Form 990-N (E-Postcard) – Interview with CCH

A few weeks ago, I was interviewed by a reporter for CCH, a leading legal publisher, about Form 990-N.  PUBLICATION UPDDATE:  The article in which I am quoted appears in Federal Tax Weekly (November 21, 2007).

Here is a transcript:

Q:  What is your opinion on the IRS’s efforts to familiarize small non-profits with the new reporting requirement?  Do you think it is effective?

A:  Thank you for your inquiry.  I believe that the IRS is doing what is expected by sending notices to smaller registered organizations that did not file a Form 990 or Form 990-EZ the previous year because they did not meet the $25,000 gross receipts threshold and generally requesting that professionals and technical assistance organizations spread the word.  However, such strategy has only limited effectiveness because the majority of the directors and officers of these smaller organizations never receive the notice and may never interact with exempt organizations professionals that can share such information with them.  With frequent turnover of volunteer board members, a small organization dependent on an overwhelmed executive, who may also be a volunteer, may easily be unaware of the new requirement.

Q:  How do you think that the new form’s internet format will be received by small tax-exempt entities?

A:  The electronic filing requirement is a good idea.  It’s convenient and administratively efficient.  However, it may adversely impact some organizations without in-house expertise or resources to file.

Q:  How likely is that a small tax-exempt entity (with gross receipts of less than $25,000) will opt to file a Form 990 or 990-EZ instead of the new short form?  The rules state that they can do this.  But, if they do so, then the statute of limitations regarding any liability begins to run.

A:  I  don’t think that most organizations with a choice will file the Form 990 or Form 990-EZ instead of the Form 990-N.  While organizations led by individuals who have some legal or accounting knowledge may make such choice to start the statute of limitations, I think the percentage of such organizations is very small.  In addition, the redesigned Form 990, once implemented, is very likely to intimidate many smaller organizations from attempting to file the more complex form.

Q:  Do you think the threat of having the organization’s tax-exempt status taken away if they do not file for three years will be sufficient to encourage filing, given the fact that the regs do not impose any penalties on small tax-exempts for not submitting the electronic notification?

A:  While the threat of revocation may be sufficient to elicit compliance from most organizations aware of the filing requirement, it would of course have no effect on organizations that are unaware of it.  The revocation provision is, in my opinion, misguided.  It will penalize smaller organizations, and the charitable beneficiaries of these organizations who might otherwise be overlooked by larger charities, for what may be the lack of knowledge of a single executive.  Revocation for an omission with respect to reporting rather than a wrongful act is too severe at the outset of a new law like this.  Reinstatement requires a complete reapplication for exempt status and payment of the user fee.  While I’m not in disagreement with the filing requirement, a grace period for compliance would be appropriate.

Q:  Do you have any other comments about which I have not asked?

A:  Not insignificantly, many large organizations, with regular access to counsel, that have been impacted by the Pension Protection Act of 2006, have no idea on how the Act affects them.  It is truly unrealistic to expect smaller organizations with typically no access to exempt organizations counsel or accountants to all be aware of the new law.  I would speculate that the vast majority of attorneys who do not practice in the exempt organizations area but who serve on the boards of smaller organizations not required to file Form 990 or Form 990-EZ have no knowledge of the e-Postcard.

Read more about the Form 990-N (E-Postcard) at the IRS website:

New Annual Electronic Filing Requirement for Small Tax-Exempt Organizations – e-Postcard (Form 990-N)

e-Postcard Proposed Regulations (comments due by February 15, 2008)