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August 25, 2015

IRS Plans to Release Digitally Readable Form 990s in 2016 (article)

The IRS is developing a technology solution that would streamline its ability to release digital copies of the Form 990 tax information filings. An announcement about the option comes on the heels of a U.S. district court ruling that ordered the IRS to produce digitally readable Forms 990 of nine organizations. Currently, the IRS releases digital copies of Forms 990 as image files. The new software would produce versions of the Forms 990 in the Metadata Exchange Format, also known as a machine-readable format and remove any personally identifiable information from the Form 990. It is slated for release in early 2016.

The announcement indicates the IRS is preparing to respond to more requests for Forms 990 in digitally readable files. Not-for-profit organizations should prepare for the demand as well. Digitally readable files make Forms 990 easier to aggregate, and allowing not-for-profits, the public and other interested parties additional ways to compare not-for-profits to one another.

Privacy Concerns

Forms 990 are considered public record and therefore subject to the Freedom of Information Act (FOIA). The IRS currently handles FOIA requests by converting paper forms of the Form 990 into an image file format, a file type that makes it difficult for users to search specific fields online. Electronically filed Form 990s are converted into images as well because the IRS has to remove personally identifiable information from all Forms 990 before it distributes them.

In Public.Resource.Org v. U.S., the case that resulted in the IRS releasing the digitally readable Form 990 files, Public.Resource.Org asked that IRS use a format that could be electronically searched. The IRS argued that the requirement would be too much of a strain on its resources. It would require IRS staff to be trained in how to remove personally identifiable information from the Forms 990 in the new format. The technology solution being developed would address the concerns about staff limitations. The program would also remove personally identifiable information from the Form and strip away information provided in the Form 990 that is not part of the Form 990 itself or its schedules.

At this point, it’s not clear whether the software will be used for current year tax filings or if past Forms 990 would also be converted to the machine-readable format.

Digitizing the IRS

It is not just the courts that are asking the IRS to become more open to digital use of the Form 990. The IRS Advisory Committee on Tax-Exempt Organizations and Government Entities (ACT) recently recommended the IRS make filing Form 990s electronically mandatory for all not-for-profit organizations.

Although some Not-for-profits are required to file electronically many have the option to file electronically or in paper form. According to the court ruling with Public.Resource.Org, 54% of not-for-profits filed paper versions of the Form 990 in 2013. The ACT argued that filing electronically could reduce the administrative burden on the IRS end. Digital-only filing­­ might also help entities meet filing deadlines, which if missed, could result in per-day late penalties for organizations. It would also cut down on the organizations that file incomplete returns because the electronic version of the Form 990 would not allow a user to submit an incomplete return.

The IRS manually transcribes some Form 990 data for its own data-collection services, and a digital-only format has the potential to make those processes easier.

Implications for Not-for-Profits

The Public.Resource.Org v. U.S. decision and subsequent IRS software announcement indicate that public databases of Form 990 information could become more robust. Public.Resource.Org hasn’t backed off its requests for digitally readable files since the court decision. It created a campaign to encourage media and watchdog groups to continue to file FOIA requests in digitally readable formats. The website monitors the FOIA requests here. Thirteen have been filed since early June 2015.

Not-for-profits should prepare now for more scrutiny on their returns. Verify that the information you include about your organizations accurately displays the mission and scope of your organization to the public and to other not-for-profits.

You should also keep in mind that easier availability of annual return information holds benefits for your organization as well. You may have any easier time benchmarking your organization’s compensation and donations against like-organizations. Having your Form 990 more readily searchable could also demonstrate to potential grant sources that your organization can effectively manage its financial resources.

For more information about how the developments in the Form 990 could affect your organization, please contact us here.

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