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IRS Revises Proposed Tax Form in Response to Critics

The Chronicle of Philanthropy

October 1, 2007


By Peter Panepento

Read an excerpt from Charity Navigator's letter to the IRS supporting the proposed changes to the Form 990.

The Internal Revenue Service is making major changes to its proposal to redesign the primary informational tax form nonprofit groups file each year, the Form 990.

Ronald J. Schultz, a senior technical adviser for the IRS’s tax-exempt division, said in an interview today that the tax agency is scrapping several questions that had originally been included on the proposed form. The agency is also considering giving nonprofit groups a grace period on filling out some parts of the form.

The IRS is, however, on target to have the form in place by the beginning of 2009.

“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.”

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

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

Mr. Schultz said the IRS is considering plans to allow groups filling out some of those schedules to get an extra year to comply with the new requirements. Those extensions would probably apply to organizations that would file schedules relating to the operations of hospitals, accounting for bonds, and for overseas activities, he said.

All organizations that currently are required to file the Form 990 would still be required to fill out the core form beginning in 2009 — although the information required on that form is likely to change considerably from the current public draft.

Among the changes:

  • The IRS plans to remove two lines from the core form 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.
  • A line that would have required organizations to calculate their fund-raising expenses as a percentage of total contributions would be removed.
  • The tax agency plans to remove a line that would compare operating expenses to an organization’s net assets, as well as lines that list gaming and fund raising revenues.
  • The IRS plans to remove a column on the first page of the proposed form that would have required charities to break out categories of expenses and revenue as a percentage of their total expenses and revenue. Charities, for example, would have been required to compute their investment income as a percentage of their total income. That column would be replaced by a new column that would require them to list the prior year’s expense and revenue figures.
  • The core form would also be rearranged so that the IRS could have the option of phasing out the Form 990-EZ for small nonprofit organizations. The new order would place items that would be required for all charities at the front of the form and would place items that would not be required of current Form 990-EZ filers at the back of the document.
  • The IRS is considering adding questions to the proposed form that would pertaining to board governance, although the language of those questions has not yet been established, Mr. Schultz said.
  • New questions that would detail deferred compensation, retirement plans, and other fringe benefits for top executives are also being considered by the IRS. That information was not included on the most recent draft of the revised form.

End-of-Year Plan

The list of changes comes as the IRS reviews comments from more than 650 people and organizations about the proposed tax form.

Mr. Schultz said IRS officials are still reviewing those comments and that more changes could come later. He said he expects the IRS to complete its review and have a new proposal for the form by the end of the year.

The proposed form — 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 form has drawn criticism from some observers who believe it will be too burdensome and that it does not offer appropriate measures of financial effectiveness.

Some critics, including Independent Sector and the Association of Fundraising Professionals, said in their comments to the IRS that the fund-raising and compensation calculations were unnecessary.

In its comments, Independent Sector said such calculations 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 to 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.

“They’re just trying 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, the 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.”

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