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Analysis: Taxpayers First Act Requires Nonprofits to E-File Tax Forms

Publication date: 
Tuesday, July 23, 2019

 

Taxpayers First Act: Nonprofits Are Now Required To File Tax Forms Electronically 

Summary: 

The newly enacted Taxpayers First Act (Public Law 116-25) is the first substantial modification reform to the Internal Revenue Service (IRS) in over two decades, revising its organizational structure, increasing cybersecurity measures and revising requirements for electronic filings. The new law also requires all tax-exempt organizations filing a Form 990 and political organizations that receive or spend funds for tax-exempt functions filing a Form 8872 to file their annual tax returns electronically and made available in a machine-readable format. The Taxpayers First Act was introduced by Representative John Lewis (D-GA-05) and signed into law on July 1st, 2019. 


Background: 

The Taxpayers First Act presents the first substantial modification reform to the IRS since the IRS Restructuring and Reform Act passed in 1998. This law excluded an original provision passed by the House to codify the Free File Program, which is a partnership between the IRS and businesses to provide free tax return preparations to the lowest 70 percent of taxpayers by adjusted gross income, currently $66,000 or less. The revised measure instead includes provisions related to electronic filing requirements for political and tax-exempt organizations. The mandate to e-file has been championed by nonprofits for several years.

 

Provisions Impacting Tax-Exempt Organizations:

E-Filing: The new law requires all tax-exempt organizations to file their annual tax returns electronically and made available in machine-readable format. This includes tax exempt organizations filing a Form 990 as well as political organizations filing a Form 8872. This provision is effective for tax years beginning after the law’s enactment, but it allows the IRS discretion to offer a two-year transition relief for smaller organizations. Additional highlights related to this provision include: 

  • Private foundations and charitable trusts, regardless of asset size, that file at least 250 returns during a calendar year are also required to file their Form 990-PF information returns electronically. 
  • Tax-exempt organizations that have assets of $10 million or more and that file at least 250 returns during a calendar year must electronically file their Form 990 information returns. 
  • Organizations with gross receipts less than $200,000 and with total aggregate assets of less than $500,000 at the end of the taxable year can request the two-year transition relief. This transition relief may also extend to organizations filing Form 990-T.  

Notifications to Tax-Exempt Organizations: This provision requires the IRS to notify a tax-exempt organization after the organization’s second consecutive failure to file a required information return.  This provision will allow organizations sufficient time and notification to submit an information return to prevent the revocation of their tax exempt status. The revocation of a tax-exempt status occurs automatically when an organization does not file for three consecutive years. 

Volunteer Income Tax Assistance (VITA) Program: VITA is a matching grants program for organizations that offer tax preparation assistance to low-income and underserved communities. With the new law, VITA gains more secure funding with the authorization of as much as $30 million per year. These allocated funds will provide permanent matching grants to organizations that support VITA programs, with the opportunity for grants to be provided for up to three years.  

  

Implications: 

Currently, about one-third of the estimated 1.5 million nonprofits in the United States file their tax returns in paper format. The new electronic filing requirement will allow for improved critical reporting, transparency and accountability in the nonprofit sector. Making the shift from paper to a digital format will make the information suitable for more up to date research and analysis for regulators, nonprofit managers, and donors alike.

Despite the general support received from nonprofit advocates and oversight groups, there are some concerns the new e-filing requirement could create an undue burden for smaller and more rural organizations. E-filing may be unfeasible and complicate logistics for organizations that are less familiar with the electronic filing system. The new mandate does include a two-year transition relief period for eligible organizations to help mitigate and address these concerns.

 


For additional questions or comments, please contact Erika Cervantes at (213) 680-8866 ext. 215 or at [email protected]

 

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