by Kathy LaBrake

Did you know that as a tax-exempt organization, you may have to file your 2005 Form 990 electronically in 2006? Furthermore, if you’re lucky enough to not have to file in 2006, it’s a good bet that you will in 2007 for your 2006 Form 990.

For years ending on or after December 31, 2005, IRS regulations now require tax-exempt organizations with total assets of $100 million or more that file 250 separate returns to file Form 990 electronically (“e-file”).

For years ending on or after December 31, 2006, the electronic filing requirements also apply to tax-exempt organizations with $10 million or more in assets if they file at least 250 returns. In addition, private foundations will be required to file Form 990-PF electronically on or after December 31, 2006, regardless of their size if they file at least 250 returns. Therefore, many tax exempt organizations will be required to file Forms 990 or 990-EZ electronically by 2007. Exceptions include amended returns and final returns.

What is a return?

A return includes income tax, excise tax, employment tax, and information returns, during a calendar year. What does this mean? It means if your organization has 245 employees, you will file 250 returns in a calendar year because each W-2 and quarterly 941 is considered a separate return; therefore, your organization files 245 W-2s, four 941s, and one 990. All original returns filed by a tax-exempt organization and other members of the organization’s controlled group during the calendar year are counted.

An organization with a September year-end filing at least 250 returns and having $50 million of assets will be required to e-file its September 30, 2006, Form 990 in 2007 (due February 15, 2007). On the other hand, an organization with a June year-end filing at least 250 returns and having $150 million of assets will be required to e-file its June 30, 2006, Form 990 in 2006 (due November 15, 2006).

The $100 million threshhold

The initial threshold for requiring tax-exempt organizations to e-file was set at $100 million in assets because the IRS felt that tax-exempt organizations of this size generally have sophisticated accounting and financial systems and, therefore, the necessary resources to comply with electronic filing requirements. E-filing is believed to be a natural extension of the electronic environment in which we currently operate.

In the first year, the portion of the tax-exempt community covered by this requirement is about 36 percent of the approximately $2.5 trillion in assets that the tax-exempt sector holds. In the second year, approximately 41 percent of total tax-exempt sector assets will be covered by this requirement.

The benefits of e-filing are that it is faster, easier, and more accurate than filing a paper return. E filing makes compliance with reporting and disclosure requirements easier by eliminating the need to make copies, assemble all of the appropriate schedules and attachments, and pay for postage.

The IRS reports that paper Form 990 returns have an average error rate of 27 percent. Built-in accuracy checks in electronic return preparation software catch the majority of taxpayer errors before the return is submitted. In addition, organizations can comply with public disclosure requirements by posting electronic forms on the Internet.

The IRS will accept returns from either a third party or directly from the tax-exempt organization; however, you must use an approved IRS 990 e-file provider. For a complete list of approved providers, go to www.irs.gov, click on the e-file logo in the lower left-hand corner and click on e file for charities and nonprofits, and then click on Approved IRS 990 e-file Provider located under “Who Can Participate.”

This Web page is continuously updated as new providers are approved and includes links to companies that offer the ability to e-file Form 990. Currently, the approved providers include Creative Solutions, The Urban Institute, Lacerte Software Corp., Fast-Tax, Internet Programming & Consulting, ATX II, CCH, and RIA GoSystem. We recommend those tax-exempt organizations that purchase tax preparation software and prepare their own return discuss the various electronic filing options with their software vendors as soon as possible.

As far as having sufficient time to implement the new system, if you are among the 80 percent of tax-exempt organizations that use a tax professional to prepare your return, you will see little difference in how your return is prepared. It will be your tax professional’s responsibility to make the necessary changes to file electronically. Thus, you should discuss electronic filing with your tax professional soon.

If a tax-exempt organization fails to comply with the electronic filing requirement, even if a paper return is submitted, a penalty will be assessed. For organizations with gross receipts exceeding $1 million, the penalty for non-filing is $100 for each day the failure continues, up to a maximum of $50,000 per return. The penalty begins on the due date of the return.

In addition, the person responsible for the non-filing will be charged a penalty of $10 a day up to a maximum of $5,000, unless the individual can support that not complying was due to reasonable cause.

Organizations can request a waiver from filing electronically. IRS Notice 2005-88 establishes the bases under which organizations can request waivers from the electronic filing requirement.  The bases for requesting waivers include technology restraints, undue financial burden, and other situations based on facts and circumstances.

A waiver request must include:

• Notation at the top of the request “Form 990 E-File Waiver Request” or “Form 990-PF E File Waiver Request.”
•  Taxpayers name, federal tax identification number, and mailing address.
• Type of form and taxable year for which waiver is requested.
• Value of the taxpayer’s total assets at the end of the taxable year.
• Detailed statement including steps taken to meet requirements and why the steps were unsuccessful. Details on the undue hardship that would result by complying with electronic filing requirements, including any incremental costs related to electronic filing (supported by a detailed computation).
• Statement as to what steps the taxpayer will take to assure its ability to file future returns electronically.
• Statement (signed by officer) with the following language:
  “Under penalties of perjury, I declare that the information contained in this waiver request is true, correct, and complete to the best of my knowledge and belief.”
• File request 45 days prior to due date of return (including extensions)
• If using the U.S. Postal Service, mail to:
  Internal Revenue Service
  Ogden Submission Processing Center
  Attn: Forms 1120 and 990 e-file Waiver Request, Stop 1057
  Ogden, UT 84201
• If using an overnight delivery service, mail to:
  Internal Revenue Service
  Ogden Submission Processing Center
  Attn: Forms 1120 and 990 e-file Waiver Request, Stop 1057
  1973 N. Rulon White Blvd.
  Ogden, UT 84404
• The request may also be faxed to 801-620-7622.

It is anticipated that it will be difficult to obtain a waiver. For questions concerning a request for a waiver, contact your tax professional or the IRS at 866.255.0654.

Exempt organizations will not currently be able to file their state returns electronically. “Modernized E-File’s Fed/State System” for businesses and tax-exempt organizations will be available in 2006. The Fed/State System will allow submission of multiple federal and state return types within one transmission, a capability that does not currently exist for tax-exempt filers. The IRS has partnered with the National Association of State Charity Officials (NASCO) and the National Association of Attorneys General (NAAG) to ensure that state reporting requirements for exempt organizations are considered.

In addition to seeking assistance from your tax professionals at Wipfli or elsewhere, organizations may e-mail questions to te/ge-eo-efile@irs.gov or call toll-free (877) 829-5500 for additional assistance in meeting the requirements of e-filing.

Kathy LaBrake is a Wipfli partner with more than 20 years' experience as a CPA. Kathy specializes in providing audit and consulting services to many of Wipfli’s tax-exempt clients. She can be reached at (715) 843-8351 or klabrake@wipfli.com.