Mandatory Electronic Filing for All Forms in Form 990 Series

On July 1, 2019, the Taxpayer First Act (H.R. 3151) (the Act) was enacted. The Act includes a wide variety of measures, most of which are intended to modernize and improve the Internal Revenue Service. This post will focus on the set of provisions found in Section 3101 of the Act that will require that all Forms 990, 990-EZ, 990-PF, and 990-T be filed electronically (e-filed.). Failure to comply with this requirement will result in substantial penalties.

Currently, Forms 990-T must be paper-filed.  Forms 990, 990-EZ, and 990-PF must be filed electronically, but there is a very significant exception that allows paper filing for organizations that filed fewer than 250 returns of any type (including 1099s, W-2s, 941s, etc.) during the calendar year that ended within the organization’s fiscal year. However, most Forms 990, 990-EZ, and 990-PF for short years must be paper-filed.

The new requirements are effective for tax years beginning on or after July 2, 2019, the date immediately after the Act’s enactment. In the case of organizations with a December 31 fiscal year end, for example, the requirements first apply to the calendar 2020 returns, due on May 15, 2021 or, if an extension is properly filed, on November 15, 2021. For organizations with a September 30 year end, the requirements first apply to the year ended September 30, 2020. For organizations with a June 30 year end, the requirements first apply to the year ended June 30, 2021.

The statute gives the IRS the right, but not the obligation, to delay the effective date for up to two years for (a) organizations that file a 990-T and/or (b) financially small organizations, defined as organizations with less than $200,000 of gross receipts and $500,000 of gross assets.

The vast majority of our tax-exempt organization clients who file a Form 990 already do so electronically, so this provision is irrelevant to them. However, a significant portion of our private foundation clients currently paper-file their Form 990-PF. In many cases, this is because the Form 990-PF instructions currently require the attachment of a schedule that lists the identity and value of each security held at the end of the year, and it is far more efficient to attach a copy of a year end investment portfolio statement than it is to manually enter each individual holding (they can number into the hundreds) into the tax preparation software. The instructions do allow the reporting of governmental bonds as a lump sum total, but this accommodation is not available for other types of publicly traded securities.

Hopefully, this logistical issue will go away before electronic filing becomes mandatory. It seems that one logical and easy way to accomplish this would be to amend the instructions to allow all publicly traded securities to be reported as a lump sum, with perhaps an exception if the foundation owns more than a specific percentage of the publicly held company, or if the investment exceeds a specific percentage of the foundation’s total assets. Alternatively, the IRS could relax its current requirements that allow PDF attachments to e-filed Forms 990-PF only in very limited circumstances.