On Sept. 14, the Internal Revenue Service (IRS) closed comment on its proposed revisions to Form 990, the annual information return filed by nonprofits. A host of organizations have weighed in with extensive recommendations, and many are calling on the IRS to delay implementation until a second draft can be published for further comment and nonprofits have time to adjust their recordkeeping systems to track the new information that will be required. OMB Watch's comments focused on flaws in proposals for reporting advocacy-related activities. Other organizations, such as the Alliance for Justice, addressed problems with proposed collection of governance information that is beyond the IRS' regulatory authority. The IRS is expected to act on the comments by the end of 2007. Advocacy Related Issues The proposed reporting of advocacy-related activities is primarily in proposed Schedule C, which combines reporting related to lobbying and political campaign activities. OMB Watch, as well as the Alliance for Justice, the Center for Lobbying in the Public Interest (CLPI), the National Council of Nonprofit Association (NCNA), and the National Committee for Responsive Philanthropy, called for separating Schedule C into two parts: one for 501(c)(3) organizations on lobbying activities, and another for other types of nonprofits that covers both political campaign and lobbying activities. The OMB Watch comments said, "Proposed Schedule C is a trap for the unwary. Mixing lobbying and political campaign activities in one form is likely to cause substantial confusion, especially when the form does not clarify what direct and indirect political campaign activities are….The likely result is that permissible nonpartisan voter education and mobilization activities will be reported here, generating unnecessary burdensome disclosure." The comments warned that the combined Schedule will confuse the public and result in inaccurate reporting. The IRS was also called on to drop a Schedule C question asking 501(c)(3) organizations that do not use the expenditure test to measure their lobbying limit and to determine if their lobbying makes them ineligible for tax-exempt status. The OMB Watch comments called this an "unfair question." The CLPI comments said, "Given that there is no statutory or regulatory definition of the amount of activity that would constitute a 'substantial part' of an organization's activity and case law only provides limited guidance, we believe this question would place filers in the untenable position of having to speculate on how the IRS would assess their overall activities." Both OMB Watch and CLPI objected to a proposed requirement to report lobbying payments to non-employees in functional expense categories as part of the core Form 990. OMB Watch told the IRS, "Not only does this impose an unnecessary burden on nonprofits, it is unclear how to allocate such expenses." The instructions for completing this section create a more serious problem, which is a definition of lobbying that is far more expansive than current IRS regulations. It includes "legislative liaison" work, which is not defined, as well as advocacy before administrative bodies and the executive branch. Because of these flaws, OMB Watch and CLPI both called on the IRS to drop this proposal. The Alliance for Justice (AFJ) comments objected to Schedule C lobbying reporting requirements for non-501(c)(3) organizations, such as action organizations exempt under 501(c)(4), labor unions and trade associations. AFJ said, "There is no statutory authority for this significant expansion of the reporting obligations of IRC § 501(c)(4) and other IRC § 501(c) organizations, nor is there any tax-administration reason for requiring such organizations to maintain records and report on their lobbying activities. Unlike non-electing IRC § 501(c)(3) organizations, which may engage only in an insubstantial amount of lobbying, there is no limit on how much other IRC § 501(c) organizations may spend on lobbying nor is there any restriction on the kinds of lobbying activities they may undertake." Many groups also objected to a proposal to require groups to report the number of volunteer hours for political campaign activity. OMB Watch said, "This requirement has no regulatory basis that we can see, is impractical if not impossible to comply with, and would discourage civic participation by forcing nonprofits and their volunteers to keep time sheets." General Issues Independent Sector's (IS) comments "identify many areas that need significant revision." The group called on the IRS to separate questions about governance practices that are required and those that are recommended. Both IS and the NCNA noted that one size does not fit all, and many of the governance practices identified by the IRS may not be appropriate for small organizations and could impose undue administrative burdens. AFJ's comments provide a detailed explanation of the flaws in these additional governance questions. They say, "With limited exceptions, these questions address policies and procedures which are not required by federal or state law or regulation. Moreover, while some of these policies and procedures may be useful for some organizations, they are not universally beneficial and may, in some instances, be counterproductive…. These problems should be sufficient to deter the Service from inserting itself into the area of organizational governance and management. It is also significant that the Service has little or no experience or expertise in determining appropriate mechanisms for nonprofit governance and that Congress itself has refrained from entering into this arena." Expanded Reporting and Inconsistent Definitions of Political Activity The AFJ comments also pointed out that "the expanded reporting of political activities in the redesign relies on confusing and inconsistent definitions which, in some critical ways, are inconsistent with current interpretations of the IRC." Attorney Rosemary Fei of Silk, Adler and Colvin in San Francisco told the IRS there is a "lack of clarity of the term 'political campaign activity' as used in the draft forms, instructions, and Glossary." Her comments recommended that the IRS adopt the definition it uses for 501(c)(3) organizations for those purposes in order "to demonstrate compliance with the 'primary activity' requirement that applies to their tax-exempt status….Starting from a single, relatively clear definition will enhance transparency and promote compliance by providing a reporting framework that is compatible with the practice and understanding of the full range of relevant organizations."