The IRS’s announcement on July 17, 2018 that it will no longer require Form 990 Schedule B donor disclosures sent shock waves through the tax-exempt sector. While such action reflects notable government restraint and certainly affects many tax-exempt organizations, there is no change for Section 501(c)(3) organizations that file Form 990s or for Section 527 “political action committee” (PAC) reporting. So why the change, and what are its implications?
Schedule B Fundamentals
The IRS Form 990 is an annual return by which most tax-exempt organizations must provide information to the IRS. (Churches and other religious institutions are statutorily exempt.) In Schedule B of the full-version Form 990, which is required for larger tax-exempt organizations with at least $200,000 in annual revenues (or at least $500,000 in assets), nonprofits must list the names, addresses, and amounts given of any donors who contributed more than $5000 or two percent of all donations, whichever is higher, in the prior tax year. This mandatory reporting has long been a mainstay within the IRS context, as a measure for nonprofit accountability and particularly to guard against improper donor control in violation of well established “public benefit” requirements. This Schedule B requirement has applied to all tax-exempt organizations, including Section 501(c)(3) public charities and Section 501(c)(4) lobbying organizations.
While Form 990s themselves are subject to public disclosure, the IRS is legally obligated to keep Schedule B information confidential. Both federal civil and criminal sanctions are available for improper disclosure of donor information, and nonprofits may legally redact such data in their publicly available Form 990s. The confidentiality of donor data is grounded in taxpayers’ well-founded First Amendment constitutional freedoms of speech and association, as articulated by the U.S. Supreme Court in Citizens United v. Schneiderman and NAACP v. Alabama. In other words, while the IRS may have a legitimate interest in donor information for tax compliance purposes, public disclosure of individuals donors’ financial support for charitable and other tax-exempt causes serves no bona fide legal purpose.
State Charity Regulators’ Interest in Schedule B Information
The IRS is not the only government regulator who seeks tax-exempt donor information. Most state charitable regulators require annual reporting for Section 501(c)(3) organizations that fundraise in their states. Such state regulators typically require charitable organizations in their states to submit a copy of the federal Form 990, and a growing trend is to require inclusion of the IRS Schedule B donor information. The Schedule B disclosure requirement for state charity regulators is highly disturbing, particularly since no comparable sanctions are available for violations of donor privacy. California and New York Attorneys General have been at the forefront of this trend and now require such disclosure, although not without pushback!
The Impact of the IRS’s Schedule B Shift
From the IRS’s perspective, the Schedule B roll-back has been cast as a fairly routine exercise of the IRS’s administrative discretion. The IRS issued the following bland statement: “The IRS has no tax administration need for continuing the routine collection of donor names and addresses as part of an exempt organization’s annual tax return. If the information is needed for purposes of an examination, the IRS will be able to ask the organization for it directly.”
Behind this official pronouncement, the Schedule B roll-back had been discussed for many prior years. It was controversial prior to the IRS’s decision, and it apparently continues to polarize the tax and political world. Critics believe the change came as a result of lobbying by “dark money” – a term referring to the idea that wealthy donors secretly fund major political advocacy groups in order to advance the donors’ own interests. Respected tax authorities have even characterized the relaxation in the reporting of donor information as a step toward expanding government information collection. On the other hand, supporters of the roll-back praise the change as an additional free speech protection for individuals who donate to politically unpopular causes, as well as a source of practical benefits such as freeing up IRS staff to spend time on other tasks.
The most notable – and probably the most controversial – impact of the rollback of Schedule B is that Section 501(c)(4) lobbying organizations will no longer be required to provide their donor information to the IRS via the Schedule B. The Schedule B requirement no longer applies to them. Many such organizations are at the forefront of political issue advocacy in the US, and, as a result, their operations are sometimes divisive and highly scrutinized by those who oppose the organizations’ positions. The 2013 IRS controversy involved several such Section 501(c)(4) organizations, and the Schedule B roll-back seems to have resurrected some of the same angst that developed in its wake.
On the other hand, however, Section 501(c)(3) tax-exempt organizations must still complete and file the Schedule B, just as before, as part of their Form 990 reporting. Within the context of state charity regulators, the Schedule B information is thus still fair game for mandatory disclosure – as currently required with great vigor in California and New York – and on pain of disqualification from charitable solicitations there. States’ Attorneys General may choose to follow the IRS’s path of regulatory restraint, or they may continue to expand their state-specific oversight of tax-exempt organizations’ fundraising.
Living With and Without Schedule B
Regardless of one’s standpoint regarding the political context of the change, the question remains of whether this change will have any impact on government regulation of tax-exempt organizations. For Section 501(c)(3) organizations, they must still file Schedule B with their IRS Form 990s. In addition, to the extent they solicit charitable funds in states like California and New York, Section 501(c)(3) organizations will be obligated to provide the Schedule B donor information to state charity regulators.
In stark contrast, Section 501(c)(4) organization will no longer will need to complete and submit Schedule B donor information to the IRS. Likewise, and to the extent state charity regulatory agencies continue to leave them alone, Section 501(c)(4) organizations will owe no such donor information to state authorities. Keep in mind though that many such organizations are at the forefront of political issue advocacy in the US, and, as a result, their operations are sometimes divisive and highly scrutinized by those who oppose the organizations’ positions.
Will the Schedule B roll-back continue? Congress has considered federal legislation to eliminate Schedule B entirely. So far, though, the Schedule B requirement remains for Section 501(c)(3) organizations and PACs. Until Congress chooses to act on this matter, Section 501(c)(3) charities that file the full-version Form 990 face continuing obligations to report Schedule B donor information, to the IRS and to some state regulators. As for the IRS, its repeal of this disclosure requirement reflects a laudable effort to limit collection of information to those facts necessary for the commission of its core responsibilities.