October 2007

Dear Friend: Readers from all over the country responded to my column last month about GuideStar's comments on the draft revision of IRS Form 990.

GuideStar has two major concerns with the proposed draft. Most important, we think it would place an undue burden on the thousands of nonprofit organizations trying to do a good job and perform admirable public services. That's why we advocate a smaller, more focused Form 990—one that collects more timely and meaningful data. Even though GuideStar is increasingly relying directly on nonprofits for much of our data, we still find the 990 to be our major source, but often a frustrating and insufficient one.

GuideStar's concerns about the additional burden the current draft return would impose on filing organizations struck a chord with many people. The executive director of an Altadena, California, nonprofit wrote, "Audits are already a huge overhead expense for us. Adding a similar charge for building in systems to accommodate this new 990 would be onerous." The president of a Boston charity agreed: "If my audit costs go up 50 to 100% there is no way I can continue. We are a small, under $500,000 organization and it is hard enough raising that much let alone another 5 or 6,000."

The executive director of a Glen Cove, New York, animal shelter predicted that they would no longer be able to depend on volunteer help to prepare their returns. "We rely on pro-bono tax preparation from a CPA/professor at our local university. If the IRS does make preparation time that much more difficult, it is likely we will lose this help." She continued, "We are totally onboard with fiscal transparency, but the extra money it would cost us to complete a 990 that is far more time-consuming, yet not on-target would pay for an awful lot of dog and cat food!"

The chair of an educational organization in nearby New Jersey echoed her thoughts, "My organization is now paying $7,000 for a 2-year audit but is fortunate to have someone who has prepared our 990 for many years. We have no problem opening our books but hate the thought of mounting a fund raiser to pay for audits and tax preparation if your projections are correct. This would become our second highest line item and no doubt take a great deal of our time."

A program officer for a Montana organization predicted a similar impact:

As a small nonprofit (budget under $100K), my biggest concern is how complicated the form will be. As a shoestring operation, as are so many in rural areas, we want to focus our limited resources on providing programming. While we work hard to ensure transparency, an over-complicated form will require that we divert resources from programming to reporting.

At present our 990 preparation is donated. If preparing the 990 became complicated, the cost would not just double for us—it would jump from an in kind service donation to a significant expense. Even as a donated service, we still need to research and provide detailed information to the preparer, again taking resources away from programming if extensive time is needed to provide the information.

The representative of a Pennsylvania CPA firm "serving over 50 non profits" suggested that these scenarios are entirely possible. "We concur with your auditors that the new 990 will increase the fee by 50 to 100%. The new 990 will be onerous, time consuming, and lead users to draw inaccurate conclusions. It also conveys indirectly that certain ratios are 'good,' possibly leading a non profit to skew its data to achieve the 'good' ratio. Ratios may vary at certain times for legitimate reasons and non profits need the freedom to manage their NPO properly, without concern that they will be judged by the IRS or 990 users based on the ratio for that particular year. The IRS should not impose burdens on the non profit sector in excess of the burdens placed on the for profit sector."

One correspondent agreed with our goals for the 990 revision but not the methods we suggested for achieving them: "I agree that the new 990 should be complete, accurate and filed in a timely manner. However I disagree that the changes should be modified. The ideal solution would be to require all the national and multinational corporate nonprofits to comply to all the new requirements and let the little guys (under $100k annual income) use a modified version of the 990EZ." We agree with this correspondent. Our comments to the IRS recommended raising the filing threshold for Form 990-N filers from $25,000 to $50,000 and that for Form 990-EZ from $100,000 to $500,000.

A North Dakota writer addressed a different aspect of who should be required to file Form 990: "I think the 990 requirements should apply to organizations like the Salvation Army, etc. as I am always uncomfortable with organizations that have no accountability or not subject to any rating system." He was pleased to learn that many religious nonprofits make their information public through the Evangelical Council for Financial Accountability and commented in a subsequent message, "I have no problem with faith-based groups providing information on a 'volunteer' basis and avoiding the 990. If they are willing to do that, it seems to me to be in their own best interests to remove doubt. Conversely, if they do NOT provide, they then can become 'suspect' and I may give elsewhere to those who do provide some accountability information."

Some people just plain disagreed with us. From Denver, Colorado, came this response:

I disagree that less is more, especially when it comes to transparency and accountability for nonprofit organizations, and especially nonprofits organizations that do not always meet their obligations concerning community benefit or public accountability. And there are a lot of them—hospitals, associations, foundations—the list is long.

I don't believe that "minimizing the burden on filers" should be the primary goals of 990 reform—even though I will be professionally affected by the increased workload. Nonprofit organizations receive extensive benefits for their exempt status, and the reporting process is a small price to pay for that, especially if the additional work allows our constituencies to hold us accountable.

A Flagstaff, Arizona, writer shared the comments he had sent the IRS. In them, he maintained, "Detail matters for the public and readers in Form 990 contexts. More is better," and cited charitable investments, compensation, and payments to consultants as examples. "Demand detail. Demand timely filing," he urged the service. "Ratchet Schedule J (and some others) up as hard as you can—then, ratchet more."

Finally, a reader from Clinton, Washington, had no objections to the draft revision: "I looked over the new IRS Form 990, from the perspective of having reviewed thousands of Form 990 filings submitted by animal protection organizations since FY 1989, and thought it was a significant improvement over the current form. Other than the usual learning curve involved in getting used to anything new, I didn't see anything problematic." Instead, he stated, certain organizations that rate nonprofits already do more damage than the new 990 will.

To these readers, I find myself agreeing with the goal, more transparency and accountability, but disagreeing on the tactics. We at GuideStar see the IRS Form 990 as an important "baseline," but one that can rarely stand alone in presenting a good picture of an organization. It needs to be supplemented by the actions of the organization (with a strong commitment by board and staff) and other organizations—such as GuideStar, and others—that are trying to provide additional information as well has help donors and others make sense of all these facts and figures. To put it another way: the IRS Form 990 is part of the transparency ecology but by no means the only vehicle for nonprofits.

As always, I greatly appreciate the time people took to share their thoughts with me (and the IRS). Whether you agree or disagree, your feedback is always interesting and informative. Thank you for writing.

Sincerely,

Bob Ottenhoff
President and CEO
president@guidestar.org