Changes in Federal Disclosure Policy: What They Mean for Charities

Wednesday, October 24, at noon, U.S. Eastern time

Dan Moore, vice president for public affairs at GuideStar, the online database that provides the 990 and other information to the public.Mr. Moore previously oversaw charitable organizations in the New Mexico attorney general's office. He also served as president of the National Association of State Charity Officials.

Jack Siegel, a Chicago lawyer and accountant who consults to numerous nonprofit groups. Mr. Siegel is the author of the blog Charity Governance and of A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good (John Wiley & Sons).

A transcript of the chat follows.

Peter Panepento (Moderator):
    Welcome to today's live discussion about the Internal Revenue Service's proposed Form 990 revision. We are pleased to have two excellent expert panelists with us today -- Dan Moore of GuideStar and attorney and accountant Jack Siegel. We've gotten some great questions so far, and we invite others to send in their questions to our panelists. I do want to stress, however, that this is not a discussion about technical aspects of filling out the tax form. It is a general discussion about the proposed form and what it will mean for nonprofits.

Dan Moore:
    On behalf of GuideStar, I want to thank the Chronicle of Philanthropy for hosting this live chat on the new Form 990.

At GuideStar, we know a little about Forms 990. As you know, GuideStar first posted Forms 990 on the Internet in November 1999.

In the beginning, we received a number of questions and complaints from nonprofits about the fact that we had posted their Form 990 on the Internet. Now we get calls and complaints from nonprofits about how long it takes to get their 990 on our site. It's a remarkable change in attitudes and expectations.

Over these years, GuideStar has changed too. We are gathering more and more information directly from nonprofits. We are striving to have complete, accurate and timely information on the work of nonprofits. We are developing products and services to better serve the field of philanthropy.

Our expertise ranges far beyond the Form 990, but we are grateful to be here. I hope that I can offer some insight in the new Form 990 from our perspective.

Thanks again for inviting GuideStar.

Question from Brad, nonprofit with intl activities:
    It seems that one troublesome consequence of the new Form 990 could be that -- by requiring very specific information on foreign programs and partners -- it could play into the hands of unfriendly foreign governments (esp police states) that want to crack down on local entities doing programs with U.S. non-profits. Am I reading this correctly, or is there some way to continue working with such partners without exposing them to unwanted risks?

Dan Moore:
    Thanks Brad. Our friends at the Evangelical Council for Financial Accountability (ECFA) made this same point in their excellent comments to the IRS. ECFA works with Christian nonprofits, many that have overseas missionary work. ECFA proposes that IRS delay in the implementation of Schedule F, I believe is the schedule, so that Congress could act to make this schedule not subject to public disclosure.

The idea would be to treat the Schedule F information like tSchedule B -- where nonprofits report the names of donors who have contributed $5000 or more to the organization. You have to file the information with the IRS, but you don't have to disclose the information to the public.

This idea creates a nice balance between reporting information that the government wants for regulatory purposes but will create some serious unintended consequences as you state.

US-based philanthropy serves the peoples of the world. Anti-democratic forces around the world are suspicious and may be hostile to this work.

I would expect the IRS to make changes to balance their need to know with the need to show the world these types of disclosures.

Question from Richard Chobot, Osher Lifelong Learning Institute at George Mason:
    What is the projected impact of the new 990 on small nonprofits <$500K?

Dan Moore:
    Richard

This is a good question. The IRS has stated it's three goals for the Form 990 redesign as:

1) Increase the transparency of the operations of nonprofits;

2) Increase it's ability to enforce the tax laws that regulate nonprofits -- or tax exempt organizations, as they like to call us; and

3) Minimize the burden on filers.

GuideStar is very concerned about the potential costs of complying with the new form. We are projecting a 50 to 100% increase in compliance costs in the first year. Most of these costs are likely to be associated with tracking and reporting new data.

Small nonprofits may also experience increases in compliance costs. One area that is of concern is the ability for small nonprofits to find qualified persons to help with the completion of a timely and accurate Form 990 at a price that is affordable to the organization.

At GuideStar, we are concerned for small organizations to file timely, accurate and affordable returns. That is why we recommended that the IRS adjust its filing thresholds in the following ways:

1) Raise the filing threshold for the Form 990-EZ from $25,000 to $50,000. (The IRS Tax Payer Advocate also makes this recommendation.)

2) Raise the filing threshold for the Form 990 from $100,000 to $500,000.

We think that IRS can manage these financial impacts by adjusting the filing thresholds as we propose.

