The passage of the Taxpayer First Act (“TFA”) in 2019 redefines some of the IRS’ processes and structure, with the stated aim of “expanding and strengthening taxpayer rights” and “reforming the IRS into a more taxpayer friendly agency.” The TFA introduces changes to the way nonprofits file information returns with the IRS, requiring that all tax exempt organizations file their returns electronically (“e-file”).
The TFA pushes the IRS to adopt a customer service strategy designed by the Department of the Treasury, implement new up-to-date technology and better protect against cyber threats. Reforms include (1) the creation of a new office dedicated to hearing appeals in controversy cases and ensuring the consistent application of federal laws, (2) the introduction of a user fee exemption for low-income taxpayers pursuing Offers in Compromise and (3) a series of sections (Sec. 1201- Sec. 1208) that will limit some of the IRS’ existing enforcement capabilities. Title III, Subtitle B of the TFA, or, Provisions Relating to Exempt Organizations, details two mandates that all Nonprofits need to be aware of:
- Section 3101 of the TFA requires that tax-exempt organizations file returns electronically.
- Section 3102 will require the IRS to notify exempt organizations before their tax exempt status is revoked due to a failure to file information returns.
The inclusion of Section 3102 is a welcome failsafe to ensure tax-exempt organizations receive a formal notification before their tax exempt status is revoked due to a late, missing or forgotten return. Meanwhile, the provisions of Section 3101 could require the adoption of new or unfamiliar practices, potentially presenting a headache for organizations that are unprepared to e-file their information return.
The following IRS forms are affected by Section 3101, which applies to all filings by tax-exempt organizations for years beginning after July 1, 2019:
- Return of Organization Exempt from Income Tax, Form 990
- Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation Form 990-PF
What if I've Already Filed?
Organizations that have already filed paper forms should receive an IRS notice that the filing requirements have changed.
Will There be a Grace Period?
The IRS is offering a grace period for some forms and forcing immediate changes for others.
While e-filing Form 990-EZ remains an option, the IRS will still accept the submission of paper-filed Form 990-EZ for fiscal years ending on or before July 31, 2020.
Forms 990-T and 4720 are subject to the e-filing requirement for calendar and fiscal years beginning after July 1, 2020, but the IRS will still accept paper submissions that can be converted to a digital file.
Organizations on a short tax year, and with other special circumstances, will need to continue filing in a paper format, as the IRS system is not yet prepared to accept these forms in an electronic format.
Small exempt organizations are eligible for “Transition Relief” and may continue to file their Form 990-EZ by paper for fiscal years ending on or before July 31, 2020, but must file electronically for all fiscal years ending on or after August 31, 2020. Typically, Form 990-EZ filers are those organizations with total assets of less than $500,000 and gross receipts of less than $200,000 at tax year-end.
I'm Already e-Filing. Will I be Affected?
Large exempt organizations with more than $10 million in assets at tax year-end, and those tax preparers that have filed 250 or more returns (of any type) throughout the year have already been required to e-file their information return, Form 990 and Form 990-PF. These filers should continue to follow the requirements they were subject to prior to the passing of the TFA.
Organizations with financial years ending on or after July 31, 2020 are required to e-file, while organizations with financial years ending on or before June 30, 2020 can file on paper.
If you need assistance with e-filing or have any questions about your tax-exempt organization’s filing requirements, contact a Friedman professional today.