In a Nutshell
Electronic filing of the annual information returns filed by nonprofit organizations will enhance tax compliance and transparency, improve oversight and enforcement by the Internal Revenue Service, and provide more timely, accurate information to the public. Currently, the IRS does not have the statutory authority to require electronic filing of the Form 990 by organizations that submit fewer than 250 returns (including W-2s and other forms). The Internal Revenue Code should be amended to allow the IRS to require electronic filing by all organizations that file at least five tax forms per year.

E-Filing Talking Points

• Electronic filing of the annual information returns filed by nonprofit organizations will enhance compliance and transparency, improve oversight and enforcement by the Internal Revenue Service, and provide more timely, accurate information to the public.
• The IRS is answering the demand for clearer and more accurate information about nonprofit organizations by redesigning the annual information return filed by nonprofits, the Form 990, based on the assumption that all or most returns will be filed in the future by electronic means.
• The public, nonprofit organizations and the government will not fully benefit from the improvements to the Form 990 until most nonprofit organizations are required to file their returns electronically.
• The Internal Revenue Code should be amended to give the IRS authority to expand the scope of returns that are required to be filed electronically by lowering the number of returns that trigger the requirement to file electronically from 250 filed per year to five per year.

Background
The annual information return (Form 990) filed by nonprofit organizations serves as the primary document providing information about an organization’s finances, governance, operations, and programs for federal regulators, the public, and many state charity officials. Research has shown that many returns filed include inaccurate or incomplete data. Review of these returns by the Internal Revenue Service is currently a costly, labor-intensive, manual process. When errors or omissions are detected, the IRS then sends a notice to the filing organization which must submit an amended return which can add considerable time before the complete, correct information is available to the public and regulators.

Electronic filing will promote effective tax form preparation and tax administration by providing immediate feedback on incomplete and potentially inaccurate information before returns are filed. Electronic filing software provides organizations with immediate checks on incomplete and potentially inaccurate information before they file returns, and e-filing also allows the IRS to reject and provide immediate feedback to organizations about incomplete returns and those with obvious inaccuracies.

The IRS currently has the authority to require larger organizations to file electronically. For the 2006 tax year, entities with assets of more than $10 million were required to file electronically if they filed more than 250 returns (including W-2s and other returns). Private foundations with at least 250 returns are also required to file Form 990-PF electronically, regardless of total assets.

Beginning in 2008, tax-exempt organizations that are not required to file the Form 990 because they have gross receipts of less than $25,000 will be required to file electronically an annual notification to the IRS containing basic contact and financial information.

On June 14, the Internal Revenue Service released a draft of its long-awaited redesign of the Form 990 information return for nonprofit organizations, bringing new attention to the need to revise the law on electronic filing of tax returns. The new design restructures questions and the presentation of financial and other information based on the assumption that all or most returns will be filed in the future by electronic means.

The problem, however, is that the IRS lacks the authority to require electronic filing by persons filing fewer than 250 returns during the year. As a result, most organizations will continue to submit paper tax returns, thus depriving the IRS and the public of the most efficient and effective means of disclosure. Legislative action in needed to require organizations that file at least five tax forms to file their informational returns electronically.

Last updated: November 16, 2007