May nonprofits keep their records private from the general public? Yes and no. Two key legal dynamics apply. First, nonprofit organizations are legally required to provide copies of their IRS Form 990 returns for the three most recent years and their IRS tax-exemption application indefinitely upon request (unless specifically exempt from these filings). Second, nonprofits are required to keep and maintain internal documentation consistent with their tax-exempt status such as bylaws, board meeting minutes, nonprofit policies, and financial records, as a condition of the operational test under Section 501(c)(3). Form 990s and IRS tax-exemption applications are thus subject to public disclosure and inspection, while internally maintained nonprofit records are not. These legal standards implicate additional important considerations for compliance and best practices.
Transparency – But Limitations Too
Individuals and corporate entities often keep their tax filings confidential to safeguard the privacy of taxpayers and the sensitive financial details within. In contrast, tax filings for tax-exempt organizations are intentionally made available to the public. This transparency both promotes accountability and acts as a deterrent against misuse and fraudulent activities.
Note that for IRS Form 990 series filings, disclosure requirements progressively extend for the nonprofit’s three most recent tax years. For nonprofits that qualify for the IRS Form 990-N “e-postcard,”[1] such records contain extremely limited organization and financial information, communicating that the organization still exists as an IRS-recognized exempt entity and that it qualifies for such filing under a monetary threshold (generally less than $50,000 in gross receipts). Disclosure requirements also extend to IRS Form 990-Ts, in which an organization must report unrelated business income tax (known as “UBIT”) liability.[2]
While these types of filings would warrant careful preparation on their own, the public disclosure requirements effectively encourage an even more careful and thoughtful preparation. For example, the IRS Form 1023 application for tax-exemption should contain accurate descriptive information that communicates the organization’s mission, goals, and operations – all fitting well within Section 501(c)(3) constraints.[3] Form 990s should contain concise and well-drafted program summaries, ongoing organizational and operational changes undertaken by the organization, accurate answers to the many questions asked, and properly prepared supporting financial data (including public support qualification for public charities).
But such transparency has its limits. Of key importance to many nonprofits and their donors, the Form 990 Schedule B contains sensitive donor information including donor names, their addresses, and specific donation amounts. Under applicable IRS rules, nonprofits may redact donor names and donor addresses from the Form 990 version that is made publicly available. Such “public disclosure” version thus may differ slightly from the version filed with the IRS.
Challenges to the Schedule B donor disclosure requirement have been made in recent years. Notably, in the 2021 Americans for Prosperity ruling, the U.S. Supreme Court upheld donor privacy interests and related First Amendment rights and rejected the California Attorney General’s asserted right to unredacted Schedule B donor information.[4] Additionally, the Buckeye Institute has filed a lawsuit against the IRS, making a wholesale challenge to the IRS’s right to obtain all such donor information via Schedule B.[5]
Categorical Exclusion for Churches and Other Religious Organizations
Do these public disclosure requirements apply to churches and other houses of worship? In a word, no. The Internal Revenue Code distinguishes such religious organizations, mission societies, associations of churches, and integrated auxiliaries exempting them from filing both the initial IRS Form 1023 tax-exempt recognition application requirement and annual IRS Form 990 information return filings. More specifically, Sections 508 and 6033 of the Code provide that such organizations are not required to apply to the IRS to qualify as tax-exempt under Section 501(c)(3), based on fundamental First Amendment religious freedoms.
Consequently, such religious organizations need not be concerned about these IRS public disclosure requirements. However, and as with so many tax issues, significant caveats apply. First, a house of worship that engages in unrelated business activity may be required to file an IRS Form 990-T. An organization’s Form 990-T is subject to public disclosure, like Form 990, regardless of whether it is religious or not. Second, to the extent a religious organization elects to submit a Form 1023 Application to the IRS, that exemption application will then be subject to the public disclosure rules. Further, all religious organizations should still be mindful to comply with Section 501(c)(3)’s organizational and operational tests that qualify them for self-declaring their tax-exemption.[6]
Public Disclosure - Legal Compliance and Best Practices
How does the public disclosure requirement apply in actual practice? Here are key considerations for legal compliance and best practices.[7]
1. Keep excellent records. Responsible nonprofits should keep their IRS Form 1023 application, all Form 990s, and any Form 990-Ts as permanent organizational records.[8] Additional record retention considerations apply for corporate governance materials including articles of incorporation, any amendments thereto, bylaws, corporate policies, corporate resolutions, board meeting minutes, and committee information. Record retention considerations should further be addressed comprehensively for other nonprofit materials such as for employment, financial, operational, and risk management – via a formal record retention policy that is adopted by the board and followed scrupulously.[9]
2. Be aware of online accessibility for Form 990s. Nonprofits’ Form 990s are available through online platforms such as GuideStar, Pro Publica, and the IRS Exempt Organization webpage. For example, an interested person may search GuideStar for a specific nonprofit organization to gain access to its most recently filed IRS Form 990s – typically one to three years at most. Note, however, that such online access may lag significantly, and it does not include access to IRS Form 1023 applications. A nonprofit organization thus may need to provide disclosure directly for specific requests.