Question from Carolyn, large non-profit:
    I had heard earlier this year that the final revised 990 will be little different from the draft revision that is currently available on the IRS website. As far as you know is that an accurate assessment?

Jack Siegel:
    Yes. The IRS received 650 comments. They appear to be taking them to heart. I have also heard that as a result of specific comments, that they are contacting people outside of the agency for their knowledge and practices with respect to specific reporting issues. So I think you will see differences.

The IRS has also announced some changes already. Most notably, they have dropped the efficiency ratios on the first page of the Core Form, the organization will have more space on the first page to describe what it does and I believe its accomplishments.

The governance questions are also being re-wirtten.

I do think the basic format of a Core Form that everyone completes and schedules that are completed if applicable will remain.

Question from Cynthia, small nonprofit:
    In the posted in Philanthropy Today, the author refers to a potential fee increase in 990 preparation, estimated to be from 50% - 200%. As a small non-profit, this is significant. What is the cause of the increase, and what can we do to reduce or mitigate this?

Dan Moore:
    Thanks Cynthia. I tried to respond to the question about cost earlier.

The source of the increased costs are mostly transitional. There are costs in tracking and then reporting on new data elements that nonprofits have not had to report on before.

It's really important for the IRS to release the new Form 990 as soon as possible so that nonprofits can know what they will have to report on. Then nonprofits will have to review their systems and processes for tracking information.

It will cost the nonprofits more if the proper systems are not in place to track information that will need to be reported on the Form 990. Or the information that will be reported will not be accurate and reliable.

The good news is that the IRS has stated that it will try to release the new Form 990 in late December or early January.

Question from D'Arcy MacMahon, Lloyd Center for the Environment:
    How should a tax-exempt (501-c-3) organization account (on its Form 990) for items (e.g., art-work, lessons, food, fishing trips, decorations, travel, wine, merchandise, etc.) which are contributed to it for a specific fundraising auction and then, almost immediately thereafter, sold (in the same accounting period) at that well-attended auction?

Jack Siegel:
    I answered this question, but it did not process.

I think the purpose of today's discussion is to focus on the draft form 990 and the issues its presents rather than answering specific preparation questions.

Having said that, Bruce Hopkins in his The Tax Law of Charitable Giving (Third Edition) has a discussion of auctions on pages 311 through 317. He points to seven discrete issues. You need to address these issues before you report the transaction on the Form 990.

I suspect it is not a coincidence that the last issue is the Form 990 reporting. Here is answers your question, but not in all that much detail. He generally looks to Form 990, Part I, Line 9, with a parenthetical comment regarding the portion of the proceeds that are treated as a charitable contribution.

I suggest you start with the Form 990 instructions--I would look at them now, but there isn't time--, then look at Hopkins book, and then talk with your organization's accountant.

Hope that is a start.

Question from John C McGee, consultant - formerly Executive Director of Family Relations Program:
    Upon what legal premise is the I.R.S. operating under to expand their reach from tax collection and enforcement of the IRS Code to oversight of agency governance?

Jack Siegel:
    The argument that IRS officials make is that they are not telling nonprofits how to govern themselves, but that asking nonprofits to disclose certain information helps the IRS determine whether there is potential for private benefit, whether the organization has the benefit of the rebuttable presumption under the intermediate sanctions, and whether the organization is organized and operated in furtherance of a charitable mission.

I think they are on sound ground in terms of asking about conflicts-of-interest policies, although I think the yes/no format is unhelpful and potentially misleading. The existence of such a policy is certainly relevant to the intermediate sanctions and the question of private benefit. As the IRS moves further afield--such as asking whether the organization has a record retention policy--I think the link between tax enforcement and the Form 990 questions becomes more tenuous. Having said that, I have to acknowledge that a record retention policy does goes to the question of maintaining adequate books and records, something that the Code does require.

I think it is useful to note the human element in tax administration. Given the Senate Finance Committee's strong interest in governance and a letter that was sent to the Treasury about the Form 990 revision project, I think that IRS officials as a practical matter had to address the issue. In other words, I am not surprised to see these questions in the current climate. Moreover, to the extent that someone in the IRS said we don't have authority to ask these questions--I am not saying that they don't have the authority or that anyone came to that conclusion--I think Congress would have provided the authority.

Question from Scott, small nonprofit:
    A significant change in the form relates to board members disclosures of business transactions with other board members, that are not related to the NFP. 1) How will the NFP know what to disclose and how will they know it is accurate?

