990 redesign calls for better filing software

[Editor’s note: A longer version of this article was published in Blue Avocado.]

Dennis Walsh

The IRS estimates it would take a novice preparer 158 hours to learn the regulations and complete the new Form 990 — equivalent to dedicating a full-time employee to this task for a month.

It’s likely that by 2010 over 300,000 small nonprofits will have to struggle with the costs related to Form 990 involving staffing or outsourcing, or both, as many confront the redesigned forms for the first time.

The majority of 990 filers have income under $500,000, making the costs of preparation onerous for many organizations.

At the same time, the revised Form 990 carries more weight than ever as more people view them on the web.

With an 11-part core form that must be completed by all organizations and that can trigger up to 16 separate schedules, or subsidiary forms, the new 990 is much more intricate than its predecessor.

The expansion of the 990 largely reflects the new governance objectives, involving boards of directors, that are included in the 2008 990 for the first time.

Translating such objectives into accurate completion of Form 990 is not straightforward, and many organizations will be left unsure of which way to turn, especially as governance guidelines are the same for large and small organizations.

One way nonprofits manage the complexity and costs is to outsource 990 preparation; roughly 75 percent of forms are completed by outsourced professionals.

The expanded questions on governance, compensation, insider transactions, and business with related organizations — along with more emphasis on narrative descriptions – have increased the time that both nonprofit clients and accounting practitioners will need to gather and process information.

Software packages supporting Form 990 are available at affordable license and per-return fees but generally require a skill level possessed only by accounting and tax

Accordingly, many organizations find themselves in a difficult position: Either struggle to learn the new forms and instructions at increased risk of an incomplete or inaccurate return, or opt for costly outsourcing to a professional firm.

To support ease-of-use filing by the nation’s individual taxpayers, the IRS partnered with commercial vendors in its “Free File” program. As a result, about one-half of individual taxpayers can prepare and file their returns online using free, user-friendly software.

To create similar tools for nonprofits, in 2004 the Urban Institute developed such software named “990 Online,” welcomed so enthusiastically by nonprofits that over 11,000 990s were completed using the software by only its third year; of these, almost 80 percent were also filed electronically.

But with the dramatic changes beginning with the 2008 form, will the Urban Institute be able to sufficiently improve 990 Online so that it is a solution for the many thousands of small nonprofits when they face the redesigned 990 for the first time while it’s phased-in between now and 2010?

The Urban Institute’s 990 Online should be applauded as a welcome step toward eliminating some of the grief and financial burden of completing the 990 as well as preparing nonprofits for the eventual requirement that all 990s be filed electronically.

However, rebuilding 990 Online to support the IRS form redesign has been much more costly than expected, according to Tom Pollak of the Urban Institute.

Pollak would like to expand the new software interface to support seamless transmission of the 990 to state agencies and exempt affiliates that require 990 data.

A modest annual investment that supports and improves the new 990 Online would be, in effect, a substantial grant to each one of the 450,000 charitable nonprofits that file a 990 each year. Even at an annual cost of $1 million for programming and support, the cost would be less than $3 per nonprofit.

Such software not only would make 990 compliance less costly to the organization, it also would improve 990 accuracy and make it far less expensive to post 990s online, thus increasing transparency and accountability to the American public.

Aside from the few nonprofits with complex tax law issues, there is simply no good reason why any nonprofit with an appropriate bookkeeping system should not be able to prepare a complete and accurate 990 without disproportionately burdensome costs.

Dennis Walsh, a certified public accountant, volunteers with nonprofits through the Guilford Nonprofit Consortium, SCORE, and the North Carolina Center for Nonprofits.

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