New E-Filing Requirements for Tax-Exempt Organizations
Under a little-noticed provision buried deep in the Taxpayer First Act, tax-exempt organizations will be required to file certain information returns and related forms electronically. Your not-for-profit organization should be prepared for this change that goes into effect for tax years beginning after July 1, 2019.
The Taxpayer First Act, signed by President Trump on July 1, 2019, requires the IRS to modernize operations and improve taxpayer protections. Accordingly, most of the provisions in the new law are aimed at bringing the IRS up-to-speed technologically and shoring up cybersecurity. This includes creating secure online accounts for taxpayers, enabling the IRS to directly accept credit and debit card payments and making various other improvements. Furthermore, the legislation establishes a new independent office of appeals that is open to taxpayers during the entire administrative review process.
But the Taxpayer First Act also adds a new requirement for tax-exempt organizations to electronically file all returns in the Form 990 series and Form 8872. Previously, this requirement only applied to small organizations choosing to file Form 990-N, private foundations and Section 4947(a)(1) trusts filing at least 250 returns annually and large organizations with total assets of at least $10 million that file at least 250 returns annually. And, even for these organizations that were affected by the e-filing rules, the IRS permitted certain exceptions.
Specifically, the new electronic filing requirements in the law applies to the following four tax forms:
1. Form 990, Return of Organization Exempt from Income Tax.
2. Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation.
3. Form 8872, Political Organization Report of Contributions and Expenditures.
4. Form 1065, U.S. Return of Partnership Income (if filed by a Section 501(d) apostolic organization).
Note, however, the mandate is only effective for tax years beginning after July 1, 2019. Therefore, for an organization with a tax year ending on June 30, 2020, the new requirement doesn't kick in until 2021. In addition, the Taxpayer First Act provides transitional relief for certain tax-exempt organizations.
Highlights of Transitional Relief
For starters, the Treasury Secretary may delay the e-filing requirement for up to two years for organizations with gross receipts less than $200,000 and total assets of less than $500,000. These guidelines reflect the thresholds for the organizations that are permitted to file Form 990-EZ instead of the longer Form 990.
In addition, organizations normally having gross receipts of $50,000 or less had the option to file Form 990-N. Although Form 990-N is only available electronically, such an organization could choose to file a paper Form 990-EZ or Form 990 return by mail.
The Taxpayer First Act authorizes the Treasury Secretary to postpone the e-filing requirement for organizations if it will cause an “undue burden.” The intention is to provide the IRS with more time to update its systems for electronic processing of all the returns that will be coming from tax-exempt organizations. Currently, the IRS isn't set up to handle this avalanche of forms.
Also, some organizations currently aren't allowed to file electronically, including the following:
- Organizations that have changed their names because supporting material must be attached to a paper return;
- Organizations filing a short year return (other than the initial or final year) or those showing a change in accounting period;
- Organizations that haven't yet been approved for tax-exempt status (for example, those with a pending application); and
- Private foundations during a 60-month termination period.
Under a special IRS rule, some tax-exempt organizations can request a waiver from the e-filing requirements, as well as the penalties for a failure to file electronically, if the not-for-profit can't meet the obligation due to technological constraints or when compliance would cause an undue financial burden. Presumably, this option will no longer be available once the new requirements take effect.
Other transitional rules apply to organizations filing Form 990-T (Exempt Organization Business Income Tax Return) that must report unrelated business taxable income (UBIT). As of this writing, organizations with UBIT can't file Form 990-T electronically. The Taxpayer First Act allows the Treasury Secretary to delay the Form 990-T e-filing requirement for up to two years.
Finally, the law requires the IRS to make all returns filed electronically by tax-exempt organizations available to the public in a “machine-readable” format in a timely fashion. With this information being easily available, both the public and state regulatory authorities will be able to search and analyze the data included on the respective returns and forms.
Congress crafted the law to make it easier for not-for-profit organizations to comply with filing requirements and increase transparency. It has given the IRS sufficient time to update its systems to accommodate the new requirements. Similarly, organizations should be prepared for the changes well in advance of the deadline. Obtain the necessary guidance from your professional advisors.