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IRS Urged to Complete Rollback of Donor Disclosure Rules (2)

Feb. 7, 2020, 4:13 PMUpdated: Feb. 7, 2020, 5:50 PM

Conservative groups pressed the IRS to move ahead with its proposal to drop a requirement that certain tax-exempt nonprofits disclose identities of their significant donors.

The groups dominated a list of 16 witnesses set to testify at an agency hearing on the issue Friday. The IRS is trying to remove the requirement that organizations exempt under tax code Section 501(c), except for 501(c)(3) charities and Section 527 political organizations, provide the agency with names and addresses of donors who contribute $5,000 or more.

Critics say the change could transform the nonprofit sector, leading to a flood of anonymous donations—"dark money"—to political organizations. But the hearing began with supporters of the change, including Institute for Free Speech attorney Ryan Morrison, who said the agency “should collect only information that it needs to enforce the tax code.”

The place where donor names and addresses are listed, Schedule B of the Form 990, “is not a substitute for reports filed with the Federal Election Commission,” he said.

The agency proposed rules (REG-102508-16) in September changing the requirement. Its previous attempt to do so through a notice was struck down by the U.S. District Court for the District of Montana in Bullock v. IRS. The donors aren’t disclosed publicly but are identified to the IRS.

Supporters’ push for the change stems from a 2013 report from the IRS watchdog, which found that the agency had singled out organizations applying for tax-exempt status for scrutiny based on their political stances. In late 2017, the watchdog released another report indicating that left-leaning groups had been scrutinized as well.

“While the overt targeting efforts may have subsided, the mistrust of the agency continues in the hearts and minds of many of our activists and donors. We believe there’s a culture in the IRS that gives rise to fears of retribution against those who hold the views that may not coincide with the powers that be within the agency,” said Noah Wall, vice president of advocacy for Freedom Works Inc., a 501(c)(4) organization.

Go Broader

Tea Party Patriots Action, a 501(c)(4) organization, urged the IRS to apply the rollback more broadly, as others—such as the Institute for Free Speech—have urged in the past.

“While you’re at it, I recommend that you advise Congress to do away with reporting requirements for 501(c)(3) organizations as well,” said Tea Party Patriots’ Jenny Beth Martin. “You don’t need the piece of paper to properly administer the tax code, and having it creates the possibility that you could accidentally release it in violation of the law, so why take that chance?”

Political groups organized under Section 527 and charities and religious groups organized under Section 501(c)(3) are banned from politicking under what’s known as the Johnson Amendment. Donations to these tax-exempt groups are deductible, unlike contributions to 504(c)(4)s and others subject to the rules.

Foreign Influence

Critics of the proposed change, like the Campaign Legal Center’s Aseem Mulji, emphasized the need for the IRS to ensure that foreign donations aren’t permeating U.S. elections through dark money 501(c)(4) groups, which are allowed to engage in limited political activity.

“At a time when the threat of foreign interference is so great, this proposed rule will only serve to make our democracy more vulnerable,” Mulji testified.

Since the U.S. Supreme Court’s 2010 ruling in Citizens United v. FEC, which held that political spending is a form of protected speech, anonymous spending spending by 501(c)(4) and 501(c)(6) groups has flooded US elections, Mulji said. Donations to such groups are “a very convenient way for foreign entities to disguise their political contributions,” he said.

Organizations exempt under 501(c)(6) can participate in some lobbying and political activity if it is tied to the entity’s exempt purpose. Such organizations include chambers of commerce and boards of trade.

A recent Government Accountability Office report found that the IRS has had a hard time policing the political activities of those groups, in part because lawmakers have barred the agency from writing guidance on the issue for years through budget legislation.

But the report, released Feb. 3, also said IRS examiners “do not review the national origin of sources of donations reported by a tax-exempt organization” on those nonprofits’ Form 990s, and don’t assess the groups’ compliance with certain campaign finance laws.

States’ Rights

An attorney in the New York attorney general’s office made the case that the disclosures are necessary for states to enforce their laws. The New York and New Jersey attorneys general in December sent a letter—signed by their counterparts from nearly 20 states and the District of Columbia—asking the IRS and Treasury to reverse course.

State tax authorities need IRS-supplied information on tax-exempt nonprofits to oversee the nonprofits in their jurisdictions, the attorneys general argued. That formed part of the argument Montana Governor Stephen Bullock’s office made in its case against the rollback.

But not all states oppose the proposed rules. Arizona Attorney General Mark Brnovich wrote a letter telling IRS officials that state governments do not rely on the IRS’s data collection.

“Frankly, the reality is that state governments do not need to rely on the IRS’s current data collection for their enforcement efforts,” he said.

Plenty of states and Washington, D.C. don’t require the disclosure of donors’ names, he added, “and it has not compromised any of these jurisdictions’ ability to detect unscrupulous activity by nonprofits.”

(Updates with additional comments starting in 17th paragraph. A previous update included comments from critics of the change.)

To contact the reporter on this story: Lydia O'Neal in Washington at loneal@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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