Filed under: Not-for-Profits

July 31, 2018

When it comes to privacy and accountability, people always demand the former for themselves and the latter for everyone else.” – David Brin

Overview of Revenue Procedure 2018-38

Recently, the Treasury issued Revenue Procedure 2018-38, correcting what some considered an overreaching and controversial regulation requiring organizations exempt under code sections other than 501(c)(3) or 527 to report the names and addresses of their contributors on Form 990, Schedule B. The new reporting rules apply to returns filed for taxable years on or after December 31, 2018 and only provide partial relief. Under the new rules, the affected organizations must still collect and retain contributor information and make it available to the IRS upon request for examination. However, the Schedule B, if required, now only requires listing the contribution amounts. The names and addresses of contributors may be redacted on the Schedule B attached to Form 990.

With very limited exceptions for churches and governmental organizations, all tax-exempt organizations operating in the United States must file a public disclosure form (Form 990) with the Internal Revenue Service each year. Schedule B – Schedule of Contributors – is attached to the Form 990. This schedule is statutorily required to disclose to the IRS the names, addresses, and amounts contributed if the organization is a charitable organization exempt under Internal Revenue Code section 501(c)(3) or 527. Ironically, only private foundations and 527 PACs must make this information available to the public. Public charities redact the names and addresses from the copy of the Form 990 provided to the public, but they must provide the information annually to the IRS.

Before this new Revenue Procedure, the Treasury regulations and Form 990 instructions directed all exempt organizations, not just the charitable organizations exempt under 501(c)(3) and the Political Action Committees (PAC) exempt under 527, to provide donor information on Schedule B of the Form 990. This disclosure requirement was not strictly provided for in the language of the statute. In issuing the relief, the IRS reasoned it did not need personal identifying information of donors on the Form 990 to carry out its responsibilities. The reporting requirements increased compliance costs, consumed IRS resources for the redaction of such information, and posed a risk of inadvertent disclosure of information not open to public inspection.

Balancing Privacy and Accountability: What is a Dark Money Organization?

What does the Schedule B disclosure have to do with politics and “dark money organizations?”

This is the balancing act between privacy and accountability.

Three categories of organizations may care significantly: trade associations, trade unions, and social welfare organizations. These organizations enjoy tax-exempt status, may engage in unlimited lobbying activities if the lobbying is to further the organization’s exempt purpose, and may take part in political agendas (electioneering) so long as it is not the organization’s primary purpose. For this reason, these organizations are sometimes referred to as “dark money organizations.” Donors to organizations that lobby on issues or engage in electioneering have complained about their contribution information being made public. This has led, in part, to the rise in popularity of the 501(c)(4), social welfare organizations, which do not require public disclosure of the donor names and addresses to anyone other than the IRS.

Social welfare organizations can be associated with a charitable [501(c)(3)] organization, independently operated, or even work collaboratively with a 527 PAC. They are versatile, useful, and now, very private. With issuing this new Revenue Procedure, donor names and addresses are no longer disclosed to the IRS unless the organization is under examination. However, PACs exempt under Code Section 527, must still disclose donors’ names, addresses, and contribution amounts.

“Dark money organizations,” exempt under 501(c)(4) are often politically active and can collect unlimited contributions (which are non-tax deductible) from donors. These contributions are not subject to a gift tax even though they are contemporaneously made to a corporation. The money can be used to further the donor’s legislative and/or political agenda so long as it aligns with the organization’s purposes. The donor list has never been open to public inspection, and now the donor name and address list is anonymous even with respect to the IRS. Only the donor amounts need be disclosed to the IRS.

According to the Center for Responsive Politics, between 2006 and 2014, the spending by organizations which will no longer have to disclose the names and addresses of donors increased from less than $5.2 million to more than $174 million in the mid-term elections. The reporting change will increase privacy. It remains to be seen the impact it has on accountability.

Power of the States as Watch Dogs

One caveat: the new Revenue Procedure is not binding on any state charity officials. State charity officials can still require organizations to provide donor lists for the privilege of soliciting contributions in their state. Attorneys General and Secretaries of State are still the charity watch dogs for consumer protection laws.

Although the IRS publicly stated the goal was protection of donor privacy and relief of reporting burden, it appears only one goal might be achieved. Exempt organizations must still collect and retain contributor information. It is really a question of whether the names and addresses may be redacted from the copies provided to the public, the IRS, or state charities officials.

If you have questions about this or any other aspects of preparing the Form 990, please contact your tax team at Clark Nuber. We are happy to answer your questions!

© Clark Nuber PS, 2018. All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.