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Public Citizen Comments to the IRS on Rulemaking of Reporting Requirements for Nonprofits

Rulemaking on REG-102508-16

By Craig Holman and Emily Peterson-Cassin

Dear Associate Chief Counsel:

On behalf of our 500,000 members and supporters, Public Citizen submits these comments to express firm opposition to the provision of the proposed REG-102508-16 that would end the long-standing requirement that most nonprofit organizations report the names and addresses of substantial contributors on Schedule B of the annual Form 990 filings.

The logic for ending this reporting requirement offered by the Internal Revenue Service (IRS) in the proposed regulation lacks merit, and the consequences would be quite detrimental to both enforcement of the tax code regulating exempt organizations as well as the integrity of the election code, particularly the prohibition on foreign intervention in U.S. elections.

Public Citizen finds at least three very troubling consequences to eliminating the requirement that exempt organizations privately report to the IRS the names and addresses of donors of $5,000 or more annually. First, it would undercut the ability of the IRS to monitor and efficiently detect violations of the tax code applicable to these nonprofit organizations. Second, it would make “dark money” in U.S. elections even darker. Third, it would facilitate the intervention of foreign governments and foreign interests in U.S. elections at the federal, state and local levels.

Inconsistent and Irresponsible Rationale

Before addressing these concerns at greater length, it is worth noting that the arguments the IRS offers in support of this reversal in reporting requirements seem inconsistent, if not entirely irresponsible. The IRS suggests four rationales for this provision of the proposed regulation: (i) to avoid inadvertent disclosure of donors to the public; (ii) to ease the reporting burden in the reporting requirements for exempt organizations; (iii) to promote uniformity in the filing requirements; and (iv) that the IRS has no responsibility to ensure the integrity of U.S. elections.

Regarding the first argument of avoiding inadvertent disclosure of the names of donors to the public, even the IRS recognizes such occasions are extremely infrequent and that steps have been taken already to ensure that donor names reported on Schedule B to the agency remain confidential. These names are only reported to the IRS and the agency redacts the names in any public records of Form 990s. Great lengths are taken to preserve the confidentiality of donors to nonprofit organizations by the IRS. Inadvertent disclosures are so rare as to not pose much of a problem.[1]

The argument for easing the reporting burden for exempt organizations is just as specious. The proposed rule change still requires all exempt organizations to file the amounts of substantial donations to the IRS on Form 990 and to keep complete records of the names and address of all such donors in the event of an IRS audit. Even under the rule change, exempt organizations must still compile complete records of the names, addresses and amounts of substantial contributions. Exempt organizations must still file a Schedule B form listing all the substantial contributions with the IRS; they need not let the IRS know the names and addresses of these donors, unless the IRS asks. Any reduction in the recordkeeping burden on exempt organizations would be de minimis.

The IRS also suggests that such a rule change would make the reporting requirements more uniform across different types of nonprofit organizations. This rationale similarly does not hold water. The tax code itself mandates that 501(c)(3) charitable organizations must file the names and addresses of substantial contributors on Form 990s and that Section 527 political organizations must also disclose this information. IRS rulemaking cannot overrule the tax code. As a result, the rule change would, in reality, create different reporting requirements for different classes of nonprofit organizations. No uniformity here.

Finally, it is simply irresponsible that the IRS would declare that it has no interest or role in protecting our elections from foreign meddling. All branches of government are seeking ways to protect our democratic institutions from foreign manipulation. Only the IRS has declared that it’s not their problem.[2]

Proposed Rule Threatens Proper Oversight of the Tax Code

For nearly a half century, the IRS has collected confidential reports of the names and addresses of substantial donors. The reason for this reporting requirement on Schedule B is to ensure proper oversight by the agency against self-dealing, improper loans or other illegal business practices by exempt organizations. Knowing the source of substantial donations can reveal whether a nonprofit organization is complying with the tax code. For example, this information permits detection of schemes like the overstatement of noncash donations that an exempt organization may claim in order to justify excessive salaries or perquisites for its executives. It permits detection of whether substantial donors have merely set up a nonprofit organization to benefit private business interests or for other personal enrichment.

Furthermore, collecting this donor information from all nonprofit organizations on a regular basis facilitates investigative efficiency and helps avoid tipping off organizations that they might be under an audit. The IRS can identify suspicious activity from information that is already available to the agency. Without this information readily available, the IRS would have to request or subpoena the information from the nonprofit organization, which could allow the organization to hide assets or destroy documents and other evidence. It would also be time consuming and costly both to the IRS and the nonprofit organization.

Proposed Rule Would Make “Dark Money” Even Darker

“Dark money” – funds laundered through nonprofit organizations into electioneering expenditures for or against candidates without disclosure of the actual sources of the money – has swamped elections, especially since the disastrous 2010 Citizens United decision.[3] Electioneering expenditures from non-disclosed sources has increased from less than $5.2 million in 2006 to well over $300 million in the 2012 presidential election cycle, to $147 million in the 2018 congressional election cycle.[4] The amount of dark money spending in the 2020 presidential elections is expected to rise dramatically once again.

Dark money is laundered through nonprofit organizations, largely through 501(c)(4) social welfare organizations and 501(c)(6) trade associations. These nonprofit groups can receive unlimited donations from any sources, including corporations and even foreign interests. As nonprofit organizations, the sources of their substantial donors are reported to the IRS but not publicly disclosed. Under the tax code, these organizations are not supposed to have political advocacy as their primary purpose, though the IRS is notoriously lax in enforcing these limits.

