A federal judge on January 30 handed the Internal Revenue Service a significant defeat in its fight to not have to release IRS Form 990 information returns in a format that can be read by computers, thereby making 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. is very important and will have a significant impact on both the IRS and 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 a Freedom of Information Act request would create a significant burden on an over-stretched federal agency. He gave the IRS sixty days to produce the Forms 990 in computer-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.
The IRS currently removes confidential information from Forms 990 and converts them to image files, even for those that have been filed electronically. That makes it difficult to conduct digital searches of multiple forms and similar functions.
The public currently gets 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 and competitors, consumer watchdog groups, researchers, and others wanting to more easily search Forms 990 for particular data.
As argued by the IRS, requiring the IRS to provide searchable, electronic versions of e-filed Forms 990 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, $6,200, constitutes a significant burden because the IRS is still operating under a sequestration-level budget, resulting in significant staffing reductions. Additionally, such a requirement imposes the burden of developing new protocols to train staff to respond to 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 entities. For instance, if searchable versions of the Form 990 make it easier for the public, the media, and others to identify and compare the amount of compensation provided to top nonprofit executives, then organizations may begin to reconsider the amount of compensation they pay to avoid unfavorable comparisons.
This also could have a significant impact on sites such as GuideStar.org, CharityNavigator.org, and others. Will these sites obtain electronic versions of e-filed Forms 990 and change their search functions so that the public can search for Forms 990 by information reported in the form? Will it become possible, for instance, 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 who was paid more than $1 million in a particular year? The answer would seem to be yes.
The mandated public availability of the Form 990 has already had a significant effect on the activities, operations, and organizational structures of tax-exempt organizations. Requiring the IRS to provide the public with searchable, electronic copies of e-filed Forms 990 should dramatically increase that effect.
Venable LLP partner Jeffrey Tenenbaum chairs Venable's Nonprofit Organizations Practice Group, which is based in Washington, D.C. This commentary originally appeared on the Venable LLP website.