NP Times / E-Filing Is Coming To Town, Maybe

By Jeff Jones

Not everyone is clicking to attention

Three or four Pennsylvania senior citizens collect shopping bags full of fundraising solicitations every year. It's not an effort to stave off boredom.

They're double agents, of sorts, for state regulators and provide important leads for hunting unregistered charities.

While agents appreciate their assistance, waiting for the solicitations, hauling the take to the office and checking them against charities in the computer system is time-consuming, said Karl Emerson, director of the Pennsylvania Bureau of Charitable Organizations in Harrisburg, Pa.

New technology is reshaping the process.

Now, officials can receive records of Pennsylvania-based charities on CD-ROM from Washington, D.C.-based National Center for Charitable Statistics, and more quickly cross match charities, Emerson said.

Some nonprofit, state and federal officials hope technology will simplify another time-consuming part of their jobs -- filing and tracking paper Forms 990 and state registration documents.

By the time winter breaks, nonprofits could be able to e-file their tax records with the Internal Revenue Service (IRS). The IRS is scheduled to unveil its electronic filing system this February in time for the May 15 filing deadline. Pennsylvania and Colorado already accept electronic Forms 990.

The idea of e-filing Forms 990 has been a gleam in IRS officials' eyes for at least a decade and has long been delayed.

Dan Moore, vice president of public affairs at Williamsburg, Va.-based GuideStar and a former New Mexico charity regulator, said he remembered someone from the IRS addressing a conference in 1993 and telling officials to "get ready, e-filing was coming."

The first successful e-filing of an individual tax return happened in 1986, according to the IRS.

As for the Form 990, the IRS began an in-depth analysis in 2000, an IRS spokesman said. It appears the IRS is closer than ever to making it happen.

Several nonprofit groups are attempting to spread the electronic filing word through the Electronic Data Initiative for Nonprofits (EDIN). Washington, D.C.-based Independent Sector (IS), a trade organization that represents nonprofits, houses EDIN.

The group recently launched a Web site (www.EDINonline.org) to provide charities more information about e-filing.

"We have enormous support for this," said Diana Aviv, IS president and CEO referring to e-filing. "There's a broad range of organizations that think that this is a very important piece of the puzzle of transparency."

At least one person expressed concern that the sector handle the promotion of e-filing with care so it doesn't promote something before tools are properly tested.

"I think we make a mistake if we promote something that can't be delivered," said Florence Green, executive director of the California Association of Nonprofits in Los Angeles. "We create more frustration."

Green has worked on the e-filing initiative for 12 years and expressed her support for it. "I think it's one of the most important things we'll do," Green said. "We're up against the way we've always done it. We have to create a value for this."

One positive is the IRS won't be on charity officials' backs as much because the return accuracy is expected to improve, which will save time and stress.

"They won't get a letter from us to call them in about the return because it wasn't filled in correctly," said Midori Morgan-Gaide, manager, IRS Exempt Organization electronic initiatives office. "We're expecting a higher quality of data coming in, and we're expecting that the correspondence going out to the filer will drop. They will get an acknowledgement right away that we received the return and could process it."

Saving money

E-filing stands to save charities an estimated $1 billion annually, the bulk of it in administrative costs, according to analysis by Linda Lampkin, program director, National Center for Charitable Statistics Center (NCCS) on Nonprofit and Philanthropy at The Urban Institute in Washington, D.C. The estimate is based on an average saving of 1 percent of management and general costs reported on 990s, she said in an email. That's not a far-flung figure when one considers that a charity soliciting nationally must register with roughly 40 states.

State charity regulators would save an estimated $59 million per year. Surveys have shown that state attorneys general spend more than 50 percent of their budgets on managing charities' paper records. In contrast, some 80 percent of Forms 990 are completed using computer software then printed out and mailed, Lampkin said.

NCCS is working with 10 states in addition to Colorado and Pennsylvania on e-filing, and also offers charities free software. The software works like popular individual tax programs that calculate as the user moves through it to prevent errors. It's available at efile.form990.org.

Elsewhere, GuideStar, a national database of U.S. charities, received a $1.3 million federal grant to develop an online charity information system. The project, NASCONet, hopes to provide a common repository of information collected by state charity regulators and lay the foundation for a standardized state registration process, according to GuideStar. It began this past October and is scheduled to finish Sept. 30, 2005.

"The goal is to support electronic filing and help charities fulfill their regulatory obligations," Moore said. "We have a short window under the grant to accomplish specific objectives. It's early in the process."

A specific timeframe hasn't been developed for the NASCONet project, he said.

One of the biggest hurdles to e-filing is convincing accounting firms and software developers to invest in new software, said several people involved with the electronic filing initiative.

Doing that is difficult because the number of nonprofits filing with the IRS after exemptions is roughly 250,000 -- a relatively low volume.

