A question that inevitably arises in any conversation surrounding the IRS electronic filing program (e-file) is: “Will an organization increase its chances of being audited if it files its return(s) electronically?” The answer is no.

While e-file eliminates many of these steps, it does not change the manner in which returns are selected for audit or the amount of data used for selecting a return for audit!

The same return items manually keypunched from the paper return are automatically extracted from the electronic submission and merged with the data from paper returns.

Thus, electronic returns cannot be differentiated from paper returns during the audit selection process. The entire electronic file will, however, be stored in a separate database for use by IRS customer service representatives or revenue agents when needed.

This chart outlines the steps for receiving, processing and storing paper and electronic returns and highlights how they are different.

Paper Returns Mailroom: Envelopes are opened payments extracted. Sort: Returns are manually sorted by form number, e.g. 990, 1040, etc. Data Entry: Certain data from returns are manually keypunched into a database. Error Checking: Data is subject to validity and consistency checks. Posting to Master File: Data from complete returns are uploaded to the Master File. Data from Master File downloaded into another database used to create pool of returns for audit. Storage: Complete and final returns are filed in a warehouse at or near the service center. Electronic Returns Eliminated. Eliminated. Automated: Identical data is automatically merged into same database. Automated: Many error checks are completed before returns are even accepted for processing. No change in process. No change in process. Automated: 100% of electronic data will be stored in a separate database.

Next month's article is dedicated to the benefits exempt organizations, practitioners and state regulators will recgonize from participating in IRS e-file.

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A CPA for 24 years, McCutcheon’s client and industry experience for the past 15 years has been focused solely on a variety of small, medium and large nonprofits in the state, including the Colorado Symphony, the Aviation and Space Center of the Rockies, and Outward Bound.

	“Form 990 is certainly not a perfect form, but it does provide valuable information that the sector can use, and the best way to access that information is through e-filing. Changes in the actual reporting required on the form could also be made more easily in an electronic environment.” Linda Lampkin Program Director, National Center for Charitable Statistics at the Urban Institute and technical advisor to EDIN

Although the state’s online registration and annual report forms are simple to complete, he acknowledges that a lot of smaller nonprofits and professional fundraisers don’t know about the relatively new state law. “Unless they have heard about it from their CPA or CANPO (Colorado Association of Nonprofit Organizations), they don’t know about it.”

McCutcheon uses Lacerte Software to prepare his clients’ 990s, gathering most of the information during the audits he conducts. Since e-filing the 990 with the IRS in 2004 is optional, McCutcheon has decided not to be one of the early adopters. Faster, timelier information on nonprofits or improving the efficiency and effectiveness of IRS oversight and enforcement are not his top priorities. Instead, he would like to see the IRS first address the problems of inconsistent reporting from nonprofit to nonprofit as well as inconsistencies between a nonprofit’s audit report and its Form 990. "I believe strongly that donors have a right to know that their money is being stewarded to the best of management’s and the Board’s abilities but I’m not sure the 990, in its present form, is the proper vehicle for maximizing accountability and ensuring stewardship,” says McCutcheon.

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	Aside from the economy, says Cash, one of the factors hindering charitable giving is donor indecision. “Nonprofit accountability issues have been prominent in the news, and have probably contributed to recently observed reductions in giving. An electronic registration system gives potential donors valuable information and greater confidence in their giving decisions. I hope that nonprofits recognize that it’s in their best interest to register, and e-filing is the best way to register.”

To register in Colorado, charitable organizations have two options: either they can complete the Secretary of State’s Charitable Solicitations Online Registration form or they can create an electronic Form 990 using Desktop990™, a free, downloadable software developed by the Urban Institute’s National Center for Charitable Statistics (NCCS) that electronically “pulls” about 17 lines of information from the Form 990 that are required by the state. About 25 nonprofit organizations have registered in Colorado using DeskTop990™.

