The IRS has been ramping up its campaign advising that charitable organizations of all sizes are now required to file annual information returns. The annual gross receipts of the charitable organization determines the kind of return to be filed. This has become a confusing issue for many smaller charities which have inconsistent receipts – some years, they may be a 990-N (e-Postcard) filer while other years, they may be a 990-EZ or 990 filer. The latter returns tend to require more information which may be arguably better for potential donors. It is, however, more work for the charitable organization.
So today’s Fix the Tax Code Friday question is:
This law/rule is stupid. The point appears to be to protect donors and others from being cheated by organizations that use too much money for operations or salaries of employees. But, this rule applies to all not-for-profit entities. The few I am involved with (not charities) pay no salaries to anyone and just use the dues collected for operations (which we report to members in our own internal reporting). This extra form doesn’t protect anyone or inform anyone of anything important (at least for those entities). I am sure this is a waste of time and a needless expense for many, many entities.
It seems highly unlikely that an organization that raises about $2K a year would manage to survive filing the 990 in its current, enlarged, form — but I can see the need for the new 990 – so while it would be nice to get that same level of detail for all orgs, it strikes me as highly unlikely…
But perhaps the measurement shouldn’t be gross receipts but gross assets?
To the extent that the change in the law means that some will be discouraged from even starting a non-profit, such a change might appear to be a very bad thing. We wouldn’t want to discourage people from doing good works because of a blizzard of IRS paperwork, after all.
But you have to wonder, if the truly tiny orgs are tiny because they only collect a tiny amounts of donations, and thus only pass on a tiny tax benefit to their tiny donors, why don’t they (or their counsel) see the obvious inefficiency? And besides, the dollars that now flow to them could flow to other orgs doing similar work, and/or they could do their good works without their own orgs and filing requirements, either under the umbrella of another org or simply not providing the tax benefit to donors if the time necessary to file is not worth it.
When individuals and groups get into the realm of starting (tiny) orgs and taking on particular filing responsibilities (whatever they currently happen to be), the discussion of what is a rational, efficient choice for how best to accomplish their short-term goals is one that is often completely overlooked, because the long-term goal of being a big, impressive, effective org that is no longer tiny seems so appealing. But like all startups, many (perhaps most?) tiny orgs stay tiny, so the pipe dream should not be the only thing fueling the decision to choose an option simply because it conveys a tax benefit to donors. That should be part of the conversation, sure, but it shouldn’t be the only part.
Many small orgs would probably benefit from taking a more wait-and-see approach with respect to organizational choices. In the meantime, there is nothing wrong with either piggybacking your good work onto someone else’s org (and there are no shortage to work with in virtually every area of philanthropic life), or simply make the decision that until your org grows to a certain size, it is simply not worth the administrative hassle and cost in order to grow funds for your project. There is simply nothing wrong with this approach, and lawyers and accountants do their clients a disservice by failing to mention it as an available option. If you are the whole org, likely including the lions’ share of time and money committed, and you know that filing will take some number of hours per year, it is simple math to decide whether it will be worth it (and that leaves out the time and expense of actually incorporating and filing the necessary paperwork at the outset, another important calculation that is frequently overlooked).
I guess this is a corollary of the adage: when the only tool you have is a hammer, the whole world looks like a nail. (Or something like that.)
I am a PTSA treasurer and I think the current system is fine for all the volunteer non-profits like us. A postcard filing is not an unfair burden for the small PTAs and our medium sized one can handle the 990EZ fine. With the new ceilings, we won’t have the issue of sometimes having to do the 990 and that’s a good reform for us. The PTAs that are big enough to require a 990 can also afford to pay for professional preparation.
Doing the 990EZ is a good exercise for us and a control that the financial records aren’t being totally ignored year to year by volunteers. Yes it was a learning curve and yes during last couple years with the changes in the form it felt complicated, but I actually kinda like puzzling through tax forms. Moving forward, I do not think it is onerous for a volunteer who will be mostly copying the format from the returns I submitted.
I’d be curious to know what percent of the postcard and 990EZ filers are all volunteer organizations such as PTAs.
As someone who filed lots of 990’s, I know what work is involved in preparing the return, especially the newly designed 990’s, which added many new filing requirements. Having an accountant filing the 990 is usually very costly, at least if the accountant knows how to complete it correctly, and makes it for small Organizations who raise less than 25,000 per year, spend a large percentage of their donations on the filing requirements, which would deter donors on contributing to such an Organizations which is a vital for the many people relying on the Organization for assistance.
Imagine an organization which raise 10,000 per year for the homeless, and has to pay 2,500 for an accountant to file their 990, that would make it spending 25% of their contributions on filing requirements.
So instead of making it better for potential donors who want to contribute, such a requirement would make it less attractive for those donors who wish to contribute to these organizations.
Just like we take for granted the 1040-ez for some, the 1040-a for some and the 1040 for others, so should we understand the same for 990’s.
However, private foundations which file a 990-PF do not have the option of a 990-PF-EZ should their income accumulate less than 25,000 etc. Adding a 990 PF EZ would make sense for smaller private foundations.
I think the burden of filing a 990 or 990 EZ is too much for organizations who regularly have receipts under 25,000. What I do think should change is that ALL nonprofits should be subject to filing the 990N, 990EZ or 990 – including churches. Where is the accountability for the so-called religious organizations to prove that they are really using all their money for charitable purposes?
Its understandable if its a large charity where more donations are being done daily, but small charities will not be able to survive. Not only that but they would need help to fill out the paperwork and all that cost money. It seems like a waste of time and money for the small charities to go through this. I know our firm will put advice on how to handle the 990 and all the other forms. For free advice on this issue or any tax issue, check out http://www.taxproblem.org.