Tax-exempt organizations are required to file a variety of forms with the Internal Revenue Service (IRS), even as they have no income tax liability on income derived from their exempt purpose. Previous rules allowed the taxpayer to mail paper versions of some forms to the IRS. However, The Taxpayer First Act (TTFA), enacted into law in July 2019, requires tax-exempt organizations to electronically file information returns, with some limited exceptions.
What Forms Do Tax-Exempt Organizations File?
Depending on the exempt purpose of the organization and the dollar amount of gross receipts and assets, an organization exempt from income tax under Section 501(c) of the Internal Revenue Code is required to file one of the following information returns annually with the IRS:
- Form 990-N: Electronic Notice (e-Postcard) for Tax-Exempt Organizations is filed when those organizations’ gross receipts are less than $50,000.
- Form 990-EZ: Short Form Return of Organization Exempt from Income Tax is filed by tax-exempt entities with gross receipts between $50,000 and $200,000, or total assets less than $500,000.
- Form 990: Return of Organization Exempt from Income Tax is filed by organizations with gross receipts in excess of $200,000, or total assets in excess of $500,000.
- Form 990-PF: Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation is filed by a tax-exempt organization classified as a private foundation (as opposed to a public charity).
When Does the Taxpayer Need to Begin Electronically Filing Information Returns?
Per the TTFA, Form 990 and 990-PF for tax years beginning after July 1, 2019, are subject to the electronic filing requirement. In other words, the new requirement first applies to calendar year 2020 tax returns and returns for the fiscal year ending on July 31, 2020. The IRS noted it will continue to accept short year returns for Form 990 or 990-PF, as the IRS system is not yet able to accept short year electronically filed returns.
The IRS has provided relief for the filing of Form 990-EZ—such return must be electronically filed for tax years beginning after August 31, 2020. In practice, this first applies to calendar year 2021 Forms 990-EZ and fiscal years ending September 30, 2021.
Are There Other Tax Filings to Consider?
In addition to the annual information return, tax-exempt organizations may be required to file Form 990-T: Exempt Organization Business Income Tax Return to report unrelated business income subject to income tax. Form 990-T currently cannot be electronically filed and is not subject to the TTFA, but the IRS has indicated it plans to convert its system to allow electronic filing beginning as soon as 2021.
A tax-exempt organization may also have annual information filings if it has employees. Employers (including tax-exempt entities) must file Forms W-2 and W-3, Wage and Tax Statement and Transmittal of Wage and Tax Statements each January to report wages paid for the previous calendar year. An employer that has 250 or more Forms W-2 to issue is required to electronically file the W-2 and the W-3. However, the TTFA authorized the IRS to reduce that number to as low as 10 Forms W-2 per year. Guidance is still pending, but taxpayers should begin considering the switch to electronically filing Forms W-2 and W-3, so that they are prepared for when additional guidance is issued.
What Are the Next Steps?
Tax-exempt organizations that have not previously electronically filed returns with the IRS should begin to implement changes. Because such returns have limitations with regard to attachments, the taxpayer must maintain records in a format that can be uploaded electronically. For example, if a tax-exempt private foundation previously had attached a PDF list of its charitable donations to Form 990-PF, that will no longer be acceptable under the new electronic filing requirement. The schedule of donations will need to be uploaded to the tax software in the software’s accepted format.
In addition, tax-exempt organizations will need to use tax software for their annual information filings. Because of the cost of acquiring tax software and training, tax-exempt organizations should begin planning now—will it purchase the software directly, or utilize an outside tax service provider?
For some organizations, the electronic filing requirement may seem distant, but it is important they consider the time required to implement new procedures and recordkeeping, as well as train personnel. For this reason, tax-exempt organizations should begin the discussion as soon as possible.
If you have questions about the requirements of filing returns electronically, or would like assistance with any matter involving tax preparation and accounting, contact a PYA executive below at (800) 270-9629.