How will the tax preparer know it is accurate? 2) How will client-accountant/attorney privilege or legal confidentiality matters be handled.

3) In speaking with other nonprofits, there is a concern that highly valuable board members and donors will resign from NFP boards, especially United Ways, Chambers of Commerce, and other high profile boards. What is the purpose of this disclosure?

Jack Siegel:
    I have raised all those questions and I don't think there are good answers yet. I think one good example is the lawyer who is on the board of a large community charity and her firm, totally unrelated to the charity's business, represents other board members and their businesses. That strikes me as a problem in terms of attorney-client privilege.

The IRS is aware of these concerns and I assume (and hope) they will make some reasonable accomodations. As I recall, in the current instructions, the IRS asks for some board member information, but then says--you need to make a good faith effort to get it, but if you can't get it, that's OK. Don't rely on my recollection on that point, but I could certainly see the IRS adopting that approach. Ask, but don't worry if they don't tell.

The IRS has a legitimate reason for this disclosure. Suppose, for example that you and I are both on a board and we do business with each other. Now suppose you want to pay the executive director of the charity more than I think is appropriate because you like the executive director, he is your brother, or you are social friends. The question is: Will I support you even though I disagree because I don't want to jeopardize our outside business relationship. That leads to the question under the intermediate sanctions as to whether an independent board approved the compensation.

I probably could say that better if I had more time, but I think the point is in there.

Question from John, midsize nonprofit:
    My accountant says that the cost of the new 990 will increase from my current $1500 to somewhere in excess of $5000. The article suggests that the IRS believes no additional burden will be placed on NFPs. How do we reconcile a significant fee increase with "no additional burden." Will the IRS offer probono services to help NFPs complete 990 returns when they can no longer afford tax preparation fees?

Dan Moore:
    Thanks John. This is another question about costs and burdens. I don't know what level of pro bono services IRS will be offering. Beyond their education programs and telephone forums, I'm not sure if they will have any specific programs for helping nonprofits complete the Form 990.

This is a really important area. And one the IRS says it is paying attention to.

Peter Panepento (Moderator):
    We've hit the halfway point in today's online chat on the proposed 990. We've had some excellent questions so far, but we certainly have time for more. Please feel free to ask a question to one of our expert panelists.

Question from Peter Panepento:
    There has been a lot of talk in the nonprofit world about the idea that the IRS should take more time to review comments and make changes to the form before it adopts a final version. Is that practical at this point -- and is the IRS leaving enough time for itself?

Jack Siegel:
    The comment period should have been at least 8 or 9 months, with successive rounds of revisions and new comments. But like the rest of us, the IRS has to live in the real world. The programmers are available right now, but then they go back to the Form 1040, which is a massive project. We in the nonprofit community think the Form 990 is the most important tax form, but the Form 1040 is where the government gets its money so we sort of get the leftovers in terms of time. That is the reality. The EO division of the IRS is not the BIG IRS, just part of it. It is fighting for resources.

Whatever happens, I think the EO-IRS people have given us a much better form already. We and the EO-IRS people will have to live with the budgetary constraints.

There is clearly a plan to review the Form and do some other stuff in four or five years. Moreover, the form is much more modular as revised. That means that when new issues do come up, the IRS will be able to address them.

Question from Peter Panepento:
    Will the new form have any impact on how quickly 990 filings will be made available to the public through GuideStar?

Dan Moore:
    Thanks Peter. I believe the Urban Institute has done some analysis on the question of how timely Forms 990 are filed. My best recollection is that it now takes about 8 1/2 months following the close of fiscal year for Forms 990 to be filed. By law, an organization can take 2 extensions to file the return and file a "timely" 990 10 1/2 months following the close of their fiscal year. At GuideStar, we are afraid that the complexity of the new form will add to the time nonprofits take to file the returns. This is one area of reform that the new Form 990 does not address.

Question from John Griswold, Commonfund Institute:
    The new Form 990 contains several questions regarding the governance structure and practices of reporting nonprofits. What use is the IRS likely to make of the answers to these questions?

