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Mandatory E-Filing Coming Soon for Nonprofit Organizations

For some tax-exempt organizations, mandatory e-filing is old news. Until now, there was no language on the books requiring the thousands of other tax-exempt organizations that didn’t fall into any of those three categories to electronically file.

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For some tax-exempt organizations, mandatory e-filing is old news. Until now, there was no language on the books requiring the thousands of other tax-exempt organizations that didn’t fall into any of those three categories to electronically file.

On July 1, 2019, President Trump signed into law H.R. 3151. Known as the Taxpayer First Act, this bipartisan bill was touted as the first comprehensive reform package related to the Internal Revenue Service in more than two decades, “revising provisions related to the IRS’s customer service, enforcement procedures, cybersecurity and identity protection, management of information technology, and use of electronic systems. 

An important piece of this legislation is language that will force all nonprofit organizations to electronically file their Form 990 information, which includes Forms 990, 990PF, 990-EZ, and 990-T. 

What’s changing?

For some tax-exempt organizations, mandatory e-filing is old news. The largest organizations (assets totaling $10 million or more and file at least 250 returns) and the smallest (annual gross receipts normally $50,000 or less) have been required to file their Form 990-series returns electronically since 2007. The same goes for large private foundations or charitable trusts that file at least 250 returns over the course of a calendar year.  

Until now, though, there was no language on the books requiring the thousands of other tax-exempt organizations that didn’t fall into any of those three categories to electronically file. The Taxpayer First Act changes that by extending the e-filing mandate to nearly every tax-exempt organization in the country. 

The exceptions to the rule are organizations that aren’t required to file any returns at all – namely, churches and governmental entities. There will be some special challenges, particularly for private foundations and organizations with unrelated business income.  

Forms 990-PF for private foundations

Additional administrative challenge with e-filing is expected for private foundations as they often have voluminous attachments, such as listings of grants and investments. Foundation managers will need to change the format for certain information so it’s conducive for electronic filing. 

Private foundations are currently on the IRS’s radar screen. The statute requires exempt organization returns be “made available by the Secretary to the public as soon as practicable in a machinereadable format.” Electronic filing may make it easier for the IRS to use their data-driven analytics, models and queries to identify which tax-exempts, including private foundations, to audit.  

Forms 990-T for unrelated business income

Until now there was never a requirement for organizations to file the 990-T electronicallyFor all tax-exempt organizations, mandatory e-filing of Form 990-T, used to report unrelated business activities carried on by exempt organizations, is brand newWith required electronic filing, it may be easier for the public and the IRS to scrutinize what unrelated business activities exempt organizations are undertaking. Exempt organizations that offset unrelated business income with unreasonable expense allocations othat report continual net operating losses annually may be challenged more frequently by the IRS 

Organizations will have to consider the mechanics of handling sensitive attachments as well. For example, larger organizations with more sophisticated investments and endowments may have information disclosure requirements (i.e. “foreign forms”) for reporting certain international investments. These are normally attached to Form 990-T. The good news is that some information may be redacted because, as noted by this guidance (click here to view)foreign forms don’t need to be made public as part of Form 990-T filings.  

Currently the Internal Revenue Service has no capability for accepting Form 990-T electronically. The newly enacted law includes a transitional rule for electronic filings of all Forms 990-T as well as Forms 990 for small organizations (assets less than $500,000 and gross receipts less than $200,000) giving the IRS discretion to delay application of the new requirement for up to 2 years.   

What’s the catalyst behind this change?

All in all, this portion of the Taxpayer First Act was nearly universally lauded as a common-sense transition – a rare piece of legislation equally supported by nonprofit leaders, the IRS, watchdog groups and both sides of the aisle on the Congress floor. 

Nonprofit experts have been clamoring for enhanced e-filing regulations for years. In fact, language nearly identical to that of the Taxpayer First Act was recommended to Congress way back in 2005 by the Panel on the Nonprofit Sector, an independent coalition of 24 philanthropic leaders from across the country.  

The idea is that mandatory e-filing will create a uniform system by which all tax-exempt organizations’ financial information is reported and stored in one easy-to-access space. This, in theory, will lead to increased efficiency, cost reductions and generally improved oversight and transparency across the sector.  

When will this change take effect?

The timing of mandatory e-filing depends on the organization. The requirement is effective for tax years beginning after the date of enactment. More specifically, it depends on when an organization’s fiscal year begins. Regardless, paper filing will be discontinued in 2022. 

For calendar-year filers, mandatory e-filing will begin in tax year 2020. The first mandatory e-file will likely be due in May of 2021. 

For tax-exempt organizations with fiscal years that began on July 1, 2019mandatory e-filing will begin with their FY2020 returns, covering the tax period from July 1, 2020 – June 30, 2021Since the Taxpayers First Act was signed into law on July 1, 2019, these organizations’ FY2019 returns are exempt from the mandate.

For tax-exempt organizations with fiscal years that began between July 2 – August 31, 2019, mandatory e-filing will begin with this current fiscal year. Their first mandatory e-filed returns will likely be due in November or December of 2020.  

The shorter answer, however, is that these changes are coming up fast. Tax-exempt organizations should take the steps to contact their financial advisors as soon as possible and start planning ahead  

 

Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law. 

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