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Burden Shifts to States After IRS Eases Donor-Disclosure Rules

May 28, 2020, 8:46 AM

It’s now on states to seek more information about nonprofit donors if they want it, after the IRS rolled back disclosure requirements.

The IRS nixed a requirement that organizations exempt under tax code Section 501(c), except for 501(c)(3) charities and Section 527 political organizations, include names and addresses of donors who contribute $5,000 or more on tax forms they send to the agency. The final IRS rules (T.D. 9898), issued Tuesday, left it up to states to take a different path.

“To the extent that any state determines that the burdens of collecting and maintaining such information are justified by its own needs, such a state is free to require reporting of such information to the state and to maintain the information at the state’s own expense,” the IRS said.

The rules heighten what has already been a fraught issue for some states, and come as state governments are already dealing with revenue fallout from the coronavirus pandemic.

“You will see some states try to enact their own rules to get this information,” Emily Peterson-Cassin, an attorney at the advocacy group Public Citizen, said in an email Wednesday.

The agency’s first attempt to ease the requirement through a notice was struck down by the U.S. District Court for the District of Montana in Bullock v. IRS for flouting notice-and-comment requirements. New York and New Jersey have sued for documents related to the notice.

The broader issue of donor disclosure was at the center of Americans for Prosperity Foundation v. Becerra, in which a U.S. Court of Appeals for the Ninth Circuit panel ruled a conservative political action committee must disclose information on its biggest donors to the state attorney general. That fight is now before the U.S. Supreme Court, where the justices have invited the solicitor general to file a brief reflecting the government’s views as they consider whether to take the case.

The California, New York, and New Jersey governors’ offices didn’t return requests for comment after publication of the final rules.

The IRS said no longer requiring the information from nonprofits on Schedule B of their Forms 990 or 990-EZ is an attempt to balance the agency’s need for the information for tax administration against “the burden and risks associated with reporting of the information.”

State Efforts

Individual states typically “piggyback” on the federal filing requirements, asking nonprofits to submit portions of their federal tax returns in their state filing, said Brian Mittendorf, a senior associate dean at Ohio State University Fisher College of Business who has studied nonprofits.

The language in the rules suggests states can require the donor information, but that would require additional state-level rules, Mittendorf said.

Nineteen attorneys general—including those from New Jersey, New York, and California—commented on the proposed rules, telling the IRS that no longer receiving the information from the agency would “require a reorientation of processes that would cost the states time and money.”

Montana will continue to require donor-reporting for expenditures from groups on election communications directed at state races, said Raph Graybill, chief legal counsel to Gov. Steve Bullock (D).

“There will be a significant gap in reporting at the federal level. In terms of challenging the rules, we are currently reviewing the rule and all options remain on the table,” Graybill said in an email.

To contact the reporter on this story: Sam McQuillan in Washington at smcquillan@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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