For the first time since 1979, the Internal Revenue Service (IRS) has proposed major revisions to Form 990, the annual information return filed by tax-exempt organizations. The draft form, supplementary schedules and instructions are available on the IRS website. The changes include a new Schedule C for all 501(c) organizations to report information on lobbying efforts and activities that support or oppose candidates for public office. Public comments can be filed electronically or mailed to the IRS by Sept. 14. Revised Aug. 2, 2007 The IRS released the proposed revisions for Form 990 on June 14. IRS officials said the redesigned form is meant to enhance transparency for the IRS and the public, promote compliance with IRS rules and minimize the burden on nonprofits. The proposed core form is 10 pages long, and there are 15 proposed schedules for supplemental information. Reporting on election related activities Proposed Schedule C, Political Campaign and Lobbying Activities, should be carefully reviewed by nonprofits. The format could be confusing, since the IRS has proposed one schedule for all tax-exempt organizations, even though the largest segment of the nonprofit sector, 501(c)(3) organizations, operate under more restrictive rules than action/civic organizations, labor unions or trade associations. Part I-A of Schedule C asks all 501(c) and 527 organizations (political action committees) to describe direct and indirect political campaign activities, including volunteer hours and expenditures. Part I-B asks 501(c)(3) organizations about excise taxes imposed for these activities and whether a correction was made, without stating the prohibition against direct or indirect intervention in candidate elections. The Instructions provide minimal guidance on what is and is not allowed, referring to the IRS' recent Revenue Ruling 2007-41 for further details. The instructions also note that "Political campaign activity does not include any activity intended to encourage participation in the electoral process, such as voter registration or voter education, provided that the activity does not directly or indirectly support or oppose any candidate." The IRS Rationale and Overview says, "The enhanced political activity questions reflect the Service's concern with the results of its Political Activities Compliance Initiative (PACI)." It notes that the service will "follow up in appropriate circumstances with a flexible array of compliance tools." This array of tools could include an investigation by IRS staff, written warnings to cease certain activities, excise taxes on the organizations and its managers, or loss of tax-exempt status. Part I-C asks 501(c)(4),(5) and (6) organizations for expanded information on ties between the organizations and political campaigns by asking for information on "all section 527 organizations to which payments were made." This encompasses political parties, candidate campaigns and political committees at the local, state and federal levels. Reporting on legislative lobbying activities Part II-A covers reporting of lobbying expenditures by charities that have opted to use the expenditure test to measure their lobbying limits. There are no significant changes in the first part of this section, since the expenditure test only counts money spent on lobbying toward the limit. However, the proposed form also includes historical reporting of total lobbying expenditures over a four-year period. The Instructions say this is because, "if over a 4-year averaging period the organization's average annual total lobbying or grassroots lobbying expenditures are more than 150% of its dollar limits, the organization will lose its exempt status." Pages four through seven of the Instructions provide a good summary of the definitions and rules. Part II-B applies to 501(c)(3) organizations that have not filed Form 5768, which allows them to use the expenditure test to measure lobbying limits. All other 501(c) groups also report their lobbying activities here. This section has significantly more recordkeeping and reporting burden for charities, since only about three percent have opted to use the expenditure test. All others default to the vague requirement that no more than a substantial part of the activities shall be attempts to influence legislation. The additional detail about lobbying sought from "no substantial part" 501(c)(3) organizations includes:

• volunteers
• paid staff
• media advertising
• mailings to members, legislators or the public
• publications and broadcasts
• grants to other organizations for lobbying purposes
• rallies, demonstrations, seminars, conventions, speeches, lectures, etc.
• other

The form then asks if these activities "cause the organization not to be described in section 501(c)(3)". However, the Instructions provide limited guidance for answering this question. Pages 11-12 explicitly state that these organizations cannot rely on the definitions that apply to the expenditure test. The failure to state a clear limit on what is "unsubstantial" lobbying activity reflects the larger flaw and lack of clarity in the law.