected, stored, and analyzed in quicker succession.

This does not apply to all nonprofits. IRS regulations only require organizations with $10 million or more in assets and at least 245 employees to file their tax returns electronically, meaning that most organizations are not subject to this law.

That being said, around 60% of all Form 990 submissions are done using e-file, most likely due to simple convenience. Open Secrets has lamented that this won’t drastically change unless an e-filing mandate is put into place, making all nonprofit data easily accessible online.

More transparency

This change in policy was driven in the name of openness and transparency by open government advocates such as Carl Malamud and his group, Public.Resource.Org. In an article by The Chronicle of Philanthropy, Malamud explains the benefit of this digital form 990 data:

“With e-file data, you can easily and precisely extract individual items on the form.”

Why this push for transparency?

Chuck McClean, a senior research fellow at GuideStar, the largest nonprofit data organization, explained in the same article that this data will help shed light on accounting inconsistencies, which would make apples-to-apples comparisons easier between nonprofits.

Before this decision, nonprofit accountability organizations would have difficulties comparing nonprofits due to accounting differences regarding similar expenses. This also opens the door for further insight into the expenses made by nonprofits in order to better spot problems such as financial troubles, embezzlement, or any other issues that would be used to establish a nonprofit’s trustworthiness.

What does this mean for nonprofits?

Now more than ever, Form 990 data becomes a public relations issue for nonprofits, since all expenses will be put on display. Nonprofits will have to take their expenses into even more serious concern so as to make sure that their actions aren’t misconstrued — or rightly criticized — in the public eye. 

As stated before, these new requirements only apply to nonprofits with assets valued at $10 million or more, however with pushes being made to make e-filing for form 990s a mandatory practice, it is important for even the smallest nonprofits to get up to speed with their form 990 accuracy.

What about privacy issues?

These rule changes have raised concerns over the possibilities for an increase in redaction errors, especially concerning extremely sensitive personal information such as social security or bank account numbers, of which 990s are chock full.

When this ruling was handed down by the courts, the IRS was compelled to evolve on current information processing to improve the government’s ability to protect this personal information, as explained by the Sunlight Foundation:

“Changing the 990s away from TIFF files to XML will allow the IRS to automatically redact far greater information, a privacy benefit that can only be realized with improved data quality. Indeed, by complementing existing hand review with such methods, the process ensures that we get a high-quality, effectively redacted result that allows us to have both the useful data and the appropriate levels of control over private information.”

So, while there are concerns about privacy during this transition, there are efforts being made to mitigate those issues and lead to a better system than was offered under the previous form 990 records.

Conclusion

If your nonprofit hasn’t moved over to e-filing your form 990s, it would be better to get a head start on the practice before it becomes mandatory. This means a greater attention must be brought to where, when, and how expenses are documented and by whom. By engaging in earlier compliance with these rule changes you lessen the likelihood of mistakes being made that could potentially embarrass your nonprofit.

Have you already begun preparing for these rule changes? Were there any snags you hit along the way? Let us know in the comments below!

Looking for Nonprofit software? Check out Capterra's list of the best Nonprofit software solutions.

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Nick Morpus

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Nick Morpus is a former Capterra analyst.

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