Some 800,000 charities are on the IRS master business file.

"There has never been enough volume and enough money in the Form 990 to make it much of a draw for software developers," Lampkin said.

Large accounting firms don't make a lot of money on Forms 990 because they do a so much pro bono work, and exempt organizations often ask for fee discounts, said Laura Peebles, a director at accounting firm Deloitte and Touche in Washington, D.C.

After considering software and training costs, there's little incentive for accounting firms to invest in e-filing, Peebles said. "What's in it for me?," Peebles asked rhetorically. "What's in it for the client? Nothing and nothing, so what's the rush?"

Software is updated every year, making it possible that e-filing could be available next year, Peebles said. That doesn't mean accountants will choose it, she said. They must first consider return on investment. "Why pay for electronic filing when we're already giving staff time?," she asked.

Other barriers include working the bugs out of the IRS system, which was being tested at press time, managing Form 990 attachments, finding solutions for organizations with a dial-up connection, and overcoming years of tradition and culture comfortable with mailing the Form 990 and state registration forms.

"When asking to change people's behavior, never underestimate inertia," Peebles said, "especially when you're asking volunteers to change their behavior."

Thirteen states don't require registration of a domestic charity with a few exceptions (See sidebar on page 6), according to several charity registration attorneys and groups.

In other words e-filing is not a panacea that will cure all state registration problems.

Vermont nonprofits file an article of incorporation with the Secretary of State's office in Montpelier. Betty Poulin, director of corporations, said she wasn't sure how the NASCONet project or IRS e-filing would help her department. She said a database such as the NASCONet project wouldn't change the state's registration process.

Indiana's attorney general requires professional fundraisers to register but not charities.

"I would hesitate to speculate on anything because we won't be using it and haven't seen it," said Summer Burgin, spokeswoman for the Indiana Attorney General's office about a potential database.
Some states being out of the initial mix doesn't concern one person working to promote the e-filing initiative.

Pat Read, vice president of public affairs at IS, said the effort is focused first at a federal level then on the most active states. An initial goal is to get 5 percent of charities filing electronically within the first three years, she said.

A former state regulator, Moore said he recognizes that states have their own requirements and make their own decisions. "We can lead the horse to the water, but the horse has to decide to drink," he said. "The hope, I guess, is the more the states work together the more simple it is to comply."

Audrey Alvarado, executive director of Washington, D.C.-based National Council of Nonprofit Associations, said the long-term impact of e-filing will be extremely beneficial, but there will be hang-ups along the way. One frustration at the state level is some don't know what's going on and others face investment limits, she said.

Software testing

Eight software companies were testing with the IRS as of early November, Morgan-Gaide said. The IRS declined to release the names until after testing was complete.

"Systems come up when they come up," Morgan-Gaide said. "We're looking at first part of calendar year and that would be in time for the May 15 deadline."

CCH Inc. is involved with the IRS software testing but won't offer a program for Form 990 e-filing until next year. The software firm chose to put resources toward corporate e-filing this year because demand is higher, said Jerry Connor, marketing manager with CCH Inc. in Torrence, Calif.

CCH will build the Form 990 platform on the format for corporate filings, Connor said.

"The 990 won't be that tough," Connor said. "A lot of the infrastructure will already be done. We'll go back and do specific mapping." A main marketing tool is productive savings in moving toward a paperless office, Connor said.

Plan on a slow response when the IRS does go live with its system.

"We expect very few to file in February," Read said. "When the IRS made e-filing available for individuals it took five or six years before they got anywhere close to a substantial percentage. We think over a three-to-five year period we will outpace that."

Morgan-Gaide of the IRS said, "The first year we are looking at getting software packages up and getting software developers on board."

Response to Pennsylvania's e-filing capability is muted. To date roughly 28 or 30 charities have used the system first available early last year, Emerson said. He expects more to sign up once the IRS goes live with its system.

Emerson said one potential incentive could be amending a state statute that would reduce the registration fee for groups that e-file.

Costs to install Pennsylvania's system were zero because NCCS funded the state's project. Emerson said the head of his office's computer department spent about 100 hours installing the program and working out bugs.

He's impressed with the system. "There's no data entry," Emerson said. "There's no paper."

State workers review charity information on the screen and if everything is correct, click the mouse twice. Registration screens are automatically created and renewal screens automatically updated, Emerson said.

Privacy isn't a concern in Pennsylvania because it doesn't post Forms 990 such as GuideStar, Emerson said.

As for Morgan-Gaide, she has some experience with getting e-filing up to speed at the IRS. Her previous project was developing a system for e-filing the payroll tax and partnering with states to come up with a single point of filing.

"The IRS is committed to rolling this thing out on time," Morgan-Gaide said. "I'm pretty comfortable with it going out this spring because IRS realizes its reputation is on the line."