Q&A #15 – Is it a good idea to switch to filing the Form 990-EZ to save costs?
Question: With recent reductions in revenue over the past fiscal year, my organization would qualify to file the Form 990-EZ this year rather than the Form 990 that we usually file. We are inclined to file the Form 990-EZ this year to save money on the accountant fees. Are there any downsides?
Answer: I have gotten this question a lot over the years and not just during a protracted downturn. The simple short-term answer could be yes, but the longer-term impact might not be what you wanted or expected.
The upside is that there is potential to save on professional accounting and tax preparation fees and there could be less work involved in assembling the required information. However, the cost and time savings might be minimal.
The Form 990-EZ tends to work best for organizations who expect to use this form for many consecutive years (i.e., where gross revenue is expected to stay consistently under $200,000 per year and total assets are expected to remain less than $500,000). If your intent is a temporary shift to filing Form 990-EZ for just a year or two, then you should consider these potential downsides:
Staff and auditors/tax preparers are used to preparing and filing the full Form 990, and consistency of this effort makes for efficiency over the years;
The full Form 990 provides a better platform to message (tell your story) on mission impact, types of programs and activities, related costs of programs, general and administration and fundraising, and many other areas;
If your organization has regularly filed the Form 990 in the past, switching to the Form 990-EZ might foster negative impressions that you are now a small organization, not as sophisticated, not as structured, and less impactful than larger organizations;
Similarly, switching to the Form 990-EZ might send an unintended deflating picture to your Board, volunteers, and the general public; and
Funding sources such as grantors, sponsors, and major foundation and major individual donors might prefer to look to the Form 990 for eligibility purposes before making their awards and gifts.
Remember, your Form 990-EZ and Form 990 will be visible for many years, so once the pattern is broken you may have to explain what happened each time somebody accesses your past filings. This could be a real distraction. The actual cost and time savings could be nominal as compared to these downside consequences.
Planning Tip – No matter which path you choose, the first and most important step is to reach out to the tax professional who has been assisting you in the past and have a brief discussion about the potential costs and benefits of filing the Form 990-EZ as compared to the Form 990. With this information in hand, you should then have a conversation with your Board and/or Executive Committee to make sure they are in alignment with your plan.
Considering the potential upsides and downsides early will help your organization to come to the best thoughtful choice while limiting the unintended consequences that might arise in the future.
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