IRS Changes Donor Disclosure Requirements for Non-Charitable Exempts

On July 16th, the IRS issued controversial guidance eliminating the requirement for non-charitable exempt organizations to report the names of contributors on their tax returns.

The guidance is the end, for now, of a simmering political controversy relating to information available to the government regarding “dark money” and donations to non-charitable exempt organizations.

Placing the new rules in context requires stepping back to the 1958 Supreme Court case of NAACP v Alabama. This case held that the NAACP, a 501(c)(4) organization whose primary purpose was promoting social welfare, did not have to identify its members in public filings.

501(c)(4) organizations are permitted to engage in an unlimited amount of lobbying activities as well as political activities so long as they are not their primary purpose. Because the names of donors do not need to be disclosed, 501(c)(4)s effectively provide a workaround to elements of the political disclosure rules under FEC guidelines.

The Citizens United case, which permitted corporate entities to make independent electioneering communications, made the use of 501(c)(4) more appealing.

While public disclosure of the donors to 501(c)(4) is not permitted under the NAACP v. Alabama case, the disclosure to the IRS has long been required.

The IRS and state regulators receiving the information are required to keep this information secret, though they has sometimes failed to do so as indicated by a variety of snafus such as the improper posting of 1,400 disclosure statements on the California AG’s website.

In recent years, there have been various attempts to rein in the ability of 501(c)(4)s to be utilized to influence elections and avoid disclosure. For example, in 2015, Congress added Section 506 to the tax code to require that notice be given within 60 days of the formation of a 501(c)(4).  

Citizens United itself challenged a New York requirement that it disclose a copy of its Schedule B, but lost in the Second Circuit earlier this year.

More recently the issue has caught even more steam with conservative groups lobbying the government to scrap the donor reporting rules, calling it an issue of the utmost importance.

On July 16th, the IRS in Rev Proc. 2018-38, stated that it will no longer require non-charitable exempts to report the names and addresses of donors on Schedule B of Form 990.

Although organizations subject to the rule no longer need to report the names and addresses of their donors, they are required to keep information in their books and records for IRS inspection if required. The Rule has become effective for tax years ending on or after December 31, 2018.

Reactions to the rules follow predictable political lines. Democrats on the Senate Finance committee protested the changes by intentionally not showing up for a vote on the nomination of Charles Rettig to be IRS commissioner. The Wall Street Journal editorial page hailed the move.

The change is clearly a significant step in what has been a long journey of evolving law in a controversial area, but will surely not be the last. Stay tuned.

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