Montana Governor Concerned by Proposed EO Donor Disclosure Regs

October 7, 2019

The Honorable Charles P. Rettig
Commissioner
Internal Revenue Service
1111 Constitution A venue, NW
Washington, DC 20224

Re: Internal Revenue Service's "Guidance Under Section 6033 Reguarding the Reporting Requirements of Exempt Organizations" 84 Federal Register 47447 (September 10, 2019) [IRS-2019-0039]

Dear Commissioner Rettig:

Thank you for the opportunity to comment on this proposed rule. I am deeply concerned that the proposed rule will further degrade transparency for so-called "dark money" groups that spend money to influence elections. Most concerning, the proposed rule threatens to invite foreign election influence and thwart the enforcement of state and federal prohibitions on foreign election spending. Finally, the proposed rule will create additional hurdles for state revenue agencies and charity regulators charged with making state tax and compliance determinations. It should not be adopted as written.

In recent years, there has been a dramatic rise in political spending activity by "dark money" groups. These groups with unknown funding sources are often set up as social welfare organizations that seek tax-exempt status. But state and federal laws restrict how tax-exempt organizations spend their money, limiting political spending and requiring that their activities benefit the broader community. And state charities laws protect the public by prohibiting charitable organizations from misleading donors in the course of raising money, from self-dealing, and from other unlawful conduct.

Enforcing these laws can be difficult. Among other things, it requires state regulators to consider where these groups' funding comes from and how money flows among and between different organizations. The ability to track who is giving money to what groups allows state officials to identify suspicious patterns of activity, determine whether organizations are complying with the law, and alert donors who may be the victims of fraud.

To assist state law-enforcement effo1is, federal law has required for more than a century that the Internal Revenue Service (IRS) disclose to state officials information that it gathers from federal tax returns. And more than 40 years ago, the IRS issued a regulation that requires certain tax-exempt organizations to identify the names and addresses of their substantial contributors on the "Schedule B" form submitted with their annual returns. Because of this regulation, state tax agencies like those in Montana have been able to rely on the IRS's determinations that tax-exempt entities adhere to legal requirements, and state tax and charities regulators have also been able to access substantial contributor information via exempt organizations' Schedule B forms.

States face numerous difficulties in enforcing the laws governing tax-exempt organizations. For one, campaign spending by "dark money" groups has spiked in recent years, increasing more than fifty-fold in the last 15 years. See Center for Responsive Politics, Dark Money Basics (July 23, 2018), http://perma.cc/GQR2-6GDT. By some estimates, the total political spending by these groups since 2010 has reached close to one billion dollars. See Victor Reklaitis, Secret political spending on track to reach $1 billion milestone, Market Watch (Nov. 26, 2018), https://on.mktw.net/2QgjYZo. The opacity of these groups' operations can make it difficult for states to enforce their laws protecting the public from fraud and misrepresentation by charities, as enforcing those laws often requires knowing about the underlying funding sources of tax-exempt entities.

When it comes to determining whether exempt organizations are adhering to legal obligations such as the ban on private inurement, limitations on political activity, or the requirements of state charities laws, a key piece of information is the source of those organizations' income — and in particular, the identity of contributors to the organization. While the IRS indicates that Schedule L of the Form 990 is still required, thus providing necessary contributor information, this is significantly less information than currently required in Schedule B, which is a disservice to the states.

For example, if a plumber organized her business under the guise of a tax-exempt organization, she might receive income by means of "contributions." But if a tax regulator has access to the names and addresses of the organization's "contributors," it may be possible to determine that these persons are in fact the clients who received the plumber's services, not simply charitable third parties, and thereby conclude that tax-exempt status is inappropriate. Similarly, information about the identity of exempt organizations' contributors is foundationally important for enforcing limits on political activity. For instance, Organization A might spend 49 percent of its funding on political activities, and donate the remaining 51 percent of its funding to another organization focused on similar issues, Organization B. But if Organization B uses those funds for political activities, then essentially all of Organization A's funding would have been used for political activities — which could exceed the legal limits. Knowing that Organization A gave money to Organization B would be essential in determining this violation of the tax law. State tax authorities therefore need to know the identities of contributors to exempt entities to ensure that those entities are complying with the law.