Dan Moore:
    Thanks John. The first thing that IRS is doing to do with these questions is ask your group to answer them and then use the power of transparency to change behavior. That's part of their overall strategy. The next level is in IRS eforcement activities. Lois Lerner, the IRS chief of Exempt Organizations, talked about this issue in Denver last week at the conference of the National Association of State Charity Officials. She said that the governance questions are part of an overall risk model that they are building to help target IRS EO enforcement activities. Since these risk models are the methods of law enforcement, we will never see what goes into building the model. So answering "no" to some of the governance questions will not necessarily lead to an audit. But it is clear that it is one factor in their overall risk model. Because the IRS has very limited resources to oversee 1.7 million tax exempt groups, they have to target their enforcement efforts to be as effective as they can. Steve Miller, the IRS Assistant Commissioner, reported to Congress last summer that the IRS audit threshold is about 1% of organizations under their jurisdiction. I think that some in Congress would like to see more enforcement from the IRS. But the enforcement activities are tied to budgets for IRS EO. They have been moving up over the past few years.

Question from Peter Panepento:
    Is there any information that the IRS should be asking for but isn't on the new form -- or did the agency come close to addressing most of the key metrics that are needed to properly evaluate a nonprofit group's financial picture?

Jack Siegel:
    Ah, somebody who wants more disclosure. A glutton for punishment.

Generally accepted accounting principles mandate three financial statements. The missing one on the form is the statement of cash flows. I would like to see that added, but I suspect it won't be.

I would have also liked to see a question whether the charity had any elected officials on its board.

I also asked for a question whether the organization received an unqualified audit opinion (assuming an audit) and if not, explain why not. I would not be surprised if something about audit opinions gets added.

I had asked for a question about whether there had been some embezzlement or other financial fraud. I am told that will be added.

Question from Peter Panepento:
    Jack, you mentioned that the IRS has received more than 650 comments from the public on the new form and that it has already made some significant changes as a result of those comments. What substantial issues have come up in the comments that the IRS has not yet addressed?

Jack Siegel:
    The efficiency ratios on page 1 of the Core Form were savaged and the IRS has announced that they are being dropped.

I seem to recall that one-thrid of the comments came from hospitals and concerned their form--is that Schedule H? The whole community benefit issue is a very big deal for hospitals and I know the IRS is trying to address the comments. I suspect that schedule will undergo change, but I don't have clue what the final form will look like.

There were a lot of small, but good comments. For example, there is a questions about contracts attributable to fundraising events (I am doing this by memory so I may not have it quite right). In any event, as a nonfunding raising person, I thought--"That's OK, if you got a big contract with someone to stage an event for your organization, list it." Someone wrote in and said, does that mean if we have a charity ball that we have to list the contract with florist for $500 and the contract with the bartender for $1,000, and the contact with the band for $2,000. I don't think the IRS wants that level of detail and now that the issue is clarified, I suspect you will see a change to the form or the instructions.

Eve Bornstein, an attorney in Minneapolis, submitted a set of comments that were extremely practical, often saying "That is a good question, but it needs to be refined to be meaningful." I think those sorts of concerns over details which lots of people raised will result in a much better form.

In the end, this revision really is a partnership between the IRS and the industry. The industry has a lot of practical experience that the IRS needs to hear.

Question from Peter Panepento:
    Dan: Which parts of the new 990 will increase public understanding of charity finances? Which parts are likely to create confusion?

Dan Moore:
    Thank Peter. I think that the purpose for the summary page is to provide the public better understanding of a charities finances. That's why so many of us had concerns about the use of efficiency ratios on the first page. We thought they would add confusion. GuideStar recommended that IRS ask groups to provide two years of data on the summary page. This would give the public some sense of the trends in the organization. GuideStar also recommended that the program services accomplishments be moved from page 10 to page 2 -- where it is today. Members of the public want to know what an organization is doing with its money. This is all about the programs that a nonprofit operates. In my opinion, the area of greatest confusion on the Form 990 is the functional allocation of expenses into Administrative, Fundraising and Program categories. This reporting requirement was added in 1979 for state charity officials and I believe is not core to tax administration. The Urban Institute and Indiana University have an important study about fundraising costs that highlights that a lot of reporting in this area is simply not reliable. That's a source of confusion especially since some watchdog groups are so focused on ratios derived from these allocations. The data appears to not be very reliable. This calls into question a lot of the ratings that rely so much on these expense allocations.

Question from Grant Williams, The Chronicle of Philanthropy:
    Would the new Form 990 make it more difficult for charities to register with state regulatory offices? Or does it make any difference?

Jack Siegel:
    I am not sure it makes an immediate difference. Each state still has its own requirements and forms, which might include attaching the Form 990. But I have the impression that there is a question beginning to bubble under the surface: If we have spilled our guts on the Form 990, why don't you just accept that with a postcard that includes our name and address?

I would hope that each state looks at the final Form 990 and at its own form and says: They are almost identical, why don't we just take the Form 990 and get rid of our form.

