Council Cites 3 Ways Donor Disclosure Regs Would Cause Harm

December 9, 2019

Internal Revenue Service
CC:PA:LPD:PR (REG-102508-16)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

RE: IRS REG-102508-16 — Comments on the Proposed Regulation Eliminating a Schedule B Requirement for Tax-Exempt Organizations to Submit the Names and Addresses of Substantial Contributors

Dear Reviewer:

The National Council of Nonprofits submits these comments opposing the proposed regulations regarding Internal Revenue Code Section 6033 relating to the reporting of contributions by tax-exempt organizations. It is the longstanding view of our network that mission-driven nonprofits can be successful only by earning and maintaining public trust through appropriate transparency, which can be guided by reasonable regulation that recognizes the unique role of these organizations in communities. Regrettably, the rulemaking by the Treasury Department and the IRS fails this essential principle. If adopted, the proposed regulations would result in secrecy undermining public trust in all nonprofit organizations, even charitable nonprofits to which these draft rules are not directed. Moreover, the proposed regulations threaten the integrity of federal, state, and local elections, something of concern to all individuals and organizations in our country. Finally, we urge the IRS to correct the misinformation campaign leading up to this rulemaking that, left unaddressed, will promote further distortions and outright lies. Simply put, nothing is broken, so there is no legitimate reason to remove a deterrent that has proved successful for years.

The National Council of Nonprofits is a trusted resource that advocates for America's charitable nonprofits nationwide. Through its network of state associations of nonprofits and 25,000-plus member charitable nonprofits, faith-based groups, and foundations, it serves as a central coordinator and mobilizer to help nonprofits achieve greater collective impact in local communities across the country. The vast majority of Council of Nonprofits' members are Section 501(c)(3) organizations subject to the requirement under Section 6033(b)(5) to disclose the names and addresses of all substantial contributors. The comments expressed herein are based on the experiences of thousands of charitable organizations that have filed Form 990 Schedule B Schedule of Contributors for years with no problems.

Disclosure of Donors via Schedule B to the IRS and State Authorities Protects Nonprofits and the Public

The purpose of the proposed regulations is to eliminate the longstanding obligation that non-charitable 501(c) organizations submit a Form 990 Schedule B that tells the government — on a confidential, non-public basis — the names and addresses of substantial contributors and amounts donated. The proposed regulations would not alter the obligations of charitable nonprofits to continue using Schedule B to disclose their donors and donations. Nonetheless, the proposed regulatory changes would hurt the work of charitable nonprofits — and the people who rely upon them — in at least three significant ways.

First, the proposed regulations would hamper proper enforcement of federal, state, and local laws concerning nonprofits, which would erode public trust in all nonprofits, charitable as well as non-charitable organizations. Section 501(c)(3) status is a privilege that must be earned every day. Disclosing donors to the government — with existing privacy and confidentiality safeguards — protects nonprofits, the public, and the public fisc from bad actors. This includes protecting against taxpayers who falsely seek immense tax deductions they didn't make and for-profit businesses masquerading as nonprofits, falsely claiming taxable income as nontaxable donations. The IRS cannot investigate every charitable deduction or rely solely on an individual's tax return to identify a pattern of unlawful conduct. Nor can state and local tax authorities investigate whether nonprofits are operating properly without knowing basic facts (especially given the near-automatic approvals the IRS hands out with its problematic Form 1023-EZ). Disclosure by charitable organizations of their larger donors enables the IRS and other tax agencies to compare records and root out false claims. Accountability to the truth is essential to the protection of public trust.

In our view, similar rationales exist for requiring other 501(c) organizations, most notably social welfare organizations, to continue submitting Schedule B. While abuse of tax-deductible donations isn't present with 501(c)(4) entities, the legal mandates and assumed nature of their activities raise many reasons for regular disclosures of substantial donors to the IRS and state officials. As explained in detailed comments submitted December 5 by the National Association of State Charity_Officials (NASCO), law enforcement officials at the state and federal levels have an obligation to ensure that nonprofit insiders do not engage in excess benefit transactions, whether through inflated values of donations or exorbitant compensation packages. State charities officials protect the public and need effective tools like Schedule B to do so. NASCO effectively makes the case for retaining the Schedule B: “If the IRS moves forward in relieving 501(c)(4)s of the obligation to submit Schedule B, it will effectively abdicate enforcement with respect to those organizations, signal an increased opportunity to abuse 501(c)(4) status and substantially increase the enforcement burden shouldered by state charity regulators.”

Second, as the IRS is well aware, the number of 501(c)(4) organizations has grown rapidly in the ten years since the U.S. Supreme Court decided Citizens United v. Federal Election Commission. There is no disputing that a major motivation for this growth has been the desire by partisans seeking to swing elections by contributing unlimited sums for election-related activities without public disclosure of their names and amounts of contributions. The proposed rules, however, do not directly address the propriety of “secret” or “dark money”; that is a question of public disclosure. Rather, the proposed regulations address a separate question of whether law enforcement officials will have access — on a confidential basis — to the true financial data of organizations. We believe the proposed regulations come up with the wrong answer of keeping law enforcement completely blind to the facts and freeing bad actors of any accountability. Law enforcement officials must continue to have ready access to internal financial data to ensure non-charitable nonprofits are obeying the law and living up to their statutory obligations.

As a third point, we are deeply concerned that the IRS is proposing to open the door to foreign influence in social welfare organizations that have grown to exercise an out-sized influence in our election process. It is undisputed that foreign agents sought to interfere with the 2016 elections (even if there are differing views about which countries were involved). There are bipartisan findings and existing indictments that foreign individuals are engaging in illegal election-related conduct aimed at influencing the results of the 2020 elections. So it is with extreme surprise that the IRS would seek to eliminate a key deterrent to foreign interference and the one tool it and state regulators have — Schedule B — to quickly and effectively identify whether foreign individuals, interests, and governments are attempting to buy influence or disguise their true intent. Democracy is too fragile to turn a blind eye and hope for the best.

Duty of the IRS to Correct the Record and Inform the Public

In addition to the foregoing principled objections, the Council of Nonprofits urges the IRS to speak up and tell the public about false statements made as part of a misinformation campaign in support of these proposed regulations. Clearly an astroturf campaign has been launched aimed at scaring individuals into believing false claims that their individual information and giving records are not secure and are at risk of political manipulation. Regardless of the merits of the proposal to permit individuals to enrich themselves illegally, encourage more secret money in politics, and open the door for foreign interests to purchase influence in American elections, it is incumbent upon the Internal Revenue Service to make abundantly clear to the American people that tax disclosures to governments at all levels are secure. Anything short of a strong statement from the IRS denouncing the scare campaign undergirding this rulemaking is tantamount to the abdication of the government's educational function and complicity in the campaign to politicize all reasonable and essential law enforcement.

Conclusion

The proposed regulations are misguided because they invite bad actors to infiltrate and exploit the nonprofit community to perpetrate excess benefit transactions, engage in unlawful partisan activities, and open the way for disguised foreign interference in American elections and public discourse. We are concerned about the integrity and value of the nonprofit community and believe that the proposed regulations would undermine the public trust in nonprofits. We endorse the public comments submitted by the National Association of State Charity Officials in calling on the IRS to uphold responsible tax-law enforcement by withdrawing the proposed regulations. We further insist that the IRS overcome the damaging misinformation campaign accompanying the proposal by informing the public that their privacy is secure that law enforcement officials are committed to their protections and the public good.

Respectfully submitted,

David L. Thompson
National Council of Nonprofits
Washington, DC