What does your Form 990 say about your organization? When the revised version of the nonprofit tax return was introduced several years ago, it was greeted by the nonprofit community with a mixture of animosity, despair and apprehension. Does the IRS have the right to ask about our policies? Can we afford to pay a CPA to prepare this ridiculously long form? What will the IRS do with all of this information? This last question has been the source of much debate over the past few years, and we’re beginning to get a clearer picture of the answer. As e-filing becomes easier and required in some cases, we’re seeing how big data is playing a key role in the nonprofit industry.
Transparency is one of the more celebrated aspects of the new 990. The additional narratives, disclosures and prescribed formatting for key financial data have allowed grantors and donors to compare deserving organizations much more efficiently.
However, the same formatting that makes comparison easy for potential funders also makes it easier for the IRS to use these tax returns for data mining. Many larger nonprofits are required to file their 990 electronically and countless other nonprofits file electronically simply because it’s more convenient. We’ve all been wondering how and when this information will be used by the IRS, and it looks like we may find out soon.
While the IRS has said they don’t normally flag an organization for audit based on specific responses on the 990, they have confirmed that they are building a database of responses that statistically correlate to non-compliance. In other words, you could be flagged for an audit if your organization’s overall responses to the governance questions resemble the overall responses of organizations that are doing something wrong. It’s true that the governance questions on the 990 are just best practices rather than law, but they’re good indicators of potential weaknesses in your organization. Ask yourself the question – what would a potential grantor think about our responses?
It’s not just grantors using the tax returns to compare grant applicants. Charitable organizations can search for potential grantors by reviewing Forms 990-PF, the tax return filed by most private foundations (available at guidestar.org and foundationcenter.org). It’s an excellent tool to find out what types of causes various foundations fund. But what if you want to find all foundations that fund a certain cause in a specific area? This is where the real excitement is happening, and you can thank big data. Foundation Center recently unveiled their searchable database of 990-PF tax returns. Just type in a key word and you can pull up a list of foundations that fit your criteria. Pay for a subscription and you can narrow your search even more!
The IRS has been saying for years that Form 1023, the application for charitable exempt status, will be available online with an interactive format. Essentially, you’ll be able to respond to various questions that are posed based on your responses to previous questions. Yes, it’s like TurboTax for nonprofit exemption applications, which is both frightening and intriguing. The test phase ended in September, so the final version should be available once the IRS has reviewed the feedback and made necessary revisions. While this may seem like an easy way to apply for exemption, use caution. This format is likely more of a benefit for the IRS than for applicants. With the standardized format, they can easily mine the data you’ve entered. Ideally, this will lead to more efficient, timely processing of exemption applications, although it could also result in more scrutiny of vague or poorly-worded responses. So, if you wouldn’t have prepared the application yourself on paper, please don’t try it yourself online. You need someone with expertise in nonprofit taxes to prepare or at least review the application. It’s also a good idea for the PR department to review the narratives, just like they should approve the narratives on the 990. It’s a public document, so be sure you’re treating it that way.
Note that the suggestion here is not to refrain from e-filing or from disclosing important data, but just to be intentional about how information is presented on your tax return and other IRS forms. The 990 is important because it tells the financial story of your organization. There’s a lot of hype right now about promoting your organization through storytelling, and a similar idea applies to your financials. What story are you telling to the IRS, potential funders and everyone else using your data to make decisions?
