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AFP Submits Comments on Revised Form 990

(Sept. 17, 2007) The new draft Form 990’s increased reliance on simplistic percentages and its expansion into the areas of governance and best practices will tend to mislead donors and create significant problems for charities, according to comments submitted by AFP.

The Internal Revenue Service (IRS) has proposed the largest set of revisions and reforms to the Form 990 in decades, and comments about the proposed changes were due to the agency by Friday, Sept. 14. The IRS has maintained that the new form will be implemented in 2009, although many organizations, including AFP, have indicated that additional time—both for responding to comments and for allowing charities to prepare for the changes—is needed.

The new form consists of a 10-page core form, which all organizations must complete, and then 15 separate schedules, which some nonprofits must complete depending upon circumstances, revenue, etc. For example, organizations must complete Schedule G about fundraising if they receive more than $10,000 in annual revenue from special events or third-party fundraisers.

Detailed information about the proposed changes to the Form 990 can be found here. AFP’s comments, as well as comments submitted by a coalition of fundraising organizations including AFP, can be found in the Attachments section below.

Form’s Purpose Not Clearly Defined

One of AFP’s biggest concerns relates to the expansion of the form’s purpose into areas beyond just financial reporting. The redesigned form now proposes to educate charities on IRS notions of best practices (often murkily defined) and to provide simplistic and, to some extent, subjective information on the efficiency and the effectiveness of nonprofit filers.

“Unfortunately, as with most things that try to be all things to all people, the result is a document that never achieves its lofty goals and ends up being confusing and burdensome to both filers and users,” said Paulette Maehara, CFRE, CAE, president and CEO of AFP. “The form keeps getting larger and larger, covering more areas, yet it’s not entirely clear why some data is being reported and what the IRS intends to do with it, especially considering that they don’t have the resources to adequately address the forms they’re using right now.”

A perfect example is the request for data about government practices, which seem inappropriate and out of place. Several questions also suggest certain practices that both the charitable sector and the IRS ultimately find impractical and may well fall outside the statutory authority of the agency.

AFP is also concerned that the new form will place significant administrative burdens on charities, especially smaller nonprofits with limited staff and resources.

Simplistic View of Fundraising

An equally contentious problem with the new draft form is its reliance on the use of percentages, particularly on the first page of the core form. As a public disclosure document, the likelihood that there will be widespread reliance on the summary information contained in the very beginning of the form is almost certain.

Unfortunately, the simplistic information the agency is seeking reinforces the flawed but popular notion that percentages, especially those related to fundraising and compensation, are worthwhile indicators of an organization’s intrinsic worth and effectiveness. Yet statistics are no substitute for the truth. The presence within a given charity of a high percentage of fundraising costs does not necessarily equate to a lack of efficiency or effectiveness.

This paradigm was recognized by the United States Supreme Court in its 1984 decision in Secretary of State of Maryland v. Joseph H. Munson Company, Inc., as well as four years later in Riley v. National Federation of the Blind of North Carolina, Inc. In the Munson case, the Supreme Court said:

[T]here is no necessary connection between fraud and high solicitation and administrative costs. A number of other factors may result in high costs; the most important of these is that charities often are combining solicitation with dissemination of information, discussion and advocacy of public issues, an activity clearly protected by the First Amendment. …

“AFP is hardly against the disclosure of fundraising costs,” said Maehara. “But to place them at the front of the Form 990, along with compensation information—without any sort of context for either one—is simply to invite continued assumptions about fundraising and compensation costs that simply aren’t true. The IRS may say that it understands the complexity of these issues, but the form’s layout tends to mislead donors into thinking there is an easy answer for these issues when the agency knows there isn’t one.”

Fundraising and Gaming

In addition to its own comments, AFP joined the Council for the Advancement and Support of Education (CASE), the DMA Nonprofit Federation (DMANF) and the Association of Direct Response Fundraising Counsel (ADRFCO) in submitting feedback about Schedule G of the draft form related to fundraising, as well as the issue of gaming.

In the draft form, the IRS lumps fundraising and gaming together, despite the fundraising community’s view that the two are distinct, unrelated and separate activities. While both result in the raising of money, gaming—such as bingo and other games of chance—is a form of entertainment in which most players pay fair market value for the opportunity to win prizes. The essence of fundraising is cultivation and the development of a donor-charity relationship in order to generate charitable gifts. The comments note that the Internal Revenue Code treats most games of chance as unrelated trade or business, while amounts received through fundraising are treated as gifts.

The coalition’s comments also suggest changes to Schedule G, which under the draft form must be completed by organizations that spend at least $10,000 on “professional fundraising” or receive at least $10,000 from fundraising events (including gaming).

The coalition believes that these triggers are too low and should be increased to either $50,000 in gross receipts from “special fundraising events” or “expenditures of more than $50,000 for professional fundraising services.”

Copies of AFP’s comments, as well as the coalition’s comments, are available in the Attachments section below.

Attachments

Fundraising Coalition Form 990 Comments — PDF Format, 94926KB

AFP Form 990 Comments — PDF Format, 70677KB

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