December 20, 2007
IRS Gives Small Groups Grace Period for Filing New Form 990
By Peter Panepento
Washington
The Internal Revenue Service today delivered an unexpected holiday gift to small nonprofit organizations that have worried about how they would be able to adjust to filing the revised Form 990 — the main tax form for nonprofit groups.
The tax agency said during a news conference today that it plans to phase in the new form over three years, beginning with the 2008 tax year.
The move comes six months after the IRS released an initial draft of its planned redesign of the Form 990.
The tax agency says it has now made the form final — taking into account nearly 700 letters from nonprofit leaders, accountants, and state regulators that the IRS received after it released the draft.
In many cases, those who had written the IRS had said that their organizations would not have enough time to adjust to the new reporting guidelines, which take effect for the 2008 tax year.
To quell those concerns, the IRS said today that it will give some small groups the option of filing the shorter Form 990-EZ.
Groups with annual revenue of $25,000 to $1-million and those with assets of less than $2.5-million will have the option of filing the Form 990-EZ for the 2008 tax year.
For the 2009 year, the threshold covers groups with revenue between $25,000 and $500,000 and with assets of less than $1.25-million.
In the 2010 tax year and beyond, groups with between $50,000 and $200,000 in revenue and with assets of less than $500,000 can opt for the Form 990-EZ.
“This phase-in process will allow organizations to become familiar with the new Form 990,” said Lois G. Lerner, the IRS’s director of exempt organizations.
The IRS also said that it will raise the threshold for organizations to file the Form 990 beginning with the 2010 tax year. At that time, groups with less than $50,000 will no longer be required to file the full Form 990 and can instead file the new Form 990-N.
Currently, all nonprofit groups with more than $25,000 in revenue must file the full form.
Getting an Accurate Picture
The Form 990 has been relatively unchanged for the past 25 years and has been criticized by some as being out of date and as failing to provide the public with an accurate measure of the finances of nonprofit organizations.
Based on that criticism, the IRS released a draft of a new, updated form in June. The new form requires charities to disclose more information about their financial operations than is currently required. The change is part of an effort to inform the public and to make it easier for the tax agency to find organizations and people who violate the laws that govern tax-exempt groups.
The main part of the redesigned Form 990 consists of an 11-page document — what the IRS calls the “core form” — that all nonprofit organizations would complete.
The form is accompanied by 16 supporting schedules, one or more of which charities would be required to fill out, depending on their activities. The IRS said most charities probably would have to fill out only three of the schedules.
By comparison, the current Form 990 has a nine-page main section, two schedules, and 36 possible attachments.
The new setup has drawn praise from some observers — though the June draft sparked considerable outcry because of its inclusion of ratios that compared compensation of top officers with total expenses and fund-raising expenses with total contributions.
Those ratios were removed from the new form in October — as was a question that would have compared operating expenses with an organization’s net assets.
Nonprofit Hospitals
The final version of the form released today includes more changes — most notably some revisions to the controversial Schedule H for nonprofit hospitals.
Details of the changes are available through the IRS’s Web site.
Ms. Lerner said one of the most noteworthy changes involving Schedule H involves its timing. Hospitals will only be required to fill out portions of the form for the 2008 tax year. Hospitals will have until the 2009 tax year to complete the full form.
Nonprofit groups that are required to fill out a schedule detailing tax-exempt bonds will get similar relief.
“We believe the transition relief we are providing is appropriate and meaningful, and will ease the concerns raised by commenters,” Ms. Lerner said.
Concerns from Lawmakers
While many of the changes are likely to satisfy nonprofit leaders, they are not drawing universal praise.
Sen. Charles E. Grassley, the Iowa Republican who is known for his scrutiny of tax-exempt organizations, said Thursday that he is disappointed with the changes to Schedule H.
Mr. Grassley also said he believes the elimination of fund-raising and compensation ratios water down the form’s potential impact.
“I just submitted testimony at a House hearing on veterans charities that spend more money on salaries and fund-raising than helping veterans,” Mr. Grassley said in a written statement. “The IRS easily could have done more to help donors readily understand where their money goes.”
To learn more about the new 990, see an online discussion The Chronicle of Philanthropy held with two experts.
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