Where Most Needed

Some tepid recommentations for improvements of IRS Form 990 are included in the recent Report of the Advisory Committee on Tax Exempt and Government Entities.   

It's the kind of report that only a tax attorney might find comforting.  Here's what the panel described as a good question in the current form:

Schedule A, Part III, Question 2 asks: “During the year has the organization either directly or indirectly engaged in any of the following acts with any substantial contributors, trustees, directors, officers, creators, key employees, or members of their families or with any taxable organization with which any such person is affiliated as an officer, director, trustee, majority owner or principal beneficiary?”

The report's recommendations are just statements of general principles, with no indication how they could be achieved in an actual redesign, not even an outline.  Even the recommendation about electronic filing fails to address the huge human engineering problem of entering volumes of Form 990 data in an online session.

But there are a few tidbits of information deep in the report that are worth passing on:

• In 1994 the IRS found that 24% of nonprofit bookkeepers were unaware of the requirement to file a Form 990 once an organization's gross receipts exceed $25,000.
• More than half the organizations applying for 501(c)(3) status do not have the services of a professional (lawyer or accountant).
• In the last two years, 576,794 organizations filed Form 990, and of these, 483,989 had revenues less than $1 million.

But if you are looking for some really radical suggestions about how to improve nonprofit reporting and accountability through financial and tax reporting, we can suggest a few:

• Require large scale organizations (say, with consolidated gross income over $100 million) to file in the same manner as public companies, under SEC-like rules—including Sarbanes-Oxley Section 404 internal controls.  Only about 2,000 organizations would fall in this category, but they account for about 85% of charity income. 
• Require all organizations to report consolidated results. 
• Have a fundamentally different approach for audited organizations. Instead of a separate form, develop a list of supplementary schedules to be attached to an organization's audited financial statement, similar to the method used for organizations with federal grants.  The schedules would include compensation of key employees, a governance checklist, a lobbying schedule, and so forth. 
• For all audited organizations, adapt technologies and infrastucture developed for SEC reporting to charity financial reporting.
• For unaudited organizations, have a policy of 100% examination for organizations over a certain threshold (starting with $5 million and lowering over time).
• If the IRS is going to make charity accounting rules in the form of instructions on completing the forms, allow charities the benefit of a rulemaking procedure with notice and comment. 
• In enforcement of excess benefit, put the emphasis on the recipient rather than the employer: the IRS should identify and audit individuals who receive more than some level of compensation from exempt organizations (say, $500,000) and individuals who receive substantial compensation from more than one such organization.  This would be an easy internal cross check for the IRS, much easier and more effective than publishing salaries.