	“The Colorado Association of Nonprofit Organizations (CANPO) is working to educate nonprofits statewide not only about Colorado's Charitable Solicitation Act but also about the upcoming IRS e-filing requirements. In Colorado, it is not uncommon for nonprofits outside of the largest metropolitan areas to have no direct Internet access which makes it difficult to complete on-line applications and reports. “With the continued implementation of Colorado's Multi-Use Network however, it should become easier for nonprofits statewide to comply with state regulations. The involvement of Colorado's CPA Society is also a key factor in educating accountants and auditors to the need for nonprofit on-line filing. “CANPO supports the work of EDIN and will continue to educate Colorado's nonprofits statewide to both the importance and benefits of e-filing.” Barbara Shaw Executive Director, Colorado Association of Nonprofits

Cash expects more nonprofits to use the free software when the IRS begins accepting electronically filed Form 990s in early 2004. “We wanted to be a part of the e-file learning process and encourage other states to participate in electronic filing,” says Cash, explaining his state’s participation in the eFileForm990 multi-state pilot project. “Colorado is the only state where e-filing is mandatory, so convincing nonprofits of the benefits of e-filing is not always our primary concern. However, we do want to be involved as e-filing initiatives develop elsewhere, so we can pick up new ideas, adapt our system as necessary to any new federal or state e-filing systems, and perhaps share some of our own recent experiences.”

Because Colorado’s web-based application was built quickly, Cash regularly sees the need for various enhancements that would make the system more user-friendly and his office more efficient. Renewals, for example, have been dragging, acknowledges Cash, but last week, a new application was added to the system to automatically email overdue notices and update the status of each registration accordingly. In the next release, the web application will accommodate third parties -- law firms and other companies that process hundreds of state registrations for charitable organizations and professional fundraisers.

Elected to the board of directors of the National Association of State Charity Officials in September, Cash serves on NASCO’s newly created Technology Opportunities Program (TOP) grant committee, which is working in partnership with GuideStar to oversee the renovation of NASCONet, a national on-line charity registration information system. “We’re excited about the potential for this federal money to benefit charitable organizations, the public, and state charity offices,” says Cash.

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"Just because you can file electronically, doesn’t mean people will. While XML enables electronic filing, it won’t attract it; there needs to be other carrots,” says Leonard B. Holt, Vice President of Operations of Universal Tax Systems, Inc. (UTS), which produces TaxWise® software tailored to individuals, businesses and exempt organizations.

	“We’ll let the IRS work out the bugs in 2004, and launch our e-filing software for the 990s and 1120s in 2005.” Leonard B. Holt VP Operations Universal Tax Systems TaxWise®

Recently selected by the IRS to serve on its Electronic Tax Administration Advisory Committee (ETAAC), Holt has successfully used, developed and marketed electronic tax products for a number of companies over the course of his career, including developing electronic filing from a research project to a full program at the IRS, writing the original Handbook for Electronic Return Originators of Individual Income Tax Returns, and conducting the first two seminars held to promote electronic filing.

Like most companies, says Holt, UTS marshals its resources to offer products that make a profit. “There is not much in it for software developers to be first out of the gate with Form 990 e-filing software,” says Holt, explaining that exempt organizations are not a money-making market nor have shown any customer demand for 990 e-filing software. Technology is another factor in UTS’ decision-making process. While Holt acknowledges that XML is the best way to accommodate the complexities of the Form 990 and attachments, he is “a little gun shy” about hitching his company’s horse to the popular technology of today when something even better is going to come along tomorrow to digitize and report data.

Nevertheless, UTS wants to be seen as a partner with the IRS in its efforts to make e-filing successful. At a recent conference sponsored by CERCA (Council for Electronic Revenue Communication Advancement), Holt announced that UTS will have an e-filing product for the Forms 990 and 1120 in 2005. While some companies acknowledged that they’ll need to charge extra to recoup their development expenses, UTS does not intend to charge for the XML conversion. “We’re positioned well to have a very competitive Form 990 e-filing product at a competitive price.”

Even with the availability of 990 e-filing software, Holt believes that e-filing the 990 will be a “slow sell." The IRS and industry have to create customer demand, he says, adding that the “real answer to the 990s will be federal mandates to e-file.”

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