Integrating State Charities Registration Systems with IRS 990 E-Filing

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. Background:The 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 • Can’t accept electronic payments • Can’t accept “net” from credit card transactions totalling less than fee (e.g., state receives $24, credit card company receives $1 for $25 fee) • Can’t accept electronic signature • Registration/filing deadline inconsistent with IRS filing deadlines • Can’t 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.