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IRS Proposes Changing Donor-Disclosure Rule After Court Loss (2)

Sept. 6, 2019, 5:05 PMUpdated: Sept. 6, 2019, 9:05 PM

The IRS proposed regulations to scrap a donor-disclosure requirement for certain nonprofit groups, a response to a federal judge saying in July that the agency’s previous attempt to do so didn’t follow the rules.

Judge Brian Morris of the U.S. District Court for the District of Montana said the IRS should have followed notice-and-comment requirements when changing the donor-disclosure requirement in 2018 guidance.

The IRS said its Sept. 6 proposed regulations (REG-102508-16) “provide the opportunity for notice and comment.” The rules apply to organizations exempt under tax code Section 501(c), except for 501(c)(3) charities and Section 527 political organizations, and free them from having to include the names and addresses of donors on tax forms.

The nonprofit community “in its largest sense” should take note of the proposed rules, said Philip Hackney, a law professor at the University of Pittsburgh School of Law.

The IRS includes in the proposed rules “a lot of discretion it previously exercised without notice and comment to cure the problem created by the recent court case,” said Hackney, who specializes in nonprofit law and spent five years at the IRS Office of Chief Counsel.

Some nonprofits that had prior filing exceptions could be affected, such as organizations that qualify for the tax exemption through connections to churches, governmental units, and their affiliates, he said.

The Administrative Procedure Act lays out notice-and-comment requirements, which add to the time it takes to make regulatory changes.

The agency also announced (Notice 2019-47) it will waive penalties for nonprofits that don’t report names and addresses of donors on their tax forms for the year ending on or after Dec. 31, 2018, and prior to July 30, 2019.

The court ruling had triggered taxpayer questions about filing requirements for the 2018 tax year, the IRS said.

‘Devastating Impacts’

Critics of the IRS rule change in 2018 said it would lead to a flood of dark money into the nonprofit sector. Montana Gov. Steve Bullock (D) sued the IRS along with the Montana Department of Revenue.

Raph Graybill, chief legal counsel in Bullock’s office, said in a statement that Montana “looks forward to giving the IRS a better picture of the devastating impacts its rules could have on state tax agencies as well as efforts to prevent foreign influence in our elections.”

“We appreciate that the agency reversed from its prior course that excluded public comment,” Graybill said.

The organizations still must keep donor names and addresses on hand so that information is available upon IRS request. Contribution amounts are still reported.

To contact the reporter on this story: Colleen Murphy in Washington at cmurphy@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Kathy Larsen at klarsen@bloombergtax.com