Nevertheless, collecting the names and addresses of substantial donors to nonprofit organizations can provide the IRS with important clues as to whether an organization is a legitimate nonprofit or merely a front group for electioneering purposes. If a handful of substantial donors provide the bulk of an organization’s funds whose spending activity focuses on electioneering, and the donors are party operatives or have close relations with candidates and campaign staff, this information should raise red flags. Without the names and addresses of the donors, no such warnings would be provided of a nonprofit organization’s primary purpose.

Social welfare organizations and trade associations are even more attractive avenues for laundering political cash than super PACs for those who want to remain anonymous. While all these entities can receive unlimited funds, only the nonprofit organizations do not reveal their donors to the public. The IRS has the ability to monitor these entities, and that ability depends on whether the IRS has records of the names and addresses of substantial contributors.

Proposed Rule Facilitates Foreign Meddling in U.S. Elections

Nonprofit organizations may receive unlimited funds from any source, including foreign sources. If the identity of the donors is masked from scrutiny, the IRS would be oblivious as to whether funds from foreign governments, foreign corporations or other foreign nationals are being laundered through nonprofit groups for electioneering purposes.

The proposed rule would make it ridiculously easy for foreign sources to spend money in U.S. elections. Even under the tax code, social welfare organizations and trade associations may spend substantial funds on electioneering as long as it is not their primary purpose. So, under this proposal, a foreign government, for example, could set up a nonprofit organization that then spends half of its resources on educational activities and the other half on electioneering activities, and no one would be the wiser.

More realistically, electioneering nonprofits receive funds from multiple sources, a portion of which may come from foreign interests. Without donor identities reported to the IRS, the agency would have no clue how and on whose behalf such organizations are operating.

Make no mistake about it: foreign interests, including foreign governments, continue to target U.S. elections at all levels. A Senate Intelligence Committee report found that the Russian government not only sought to influence the 2016 presidential election but likely targeted election systems in all 50 states.[5] And, according to Special Counsel Robert Mueller, Russia again is “doing it as we sit here.”[6] In fact, this time around, the Russians are not alone. Iran, China and other foreign governments appear to be joining in the fray seeking to influence the 2020 U.S. elections.

Foreign intervention is a very real threat to the integrity of U.S. elections. This proposed rule change will vastly facilitate foreign meddling in U.S. elections at the federal, state and local levels. All of which makes the timing of this proposed rule change particularly ironic. The proposal was issued the same day that the Department of Justice announced the arrest of Maria Butina for conspiring to influence U.S. elections as a foreign agent on behalf of Russia through the NRA nonprofit organization.[7]

It is every much the responsibility of the IRS to help protect our democracy as it is for any other agency of the federal government. In the IRS’s case, it must prevent the tax code from being abused by foreign powers to the disadvantage of U.S. interests.

Conclusion: Proposed Rule Change Is Unwarranted and Detrimental

to the Tax Code and the Integrity of U.S. Elections

The provision of the proposed REG-102508-16 that would end the long-standing requirement that most nonprofit groups report the names and addresses of substantial contributors on Schedule B of the annual Form 990 filings not only provides little, if any, benefit to exempt organizations, it poses consequences that are detrimental to the tax code as well as the integrity of U.S. elections.

The justifications offered by the IRS for the proposed rule change are inconsistent and irresponsible. The consequences of such a rule change – weakening IRS oversight over section 501(c) of the tax code, making “dark money even darker, and facilitating foreign meddling in U.S. elections – make the proposal not only unwarranted but also damaging to the American system of governance.

Public Citizen firmly opposes such a rule change.


[1]  Americans for Prosperity v. Becerra, 903 F.3d 1000 (2018) (“Even assuming arguendo that the plaintiffs’ contributors would face substantial harassment if Schedule B information became public, the strength of the state’s interest in collecting Schedule B information reflects the actual burden on First Amendment rights because the information is collected solely for nonpublic use, and the risk of inadvertent public disclosure is slight.”)

[2]  As noted in the NPRM: “The Treasury Department and the IRS are aware of concerns raised regarding campaign finance laws; however, Congress has not tasked the IRS with the enforcement of campaign finance laws.” Federal Register, Vol. 84, No. 175 (Sep. 10, 2019) at 47452

[3]  Citizens United v. Federal Election Commission, 540 U.S. 93 (Jan. 21, 2010).

[4]  Center for Responsive Politics, available at: https://www.opensecrets.org/dark-money/basics

[5]  Report of the Select Committee on Intelligence, United States Senate, on Russian Active Measures Campaigns and Interference in the 2016 U.S. Election (July 2019), available at: https://www.justsecurity.org/wp-content/uploads/2019/07/Senate-Intel-Report-On-Election-Interference.pdf

[6]  Editorial Board, “They’re doing it as we sit here,” New York Times (July 24, 2019), available at: https://www.nytimes.com/2019/07/24/opinion/robert-mueller-report-testimony.html

[7]  Emily Stewart, “The government is making it easier for ‘dark money’ donors to go unnamed,” Vox (July 17, 2018), available at: https://www.vox.com/policy-and-politics/2018/7/17/17581384/irs-dark-money-nra-maria-butina-donors