July 12, 2016

By Sarah Huang, CPA

On June 14, the House passed a bill prohibiting the requirement that Section 501(c) organizations must disclose their donors on Schedule B. Under current law, all organizations exempt under §501(c) must provide the IRS with a listing of any donor that gave $5,000 or more during the tax year. Some organizations qualify for the special 2% rule that increases this $5,000 threshold, thus further limiting the donor disclosure. Except in the case of private foundations, Schedule B is not open to public inspection.

The new bill, H.R. 5053: Preventing IRS Abuse and Protecting Free Speech Act, would prohibit Treasury from requiring that charities disclose donor information on their annual Form 990 or 990-PF filing. There are two exceptions to the proposed disclosure requirement change:

  1. Donations from any officer, director or person with powers or responsibilities similar to an officer or director must be disclosed; and
  2. Donations from any of the organization’s five highest paid employees for the current tax year must be disclosed.

The IRS commented late last year saying it too was considering dropping the donor listing requirement. At a conference last December, Tamera Ripperda, director of Exempt Organizations at the IRS, indicated the IRS is considering whether they actually need that information for tax law enforcement. The IRS is also running the idea by state regulators, as many have an interest in the donor listing for state compliance purposes.

Impact on Public Charities

This new bill would largely affect public charities, were it to become law. While many do receive donations from their board members, many large donations also come from unaffiliated individuals. The donor reporting for most of these organizations would be minimal under the proposed bill. Some may no longer have a Schedule B at all.

Impact on Private Foundations

Under current law, private foundations do not fall within the public disclosure exception for Schedule B. Instead, all donors listed on Schedule B are open for public inspection. This should not be surprising, as in many cases, the private foundation is named after the donor. Under the proposed bill, donations from these individuals would still be disclosed, assuming the founder is an officer or director of the private foundation. However, private foundations that receive donations from outside sources would no longer be required to include those donations on Schedule B.

Impact on Non-501(c)(3) Organizations

There is speculation that this bill targets non-501(c)(3) exempt organizations. Section 501(c)(4) organizations have received much scrutiny these past few years by the IRS, Congress and the media. Many believe these organizations are conducting political activities and donors are contributing to them to hide their donations (donor listings for political action committees are made public while donations to (c)(4) organizations are subject to the normal public disclosure rules). Many democrats say the bill is a shield for campaign influence by the wealthy. Also, while it is illegal for foreign donors to contribute money in a U.S. election, foreign donors are allowed to contribute money to a 501(c)(4) organization. By eliminating the majority of donor reporting, the IRS would have no way of knowing whether a 501(c)(4) organization that is participating in political activity received any funding from overseas donors.

Will It Pass?

Whether or not the bill will become law ultimately depends on the President. Many believe the Senate is likely to approve the bill since Republicans currently control the Senate. The biggest hurdle will be getting the President’s signature. The current thought is that President Obama will likely veto the bill.

In the meantime, stay tuned. Regardless of this new legislation, the IRS still has the authority to remove the Schedule B requirement on its own. This means that even if this prohibition bill is vetoed, it is entirely possible that the IRS will decide to make this change, regardless.

© Clark Nuber PS, 2016.  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.