Are tax-exempt organizations required to disclose their major donors on their IRS Form 990 Schedule B’s, or not? In July 2018, the IRS issued Revenue Procedure 2018-38, answering “no” for Section 501(c)(4) and other tax-exempt organizations, but leaving the disclosure requirement intact for Section 501(c)(3) organizations and Section 527 political action committees (known as PACs). On December 12, 2018, the Senate voted 50-49 to repudiate this IRS rule, and on December 13, 2018, Congressman Price (D-NC) introduced legislation to similarly nullify it. This proposed Schedule B change-back reflects the underlying political turmoil regarding so-called election “dark money.”
Form 990’s Schedule B mandatory reporting of major donors has long applied to all tax-exempt organizations, including Section 501(c)(3) public charities and Section 501(c)(4) lobbying organizations. For additional background, including confidentiality requirements and state regulators’ involvement too, please see our July 25, 2018 blog article.
The current political battle centers on claims of corrupting influences in political campaigns. Advocates of disclosure seek to curb abuses such as wealthy donors secretly promoting major political advocacy groups and foreigners seeking to interfere with U.S. elections. According to disclosure advocates, requiring Section 501(c)(4) lobbying organizations, Section 501(c)(5) labor unions, and Section 501(c)(6) trade associations to disclose will reveal such nefarious activities. Opponents of disclosure tout taxpayer privacy concerns and First Amendment freedoms of speech and association rights.
Where is the right balance? Is this good policy change, or just politics? Perhaps at least a significant part of the answer lies in addressing why such donor disclosures are required, focusing on the specific contexts of differing tax-exempt organizations.
The Form 990 Schedule B donor disclosure requirement may reflect legitimate tax policy for Section 501(c)(3) and PACs, to which it still applies. For Section 501(c)(3) organizations, this requirement helps the IRS to check on whether (a) tax-deductible donations are reported consistently, as between donors’ and donees’ tax reporting, and (b) major donors are improperly controlling tax-exempt organizations to which they contribute. For PACs, the Schedule B donor disclosures dovetail with stringent political contribution constraints.
Yet these policy considerations apply differently to other tax-exempt organizations. The IRS certainly has a legitimate interest in checking up on whether too much political activity is carried out by Section 501(c)(4) lobbying organizations, Section 501(c)(5) labor unions, and Section 501(c)(6) trade associations, in violation of their prescribed tax-exempt purposes. The IRS has significant resources to make such determinations through existing Form 990 reporting mechanisms. But Schedule B requires disclosure of donor identities. Requiring specific donor names does not contribute an IRS evaluation of impermissible levels of political activity by the organization. There is no tax compliance goal equivalent to the goals for Section 501(c)(3) donors and PAC contributors. Notably, well before the IRS’s July 2018 Schedule B roll-back, significant questions were raised about disclosure requirements for these other tax-exempt organizations. Advocates’ arguments that disclosure promotes transparency are not compelling. Schedule B remains confidential within the IRS and is not disclosed to the public (although other parts of the Form 990 are subject to public disclosure).
Improving safeguards to protect our country’s democratic political systems is a laudable objective; but preserving First Amendment rights of free speech and association is an equally important goal. The government’s inappropriate collection of information may quickly chill donors’ willingness to give. From a strict tax-exempt policy perspective, there is little to support enforcement of Schedule B’s donor disclosure requirement for tax-exempt organizations other than Section 501(c)(3)s and PACs. But then again, present political momentum may swing toward political optics focused on protecting our democracy against “dark money” and lack of transparency. Whether such voices will carry the legislative day or not remains to be seen.