Breaking Down the Taxpayers First Act Which Requires Nonprofits to E-File Tax Forms

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 changing requirements for electronic filings. The new law also requires all tax-exempt organizations filing a Form 990 and political organizations filing a Form 8872 to file their annual tax returns electronically and make them available in a machine-readable format. Representative John Lewis (D-GA-05) introduced The Taxpayers First Act and signed it 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, a partnership between the IRS and businesses to provide free tax return preparations to the lowest 70 percent of taxpayers by adjusted gross income, which is currently $66,000 or less. The revised measure instead includes provisions related to electronic filing requirements for political and tax-exempt organizations. Nonprofits have championed the mandate to e-file 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 make them available in a machine-readable format. The law includes tax-exempt organizations filing a Form 990ands 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: 

• Regardless of asset size, private foundations and charitable trusts that file at least 250 returns during a calendar year are required to file their Form 990-PF information returns electronically. 
• Tax-exempt organizations with 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 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 its 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 for up to three years.  

Implications: 

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 improve 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.