Integrating State Charities Registration Systems with IRS 990 EFiling

1
Integrating State Charities Registration Systems
with IRS 990 E-Filing

• A non-technical overview prepared by NCCS for
  State Charity Officials (March 2005)

2
State Charity Registration

• Approximately 176,000 charities register
  nationwide.
• On average, 16 of registration renewal
  statements are filed by charities filing in more
  than one state.
• Big states tend to have fewer multistate filers
• 32 states either require or accept the IRS Form
  990 in lieu of a state form

3
The Problem

• Too much paper
• Inefficient processing
• Difficult for charities that file in more than
  one state
• Errors on 990s and state charity forms

4
The IRS Perspective Federal E-Filing Used by
Millions

• 60 million returns have been e-filed in 2004.
• Of these, 43.2 million individual tax returns
  were e-filed by Tax Professionals.
• E-file brings you customers - and Tax
  Professionals who e-file report using an average
  of 10 minutes less per return!
• Smart - IRS provides an official acknowledgement
  that your client's return was received. And,
  through integrated e-file and pay options, you
  can help your client e-file and pay at the same
  time!
• Fed-State individual income tax e-filing
  available in 37 states DC.
• 6.7 million business returns were e-filed in 2003
• Source http//www.irs.gov/efile/

5
BackgroundThe Potential for Nonprofits

• Whether organizations prepare their own or use
  CPAs to prepare their 990s, the potential for
  e-filing is high
• 90 of organizations had access to the Internet
  in 2002. (We expect the percentage is even higher
  now.) (Urban Inst. 2002 e-filing survey)
• Nearly 3 out of 4 nonprofits use outside
  preparers (almost always CPAs) to prepare their
  990s. With the 2 largest tax prep software
  vendors (CCH Intuit) going online with their
  990s by Jan. 2006, the potential for efiling is
  great.
• 73 of financial executives said they would be
  very likely or somewhat likely to electronically
  file their Form 990. (Urban Institute 2002
  e-filing survey)

6
The IRS Fed-State Retrieval System

• Pass state federal information along to states
• Similar to IRS individual corporate return
  systems
• Jan. 2006 activation
• Payment information (credit card numbers, etc.),
  but not dollars, sent to states for processing
• All electronic no notarization
• IRS IRS-approved providers validate EIN
  authentication

7
NASCOnet XML SuperSchema

• XML provides a shared language for transmitting
  information that can be used by any operating
  system or database.
• Windows, Linux, mainframe systems
• Oracle, Informix, MS SQL Server, MS Access
  databases
• The IRS developed the schema for the 990s
• GuideStar NCCS are developing a complementary
  NASCOnet XML SuperSchema for state filing that
  the IRS will use in its Fed-State Retrieval
  System
• Includes the Unified Registration Statement (URS)
  all state-specific charity registration
  renewal forms
• The schema is in the public domain Software
  developers others can use it for free.

8
Benefits

• No more State Charity Office data entry of state
  forms 990 information. Allow states to focus
  on enforcement.
• Simplify process reduce registration burden for
  charities
• 990 financial information automatically flows
  into state forms
• Tax prep software companies like Intuit CCH can
  integrate state registration renewal with 990
  preparation
• Better quality information
• Financial data consistent with Form 990
• No illegible returns
• No arithmetic errors
• Easy crosschecks with prior years returns or
  professional fundraisers reports

9
Benefits (continued)

• Potential cost-savings as system widely-used
• Electronic infrastructure already being built by
  IRS, GuideStar, NASCOnet NCCS big startup
  savings for states
• Expect quick adoption 35 of individual 1040s
  now efiled. Most organizations have web access.

10
State Cooperation Coordination in Other Areas

• Law enforcement generally
• Uniform codes (Uniform Commercial Code)
• IRS 1040 program with states
• IRS Form 990 is a fed-state partnership

11
The Flow of Information
Charity or Tax Preparer Using CCH, Intuit, NCCS
Online tax prep. systems
IRS 2005 Fed forms only Jan. 2006 Fed-State
Retrieval
State Charity Offices
XML is the common language for transmitting the
information
NCCS State forms 2005
12
Milestones

• Sign up for NASCOnet XML development
• Review statutes regulations
• Can state receive electronic payments?
• Can state accept electronic signatures?
• Are filing deadlines consistent with IRS
  deadlines?
• Identify items on state forms that are
• already on IRS forms,
• the same as standard questions asked by most
  other states, or
• that are unique to state

13
Milestones (2)

• Test prototype systems
• XML SuperSchema (NASCOnet)
• Web-based application (NCCS, commercial software
  developers, or others)
• Develop requirements
• Data transfer conversion. Can we accept XML
  files or will they need to be converted to other
  format first?
• Data storage. Need to keep PDF copies of form?
  Print out all forms?
• Set up electronic payment system

14
Costs

• NASCOnet SuperSchema, which provides structure to
  data collection and exchange FREE
• NCCS web-based system for charities Internal
  development, commercial tax prep software
  developers, NCCS (10,000-17,500)
• System for converting XML files received from the
  IRS to internal database NCCS (1,500 - 2,500
  depending on needs) or use own IT staff (20-40
  hours).
• Internal IT costs 20-120 hours for support
  technical assistance
• Charity office costs 40 hours startup to review
  schemas and manage implementation.
• Ongoing costs Support to charities, maintenance
  enhancements (5,000 - 10,000 per year)

15
Potential Barriers

• Cant accept electronic payments
• Cant accept net from credit card transactions
  totalling less than fee (e.g., state receives
  24, credit card company receives 1 for 25 fee)
• Cant accept electronic signature
• Registration/filing deadline inconsistent with
  IRS filing deadlines
• Cant download electronically transmitted data

16
The Process The Preparer

• Nonprofits tax preparers
• Use 990 Online system
• Professional preparers use CCH, Intuit products
• File with IRS

17
State Charity Office Processing

• States use IRS web service to automatically
  download data from state charity
  registration/renewal forms 990s for
  organizations
• Charity must first indicate that it wants data
  sent to particular state

18
State Charity Office Processing (2)

• Local computer converts XML to database structure
• Forms checked for errors and accepted or rejected
• Notification via email to charity that
  registration or renewal accepted or rejected
• Payment processing
• Credit card or ACH info extracted from XML
  document and transactions processed, or charity
  redirected to state site to make payment online

19
Long-Term Benefits for Starting Now

• Likely that e-filing will be mandatory for many
  states and IRS
• Valuable to be part of national effort with major
  economies of scale
• Permits state flexibility at same time
• Gives us time to work out kinks in our processing
  system before e-filing becomes mandatory or
  widely-used

20
Two Options for Implementation

• Deploy XML and payment processing infrastructure
  in early/mid-2005
• Gain experience with new system in preparation
  for full IRS Fed-State Retrieval System roll-out
  in 2006
• NCCS server transmits e-filed 990 and state
  charity documents to both the IRS and state
• Functionality same as IRS system
• 2006 Use IRS Fed-State Retrieval System
• More software developers can transmit

21
Schedule

• Remove statutory regulatory hurdles Winter
  2004-2005
• Implementation of XML SuperSchema Spring 2005
• Development of software websites for charities
  professional preparers Spring/Summer/Fall
  2005
• Testing of system Fall 2005
• IRS Fed-State System Activated JANUARY 2006
• Use NCCS System? Timeline shortened so that
  development testing are completed by mid-2005.