The Taxpayer First Act (H.R. 3151), signed into law on July 1, 2019, extends the requirement for nonprofits to electronically file IRS annual information returns (Forms 990, 990 PF, 990-EZ, and 990-T) to all tax-exempt organizations who must file returns. It also extends mandatory e-filing to the periodic contribution and expenditure reports (Form 8872) filed by Section 527 political organizations.
The new law also requires the IRS to publicly release data from these returns in machine readable format as soon as practicable, and to warn organizations that are delinquent in filing and at risk of losing their tax-exempt status before that status is automatically revoked.
Organizations exempted from filing information returns with the IRS, such as churches and their affiliates and governmental entities, are not affected by these technical changes.
Gradual Implementation of Mandatory E-Filing
Before enactment of the Taxpayer First Act, only some tax-exempt nonprofit organizations with total assets of $10 million or more as well as private foundations and charitable trusts that filed 250 or more IRS returns annually, were required to e-file Forms 990 and 990-PF. Under the new law, mandatory e-filing will arrive for most tax-exempt nonprofit organizations in 2021 and for all tax-exempt nonprofits that file returns with the IRS by 2022. The new requirements apply to calendar-year filers for returns covering tax year 2020 (due May 15, 2021) and to fiscal-year filers for returns covering tax years beginning on and after July 2, 2019 (due the 15th day of the fifth month after the end of the tax period). Because the law takes effect for years starting after July 2, 2019, the many nonprofits that just started a new fiscal year on July 1, 2019 will also be required to e-file in 2021 (for the July 1, 2020–June 30, 2021 tax period) rather than in 2020 (for the July 1, 2019–June 30, 2020 tax period).
Those few organizations with fiscal years starting between July 2 and August 31, 2019, such as new organizations whose initial tax periods are established during this period, are slated to take up e-filing sooner, with their first electronic returns due in November or December 2020. However, these early filers may obtain an ordinary six-month automatic extension of time using Form 8868 to push their filing deadline into 2021.
Smaller organizations that file the Form 990-N have already been subject to mandatory e filing since 2007; the 990-N can only be filed directly by those organizations online through the IRS's website after registering a filing account. Nonprofits that do not file the Form 990-N can prepare and submit their own returns electronically using IRS-approved tax preparation software, or by engaging a tax professional who uses software approved for electronic filing. A list of approved e-filing providers has not yet been released for tax year 2019, though we expect that the technical guidance on electronic filing options for exempt organizations will be updated as part of the implementation of the new law.
The IRS may delay implementation of obligatory e-filing for up to two years for financially small organizations with total assets of less than $500,000 and annual revenue less than $200,000, all organizations filing unrelated business income tax returns, and any organization facing undue burdens from the change. Organizations eligible for this temporary transitional relief should prepare to e-file their returns beginning in 2022 and beyond, when paper filing will be discontinued.
Greater Availability of Nonprofit Data
A continuing trend in the nonprofit sector is broadening public access to data to promote greater transparency, accountability, and regulatory oversight. As mentioned, the new law requires the IRS disclose return information so computers can process it. This step will reduce barriers for state and federal regulators, charity watchdogs, academics, journalists, and other persons interested in analyzing the activities of nonprofits, and make it easier to scrutinize conflicts of interest, excessive salaries, and other signs of mismanagement and impropriety.
Automatic Revocation Reminder Notices
The IRS must now notify organizations that have not filed a required annual return for two consecutive years, reminding them to file a return and thereby avert automatic revocation of tax exempt status if a required return is not filed for the third year in a row. The loss of tax exemption for delinquent filers is still likely to continue despite the notice, particularly for organizations that do not keep their contact information up to date with the IRS. If an organization has lost its tax-exempt status for failure to file required returns, it must file a formal application for reinstatement to restore its status.
For more information on these issues, contact Venable's Nonprofit Organizations Practice.