Donor-disclosure rules end for some tax-exempts

National museum Ireland Dublin The IRS issued final regulations (TD 9898) on May 26 providing that all organizations exempt from income tax under Section 501(a), other than Section 501(c)(3) and Section 527 organizations, are no longer required to report the names and addresses of their contributors on the Form 990, Schedule B.

The final regulations settle a long gestating dispute as to whether tax-exempt organizations are required to disclose their donors on their annual Form 990 information returns. While they do provide some certainty at the federal level, affected tax-exempt organizations should monitor developments at the state level to ensure compliance with state law.

Background Section 6033(a)(1) provides that every organization exempt from tax under Section 501(a) must file an annual information Form 990 series return. Forms 990, 990-PF and 990-EZ are not income tax returns, but instead collect data about an exempt organization’s annual operations intended to help ensure that the exempt organizations comply with federal tax rules. Section 6104 provides for public inspection of these forms, so that the public may be apprised of the manner in which the organization is fulfilling its tax-exempt purpose. In 1969, Congress added a requirement that Section 501(c)(3) organizations must report the names and addresses of all of its substantial contributors (generally those donors that donate $5,000 or more during an organization’s tax year); this requirement was extended a year later to encompass all other Section 501(c) entities.

This information is transmitted to the IRS on the Form 990, Schedule B. While the Form 990 is a public document open to scrutiny by any member of the public who wishes to review it, the Schedule B is the lone exception as it is redacted from the public disclosure copy of the Form 990. This information is available not only to the IRS, but to various state regulatory agencies that may require an organization to submit the Form 990 as part of its annual reporting.

In July of 2018, the IRS issued Rev. Proc. 2018-38 that dramatically changed these disclosure requirements by relieving all Section 501(a) organizations other than Section 501(c)(3) organizations from the requirement to provide the names and addresses of substantial contributors. Shortly after the issuance of this revenue procedure, Montana filed a lawsuit against the IRS in the federal district court. New Jersey joined that lawsuit as a co-plaintiff in March 2019.

The states argued that while ordinary citizens can’t view a Form 990 donor listing, state officials can do so, and the new Rev. Proc. 2018-38 obstructed a state’s ability to enforce its own tax laws. In July 2019, the district court set aside Rev. Proc. 2018-38 on procedural grounds, holding that the IRS did not follow the proper notice and comment procedures pursuant to the Administrative Procedure Act to adopt this new rule.

The IRS published proposed regulations under Section 6033 on Sept. 10, 2019, and received nearly 8,400 comments in response. After vetting all the comments and hearing testimony at a public hearing, it issued final regulations on May 26 which largely adopt the proposed regulations with minor modifications.

Donor disclosure tax rules In addition to codifying some technical corrections and administrative matters, the final regulations officially remove the requirement that donors’ identifying information be included on the Form 990 returns filed by certain tax-exempt organizations. These regulations primarily impact Section 501(c)(4) social welfare organizations, 501(c)(5) labor unions and Section 501(c)(6) business leagues, enabling them to dispense with including donor information on their annual Forms 990. The regulations require these organizations to maintain the information in their files and to disclose it to the IRS on a case-by-case basis in an audit or other compliance action.

The IRS believes that the relief from the disclosure requirements will reduce:

  • The risk of inadvertent disclosure of names and addresses of contributors to the public
  • The compliance burden on affected tax-exempt organizations, allowing such organizations to spend more time and resources on their missions
  • The burden on the IRS associated with the redaction of information as required by Section 6104(b)

Critical comments received in response to the proposed regulations cited concerns about the elimination of the donor disclosure requirements. Commenters opposing the proposed changes identified concerns over losing the ability to monitor funds used for private benefit and to enforce political activity limits on social welfare organizations exempt from tax under Section 501(c)(4).

The IRS countered these arguments by claiming that such donor information is not required to administer internal revenue laws efficiently. The IRS argued that other elements of the Form 990 can be used to ferret out private inurement or private benefit issues, and enable it to identify the potential violation of any political activity limits. In addition, the IRS still has the authority to conduct an audit of the organization’s activities if it believes an organization has violated its tax-exempt mission.

The IRS contends that concerns about involvement in political activities are, likewise, misplaced. It states that it is not required to confer with the Federal Election Commission (FEC) to determine whether its change in the donor disclosure requirements impacts campaign finance laws or promotes the use of tax-exempt organizations to influence elections. It also contends that the final regulations will have no impact on donor information available to the public (since this information was not disclosed to the public before the regulations were enacted). If state attorneys general are concerned about the availability of such information, the preamble to the final regulations makes clear that states are free to enact their own reporting requirements to address their compliance objectives.

Next steps With the issuance of these final regulations, a nearly two-year saga of federal donor disclosure requirements comes to a close. However, the story may be just beginning at the state level. Not-for-profit entities must be mindful of the state laws governing their operations to ensure compliance with their state disclosure requirements.

For more information contacts:
Michelle Weber
Not-for-Profit Tax Practice
Grant Thornton LLP
T +1 414 277 1536

Amyn Gillani
Not-for-Profit Tax Practice
Grant Thornton LLP
T +1 617 973 4727

Scott Thompsett
Managing Director
Not-for-Profit Tax Practice
Grant Thornton LLP
T +1 631 577 1867

Jack McDermott
Senior Associate
Not-for-Profit Tax Practice
Grant Thornton LLP
T +1 212 624 5460

To learn more visit Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.