Nonprofits and Foundations Are Slow to Take Up E-Filing of Public Tax Documents
October 22, 2018 | Read Time: 8 minutes
More than a decade after the Internal Revenue Service began allowing nonprofits to file their returns online, one third of tax-exempt organizations that file commonly used annual forms choose to submit paper forms, according to data compiled by the Chronicle. And some of the nation’s largest charities and foundations are among those that still file the old-fashioned way.
Academics, journalists, and regulators have pushed for nonprofits to electronically file their forms in “machine readable” formats. Doing so would allow the public to sort and search tax filings that contain information about nonprofit finances, programs, and governance.
Watchdogs say electronic filing will provide a more complete picture of nonprofits’ activities and performance, helping grant makers determine which charities are the best place to steer money. Electronic filing also makes it easier for nonprofit executives to compare their pay against their peers and for law enforcement officials to spot suspicious financial transactions.
The electronic-filing holdouts make it impossible to completely understand nonprofit activity, says David Borenstein, chief data scientist for Open990, a consulting firm that analyzes nonprofit data,
“It’s definitely frustrating,” he says. “We have the technology to understand the sector, but we have an incomplete picture. We’re missing a lot of comparables because we lack the data.”
Changing the Law
Most nonprofits must file a Form 990 annually with the IRS. The tax form provides a wide range of information on nonprofit finances, fundraising results, program expenses, compensation levels, and investment returns.
According to the IRS, 68 percent of all 990 and 990-EZ forms (a shorter version of the 990 that smaller nonprofits can use) were electronically filed in 2017. This figure includes charities and other tax-exempt organizations. The House of Representatives passed a bill in April that would phase in an e-file requirement. Similar legislation is pending in the Senate. Cinthia Schuman Ottinger, a longtime proponent of going paperless, said such a requirement would help people decide where contributions are most needed.
“Donors would benefit from knowing where to direct their donations by being able to look at nonprofits as a whole and having a better sense of where money flows and where there are gaps in funding,” said Schuman Ottinger, who is deputy director of philanthropy programs at the Aspen Institute.
In Defense of Paper
Nonprofits provide a variety of explanations for resisting e-filing.
The main reason the Conrad Hilton Foundation files a paper form is simply that there is no e-file requirement, according to Pat Modugno, the grant maker’s chief financial officer. In addition, he said, the electronic form is more restrictive in terms of the type and amount of information that can be provided. For example, the paper form allows Hilton to provide more detailed information about international grants and program-related investments, Modugno wrote in an email.
The Michael & Susan Dell Foundation, another grant maker that submits paper filings, provided a similar rationale. The foundation’s tax return is “quite complex,” spokeswoman Meredith Young wrote in an email. Using a paper filing allows the foundation to render descriptions of its activities in an easy-to-read format.
“Existing e-file software does not accommodate attachments in a user-friendly manner,” she wrote.
Several of the organizations that still paper file, such as the Bank of America Charitable Gift Fund and the Goldman Sachs Philanthropy Fund, declined to comment. Representatives from the Chicago Community Trust, Helmsley Charitable Trust, and Sightsavers International did not return calls.
Vanguard Charitable, a large donor-advised fund sponsor, says it supports a requirement that all nonprofits file machine-readable forms. But until the rules are changed, Vanguard will file paper returns because the electronic format is limiting, according to Sean Gordon, a Vanguard spokesman. As an example, he cites Schedule I, where nonprofits list their grant recipients.
The IRS format doesn’t allow Vanguard to list grantees without truncating their names, making the information hard to understand, according Gordon.
Jacob Fenton, a data journalism expert who previously served as a consultant to the Chronicle, sorted through 1.5 million Schedule I entries going back to 2013. Of those, there were 726 instances where the grantee name in line one of the schedule is 75 letters long, the limit for that entry field. But entries that are longer than 75 letters get wrapped into the field’s second line, meaning all the information is in the filing, but it might not be easily read.
Lawsuits
In 2015, Public.Resource.org successfully sued the IRS to make nonprofit records available in machine-readable format. The Chronicle of Philanthropy was one of several media organizations that coordinated with the group to request files from the IRS and later helped test the agency’s system for distributing e-filed 990s. In June 2016, the IRS released electronically filed 990 forms through the Public Data Sets area of Amazon Web Services.
Since the forms’ release, the Aspen Institute’s Program on Philanthropy and Social Innovation has held several “Datathons” to make the information more user-friendly. Proponents of e-filing, such as Tom Pollak, a longtime open-data advocate, said the IRS could make some small changes to its e-filing platform that would allow information to be rendered more elegantly. But Pollak, the former director of the Urban Institute’s National Center for Charitable Statistics, argues that filing a machine-readable return is important to help nonprofits reach their full potential.
“There are a lot of smaller organizations that have tended to be off the radar for major funders,” he says. “The IRS data is really essential for identifying those organizations.”
Pollak, a mentoring advocate who runs an electronic filing service at the Civic Leadership Project in Washington, isn’t convinced that nonprofits are avoiding electronic filing because it produces ugly, unreadable reports. Nonprofits, he says, are free to produce their own attractive reports and still help advance knowledge about nonprofits by filing electronically.
“The problem isn’t the electronic submission of the form,” he says, adding, “an organization can electronically file, and if they don’t like the rendering of the form, they can print their own version of it.”
“Perfectly Adequate”
Online filing, introduced in 2004, works well, according to Open990’s Borenstein.
“The format is perfectly adequate as reflected by the millions of excellent filings we work with every day,” he says.
Filing paper forms allows nonprofits to leave fields blank and use attachments to explain certain results that may raise eyebrows, such as year-to-year swings in fundraising results or a new consulting fee to a high-priced vendor.
But the 990 form isn’t the place to make excuses, he says. He compares nonprofit public disclosure forms to a standardized college-entry test taken by high school students. A student’s results may suffer from a bad situation at home or an illness. But the test-taker can’t explain that in the answer bubbles provided in an ACT or SAT test form.
“Large organizations have developed documents that describe the idiosyncrasies of their operations in ways that can be challenging for them to shoehorn into a standardized 990 form,” he says. “The problem is, the purpose of a standardized form is to strip away some of those idiosyncrasies so you can make comparisons.”
Making the Shift
Not all the organizations that used paper forms in 2016 and 2017 plan to continue. Sierra Club Foundation, for example, had electronically filed in previous years, But in 2016, the nonprofit dropped “The” from its name, and said it filed a paper form per IRS requirements for initial returns filed by newly named entities. It says it plans to go back to e-filing.
Fidelity Charitable filed electronically for the first time this year when sent in its 2017 Form 990 in May.
“It’s the future of things,” says Nabil Ashour, a Fidelity spokesman. “We didn’t have any issues with it.”
Tyler Davis contributed to this article.