3. Be ready to respond. Particularly in light of the above considerations, nonprofits should be ready to provide their IRS documents in response to requests made by interested parties. Such requests may come from the media, watchdog groups, persons seeking compensation comparability data (for other nonprofits), or other reasons. No justification for such a request needs to be given; disclosure is required regardless of the requesting party’s purpose. It is legally appropriate to respond that certain material is already publicly available, such as by directing the requesting party to GuideStar’s online tool. But for materials that are not publicly available (e.g., if GuideStar only contains a single year’s IRS Form 990), the nonprofit must provide any additionally required tax materials via a timely response – as follows.
4. Provide required IRS materials timely. The legally required response time for the prior three years’ worth of IRS Form 990s and IRS Form 1023 applications is within 30 days of a request. A responding nonprofit may appropriately seek clarifications as warranted, such to identify the correct fiscal year – especially for a non-calendar fiscal year (i.e., ending in the identified year, or starting in the identified year)? Note too that a response need not be provided as quickly as possible, just by the 30-day deadline. The penalty though for untimely provision of IRS materials is $20 per day, up to a maximum of $10,000 per Form 990 requested (and no maximum regarding a requested IRS Form 1023 application).
5. Provide required IRS materials otherwise properly. A nonprofit may choose to provide IRS materials through its own website. Such approach may allow for quick responses, but doing so is not always desirable (i.e., perhaps too much transparency). A responding nonprofit also may charge a reasonable fee for copying these documents and for postage costs, but typically responsive materials are best provided electronically. Note too that a request may be made for in-person review, but typically electronic provision is the better approach – especially if any disruption or other problem may be anticipated (e.g., from a reporter who is also seeking an interview or to otherwise fish for additional information).
Benefits All Around
Nonprofit leaders owe fiduciary responsibilities of due care to maintain records, to responsibly report nonprofit activities to the IRS (and other government regulators, as applicable), and to comply with legal obligations such as the IRS disclosure requirements.[10] Efficient and well organized recordkeeping, which should be helpful in a plethora of ways, exhibits care in the following: donor relations, especially for charitable contribution reporting; accounting; audits; charitable solicitation (fundraising) registrations and reporting, as may be applicable; state registrations; payroll tax compliance, employment matters, grantmaking activities and related legal compliance; insurance coverage; risk management, including child safety and supervision; and perhaps other areas as well depending on a nonprofit’s specific operations (e.g. scholarship activity). Recordkeeping should be addressed as well in terms of the extent to which materials are maintained electronically (e.g., solely, or in tandem with physical records) and related security and confidentiality aspects.
The IRS’s reporting and disclosure requirements are quite important not only for legal compliance but also to build organizational credibility, to reflect transparency, and to strengthen relationships with donors and other stakeholders. IRS-related legal compliance, and all the efforts to do so, can contribute meaningfully to a nonprofit’s effective recordkeeping practices that foster its operational excellence and missional success.
[1] For more information about which organizations qualify for Form 990-N (e-postcard) filing, reference the IRS website here.
[2] Our firm’s UBIT blog article addresses related liability and reporting consideration further.
[3] See our law firm’s blog article on Form 1023 for more information. Depending on an organization’s circumstances, the significantly more streamlined IRS Form 1023-EZ may be appropriate to use instead – as addressed in this article.
[4] For more information about this resounding victory for charitable organizations and their donors, see Schedule B Donor Disclosures: Supreme Court Sides with Charities.
[5] No. 2:22-cv-04297-MHW-EPD. Numerous nonprofits have filed amicus briefs arguing, among other things, that (a) such information can be of only minimal value to the IRS since such donor information cannot easily be cross-checked against donors’ own tax returns, and (b) the IRS’s ability to maintain confidentiality and to avoid leaks has been proved unreliable.
[6] For more information about Section 501(c)(3)’s organizational and operational tests, please see our firm’s related article.
[7] The list here builds on Treas. Reg. § 301.6104(d)-1-2.
[8] If an organization does not have access to its Form 1023 or related documents, copies may be requested from the IRS through Form 4506-B.
[9] Such considerations are addressed in terms of legal compliance and best practices in our firm’s related blog article.
[10] See our firm’s fiduciary duty blog article for more information.
