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IRS Faces Choice Between Dark Money and Donor Privacy

Posted on Feb. 10, 2020

The IRS is getting an earful as it considers a proposed rule change pitting free speech advocates against those warning against dark money and foreign meddling in elections.

Representatives of several groups who spoke at the February 7 hearing had good things to say about REG-102508-16, which proposes that exempt organizations other than section 501(c)(3) entities and section 527 political groups won’t have to tell the IRS the names, addresses, or donation amounts of their substantial contributors on Schedule B, “Schedule of Contributors.”

Ryan Mulvey of Americans for Prosperity spoke in support of the proposed regs. Compelling nonprofits to disclose donor information raises constitutional concerns because it tends to chill Americans’ exercise of their First Amendment rights, he said.

“The mandatory reporting of the names and addresses of contributors is a strong disincentive for Americans to organize around their deeply held beliefs, especially in an increasingly divisive society where marginalized voices need strong speech protections,” Mulvey said.

Ryan Morrison of the Institute for Free Speech said the proposed rule change “is an important step to protect the privacy of American citizens exercising their First Amendment rights of free speech and association.”

The proposed change would also reduce the risk of inadvertent disclosure of private donor information, Morrison added.

“Even accidental disclosure is catastrophic, because once information is public, it is public forever,” Morrison said. “Lifting the burden of collecting information from Schedule B decreases the likelihood of donor exposure.”

However, Catherine Suvari of the New York state attorney general's office said the risk of inadvertent donor disclosure is extremely small. As of the summer of 2018, the IRS identified only 14 accidental disclosures from approximately 1.6 million Schedule B forms filed between 2010 and 2018, she said.

Noah Wall of Freedom Works Inc. said the proposed rule change would help prevent biased IRS officials and employees from harassing donors to conservative organizations. He noted that in 2013 the agency was accused of viewpoint discrimination in its handling of exemption applications submitted by right-leaning groups.

“The mere potential within the IRS for retaliation against donors based on a bias against those donors’ political or policy views is disturbing beyond words and reflects a very serious problem within the IRS that demands attention and should be addressed,” Wall said. “And it is another reason why the Schedule B list of donors to conservative organizations such as mine should not be required to be turned over to the IRS.”

The IRS doesn’t need information from Schedule B to enforce tax laws governing exempt organizations, Morrison said. Enforcement of laws against self-dealing, fraud, embezzlement, and other misconduct can be achieved with other schedules to Form 990, “Return of Organization Exempt From Income Tax,” he said.

The IRS can also obtain information through its regular investigatory process “instead of requiring annual reporting of sensitive donor information by every organization,” Morrison said.

Morrison also pointed out that Schedule B is a tool for the administration and enforcement of tax regulations, not campaign finance laws, and is not a substitute for reports filed with the Federal Election Commission or equivalent state agencies.

Congress created an expert agency to handle campaign finance disclosure,” Morrison said. “Accordingly, the IRS should leave these matters to the FEC.”

Impact on State Regulators Feared

Suvari said the proposed rule change would have a significant impact on regulatory enforcement efforts.

Federal and state reporting standards operate in tandem to encourage and support compliance with the requirements for exempt status, Suvari said. She added that most states rely on Form 990 for charitable and other regulatory oversight and to satisfy state income tax filing requirements for organizations claiming exemption from state income tax.

Form 990 is New York’s primary financial report for state-registered exempt organizations, Suvari said. Her office uses federally filed contributor information to review private inurement and private benefit concerns, evaluate potential violations of related-party and conflict-of-interest requirements, and examine donations that may conceal money laundering or other illegal transactions, she explained.

“Complete contributor disclosure through the existing Form 990 is critical to the success of that scheme,” Suvari said.

But Hans von Spakovsky of the Heritage Foundation, which supports the proposed rule change, disagreed.

“The fact that some state governments are asking the IRS to retain this requirement is no reason for the IRS to continue it since the purpose of the IRS is to enforce federal tax law, not state tax law, and your objective is to collect federal tax revenues, not state tax revenues,” von Spakovsky told the panel of IRS and Treasury officials.

“State governments are responsible for their own enforcement of their own state laws with regard to nonprofits operating in their states, not the IRS,” von Spakovsky added.

Dark Money and Foreign Influence Concerns

Aseem Mulji of the Campaign Legal Center argued that the proposed rule change would make it harder for law enforcement to detect when foreign entities use section 501(c)(4) and 501(c)(6) groups to inject money into American elections.

Section 501(c)(4) and 501(c)(6) organizations have become the main conduits of dark money — money spent on U.S. elections through groups that don’t publicly disclose their major donors — and have become a convenient way for foreign entities to disguise their political contributions, Mulji said.

The disclosures are the only systematic information readily available to the federal government about 501(c)(4) and 501(c)(6) donors, Mulji said, adding that they give the Justice Department quick and efficient access to information about the top contributors to organizations involved in foreign influence schemes.

But Morrison said the proposed regs will not allow foreign spending in U.S. elections or otherwise encourage unlawful meddling by non-U.S. citizens.

“The tax code is designed for collecting revenue, not counterespionage,” Morrison said. “Because of strict privacy controls in the tax code, the IRS generally cannot provide donor information to other agencies. Accordingly, government law enforcement obligations are unaffected.”

Even if the IRS could readily share information with defense and law enforcement agencies, Schedule B has limited utility for detecting the methods that foreign agents use to sway U.S. elections, Morrison added.

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