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/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 NCCS State forms 2005 XML is the common language for transmitting the information

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.