Due to the importance of this information, more than 40 years ago the IRS issued a regulation requiring ce11ain exempt organizations to report annually to the IRS the identities of persons who contributed a substantial amount of money to the organization during the year. See Treasury Decision 7122, 36 Fed. Reg. 11,025 (June 8, 1971). For many years, the IRS has implemented this regulation in part via a form known as "Schedule B," on which exempt organizations list the names and addresses of their significant contributors.

In the time since this regulatory regime was implemented, the importance of the information gathered via Schedule B has only grown. Political activity has increased dramatically by organizations claiming exemption under Sections 50l(c)(4), (c)(5), and (c)(6) of the Internal Revenue Code. In 2011, the IRS's Tax Exempt and Government Entities Division noted that Form 990 (which includes Schedule B) provided the IRS with "a wealth of information" on exempt organizations and touted the benefits of the information in "enforc[ing] the rules relating to political campaigns. . . . " Internal Revenue Service, 2011 Annual Report & 2012 Work Plan, https://perma.cc/D2XF-DZTW. Information from Form 990 has helped the IRS respond to "serious allegations of impermissible political intervention" and ensure compliance with the tax laws. Id.

In addition to being important for state tax regulators, having access to information contributor also equips state charities regulators with a powerful tool to enforce consumer-protection laws. And given the federal government's resources, the rigor of its exempt-entity determinations, and the longstanding policy of federal-state information sharing, state tax agencies have structured their own policies and practices with the IRS's regulations in mind.

Montana' s Department of Revenue, for instance, regularly requests and receives information from the IRS pursuant to Section 6103(d)'s information-sharing provision. Montana has regularly relied in particular on the IRS regulations requiring the reporting of substantial-contributor information via Schedule B. Because federal law contains similar standards to Montana law, and because the IRS ' s regulations require entities to submit the necessary information for exemption determinations, Montana relies on the IRS ' s exemption determinations when making its own exemption determinations under state law. Additionally, the Montana Department of Revenue sometimes receives copies of organizations' Schedule B forms as a matter of course during the normal process of evaluating organizations for exemptions.

Because the proposed rule decreases the amount of information collected by the IRS, it diminishes the information available to Montana and other states through the information-sharing provisions of Section 6103(d) of the Internal Revenue Code. It also diminishes states' ability to rely on the IRS's own tax-exemption determinations. Thus, the proposed rule will shoulder Montana with additional financial and administrative burdens connected to regulation of tax-exempt entities. For state governments like Montana's, there is a significant burden involved in reorienting tax processes.

The IRS indicates that there is no need for the tax-exempt organizations to provide the information previously required in annual reporting. But adoption of these proposed changes inhibits federal and state agencies' ability to audit tax-exempt organizations. The IRS currently has in its possession the donor identifying information necessary to determine whether an audit of the tax-exempt organization is necessary. Eliminating filing of the donor identifying information except "as required upon examination" prevents the IRS (or the states) from having the audit-triggering information in hand, inhibiting efficient tax administration.

The IRS justifies the elimination of reporting of donor identifying information as the prevention of inadvertent disclosure of confidential information to the public. However, the IRS has safeguards in place for all Federal Tax Information (FTI) requiring confidentiality, that protect this type of information. Therefore, there is slim risk of disclosure. The need for the IRS and the states to be able to review the donor identifying information outweighs the minimal risks of inadvertent disclosure.

Reduced transparency for § 501(c) organizations at the federal level has significant downstream effects. In the context of elections and election spending, reduced transparency at the IRS upends settled expectations that federal tax-exempt organizations are what they purport to be: domestically-funded social welfare groups validly participating in elections. Absent the reporting of the names and addresses of significant contributors to the IRS, the task of eradicating foreign influence in elections becomes harder if state and federal campaign finance officials cannot rely on the IRS. The same goes for tax officials seeking to determine whether organizations are evading requirements about what proportion of their funds can be dedicated to political activity. And for state treasuries, reduced reporting of significant information contributor makes it far harder for tax officials to target abuse of the tax-exempt designation.

For these reasons, I urge you not to adopt the rule as proposed.

Sincerely,

STEVE BULLOCK
Governor
State of Montana
Helena, MT