Presumably the XML language or varation that I assume is being used in the programming of the Form 990 will make it easy for anyone to mine the form for information, meaning that states could write a program to analyze the information in a format that works for them.

Aren't I am optimist?

Question from Grant Williams, The Chronicle of Philanthropy:
    How would the new form affect the way charities keep track of and report donated goods they receive (in-kind gifts)?

Dan Moore:
    Thanks Grant. Goodwill Industries made comments on this reporting obligation. They are very concerned about the compliance costs to track and report this information when so much of their revenue is derived from the sale of donated goods. I'm not sure how the IRS is going to respond to these concerns. There is a concern that donors are taking charitable deductions that they are not entitled to. But the solution seems to layer in new and apparently burdensome reporting costs. It will be important to see how the IRS handles these questions.

Peter Panepento (Moderator):
    We're approaching 1 p.m., but we still have a few outstanding questions. We'll keep the chat open for a few extra minutes to accommodate those questions -- and we invite those who are awaiting answers to stick around.

Question from Debra Natenshon, The Center for What Works:
    One of the key changes highlighted in the Chronicle article referred to nonprofit groups needing to describe their "most significant program service accomplishment" for the year. Is that meant to be an optional field? If required, is there a plan to have choices or guidelines, so that useful information is entered and some comparisons can be made? It seems that if it is an open, required field, it will not be very useful to anyone who may be interested in analysis.

Jack Siegel:
    You raise a good point. I should look, but I assume they are retaining activty codes so that there is some standarization.

When people commented on this information, I think the general consensus went like this: The first page of the Core Form is designed to tell donors and the press what they most want to know. Charities said: What people most want to know is what we do and what we accomplish. Get rid of the efficiency metrics (fundraising ratio, for example) and give us space to tell our story.

The movement of these questions to the first page responds directly to what charities requested and I think appropriately so. Nevertheless, it might make comparisons more difficult if there is not some standarization mechanisms.

Maybe in the instructions, the IRS will list one thousand things that charities do and ask people to use the exact phrases.

Question from Tom, researcher:
    Dan or Jack - besides the new questions dealing with governance and conflicts of interest, are there other new sections or questions that you think will be especially burdensome for a typical nonprofit in the $250,000 to $1 million budget range?

Dan Moore:
    Thanks Tom. I'm not sure that I would characterize the questions on governance and conflicts of interest as burdensome. They are new. Many of the state associations of nonprofits and management support organizaitons will be doing a lot of trainings in the coming years on these topics. Many do that already. Tom -- I'm not sure there is a typical nonprofit because as you know researchers categorize nonprofits into 26 different categories. I think that biggest burden for these small and emerging nonprofits is going to be securing competent tax help to complete the Form 990 in a timely and accurate way. And at a cost that these nonprofits can afford.

Question from Grant Williams, The Chronicle of Philanthropy:
    It sounds like charities, state regulators, and lawyers for charities all disliked the IRS's original idea to require nonprofits to put certain ratios on the Form 990 -- such as their fund-raising expenses as a percentage of contributions. Why? And why did the IRS decide back away from its idea?

Jack Siegel:
    Efficiency ratios are bad!!! They are misleading and they cause charities to do dumb things. Let's say we have a charity that spends $90 to raise $100 and another that spends $50 to raise $100. Is the second charity better than the first one? Not necessarily. Suppose Charity 1 kicked off a five-year capital campaign this year and Charity 2 didn't? Charity 1 may have a lot of one time upfront costs associated with that campaign. Or suppose Charity 2 has a foundation or separate arm where it does most of its fundraising. Those costs are real, but they are not reflected in Charity 2's numbers. In short financial ratios are useful metrics if you use them to ask questions and do analysis. They are not useful and are detrimental when they are used as benchmarks without analysis.

If you doubt that charities don't do dumb things, take a look at the Chronicle of Philanthropy's story yesterday on the United Way of the Bay Area court case. The business arrangement turned out to be a disaster by anybody's meeasure. If you read the court opinion, one fo the findings of fact is that the United Way engaged in the transaciton in part to improve how it appeared to donors in terms of administration and overhead expenses. As I point out in my blog article, I don't even see how what they did really helps even if it went as planned, but this is a great example of what these stupid ratios cause charities to do it. And why do they do it? Because they have to be competitive in the fundraising marketplace. The IRS shouldn't encourage that.

Peter Panepento (Moderator):
    Thank you to everyone who joined us today -- and a special thank you to Dan Moore and Jack Siegel for their thoughtful responses.