The IRS is under fire from Public.Resource.org for noncompliance with the Freedom of Information Act. The IRS is required to make Forms 990 available to the public under the Freedom of Information Act, but the documents they currently provide are not formatted with searchable text. Although large nonprofits are required to file Form 990 electronically and many other nonprofits voluntarily file electronically, the IRS converts those documents to PDF images that are not machine-readable, which means they are not easily searchable. After a legal battle with Public.Resource.org, a government transparency advocacy organization, the IRS will soon be releasing a “modernized e-file” version of the 990 that will allow for data searches within the document.
The new forms will allow the public to more easily aggregate data from the nonprofit sector, making divergence from the “norm” much more obvious. The IRS has said for years that they are using the 990 information to flag organizations for audit, but reporters and watchdog groups have had to rely on manual review and paid services to identify discrepancies and perform in-depth analysis of financial data. Nonprofits should be prepared for closer scrutiny of financial data as well as governance and compliance questions.
It’s easy to find red flags on the 990 for organizations that have already been outed for misusing funds (i.e. Wounded Warrior Project), but the value of machine-readable forms is the ability to detect issues before employees and/or donors blow the whistle. Single factors don’t necessarily indicate noncompliance, but easy aggregation of data can often reveal common factors among noncompliant organizations or a group of factors that, together, suggest inappropriate behavior by the nonprofit.
Wounded Warrior Project has been criticized for lavish spending on conferences, employee training and team building events, which may not stand out as unreasonable on Form 990. However, paired with a lack of specific data about program service accomplishments and high overall fundraising spending, the business practices start to look more suspicious. It’s important to remember that data aggregation alone is merely an indicator, not confirmation of inappropriate behavior. Many factors can make a good organization look bad on paper – ramping up on spending to prepare for a new initiative, improper allocation of expenses between the functional categories, or an inexperienced tax return preparer. Full disclosure and accuracy are paramount.
As a publicly-available document, Form 990 is a valuable marketing tool for nonprofits. Beyond its primary purpose of demonstrating compliance with IRS exemption rules, the 990 tells a story to donors as well as potential board members, employees and volunteers. Nonprofits should strongly consider the impact of narratives, the value of specific program data, and the accuracy of information provided on the 990. The new searchable 990 is a much-anticipated tool for nonprofit watchdogs, and it will be interesting to see the degree to which it is used.
