A federal judge on January 30, 2015, handed the Internal Revenue
Service (IRS) a significant defeat in its fight against releasing
IRS Form 990 information returns in a digitally readable format
– a format that would make information about tax-exempt
operations more easily accessible.
The ruling of Judge William H.
Orrick of the U.S. District Court of the Northern District of
California in Public.Resource.Org v. U.S. will have a
significant impact on the IRS as well as all tax-exempt
organizations required to file the annual Form 990.
Judge Orrick rejected the IRS's argument that producing the
documents requested by Public.Resource.Org under the Freedom of
Information Act (FOIA) would create a significant burden on an
over-stretched federal agency. The judge gave the IRS 60 days to
produce Forms 990 in a digitally readable format for nine
tax-exempt organizations named in the lawsuit, all of which had
filed their returns with the IRS electronically. The agency has
until then to file an appeal.
In response to FOIA requests, the IRS currently removes
confidential information from Forms 990 and converts them to image
files – even those that have been filed electronically
– making it difficult to conduct digital searches of multiple
forms and perform similar electronic functions. The public
currently has online access to Forms 990 primarily through
organizations such as GuideStar, which convert them to PDF files.
This ruling could open the doors to other FOIA requests from the
media, adversaries, competitors, consumer watchdog groups,
researchers, and others wanting to more easily search Forms 990 for
particular data.
As argued by the IRS, requiring the agency to provide searchable,
electronic versions of e-filed Forms 990 in response to FOIA
requests imposes the burden of establishing a process of redacting
certain information from the returns that is not subject to public
disclosure. According to the IRS, the initial expense of $6,200 for
this particular FOIA request would constitute a significant burden
because the agency is still operating under a sequestration-level
budget and significant staffing reductions. Additionally, such a
requirement imposes the burden of developing new protocols to train
staff to respond to FOIA requests for searchable, e-filed versions
of Forms 990.
A more significant impact will be on organizations that e-file
their annual Forms 990 – the entities whose returns may be
requested in the future. For these organizations, it will be far
easier for the public, the media, and others to search for specific
information reported on their annual Forms 990. This may impact the
manner in which information is reported, and possibly alter the
behavior of certain organizations. For instance, if searchable
versions of Forms 990 make it easier to identify compensation
provided to top nonprofit executives, organizations may begin to
reconsider compensation levels to avoid unfavorable
comparisons.
This ruling also could have a significant impact on GuideStar,
Charity Navigator, and other charity rating and watchdog groups.
Will these groups file FOIA requests to obtain electronic versions
of e-filed Forms 990 and allow the public to search for Forms 990
by information reported in the form? For instance, will it become
possible for watchdog groups to conduct a search of all 501(c)(3)
tax-exempt organizations that incurred lobbying expenses in excess
of more than $2 million a year, or to identify every nonprofit
executive that was paid more than $1 million in a particular year?
The answer could well be, yes.
The mandated public availability of Forms 990 has already had a
significant effect on the activities, operations, and
organizational structures of tax-exempt organizations. Requiring
the IRS, in response to FOIA requests, to provide the public with
searchable, electronic copies of e-filed Forms 990 should
drastically increase that effect.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.