Proposed Regulations: Donor Disclosures and Dark Money

The IRS and Treasury are taking another shot at providing an exception for 501(c)(4), 501(c)(5), 501(c)(6), and certain other tax-exempt organizations (notably excluding 501(c)(3) organizations) from the requirement to report the names and addresses of their contributors on Schedule B of Form 990, prompting concerns of more dark money in politics. The IRS first adopted Rev. Proc. 2018-38 to effect this change. But on July 30, 2019, in Bullock vs. Internal Revenue Service, a federal court held unlawful and set aside the law because it had been adopted by the IRS without complying with applicable notice-and-comment procedures. Now, the change has taken the form of a Proposed Rule that was published on the Federal Register on September 10, 2019 and which solicits comments by December 9, 2019.

To justify the proposed change in the law, Supplementary Information to the Proposed Rule provides in pertinent part as follows:

In exercising this discretion, the Treasury Department and the IRS seek to balance the IRS’s need for the information against the costs and risks associated with reporting of the information. The IRS does not need the names and addresses of substantial contributors to tax-exempt organizations not described in section 501(c)(3) to be reported annually on Schedule B of Form 990 or Form 990-EZ in order to carry out the internal revenue laws, including provisions dealing with transfer taxes. A requirement to annually report such information—rather than providing it to the IRS as required upon examination—increases compliance costs for affected tax-exempt organizations and consumes IRS resources in connection with the redaction of such information as required in section 6104(b). …

The Treasury Department and the IRS are also concerned that the requirement to report the names and addresses of substantial contributors poses a risk of inadvertent disclosure of information that is not open to public inspection because this information on Schedule B generally must be redacted from an otherwise disclosable information return.  …

As we discussed in a previous post, a major concern with the elimination of the disclosure requirement is that more dark money will flow through 501(c)(4) social welfare organizations (like the NRA), 501(c)(5) labor organizations, and 501(c)(6) business leagues (like the U.S. Chamber of Commerce) to fund political campaigns with no identification of the source of those funds. As noted in this Reuters article:

The change protects the privacy of wealthy donors of “dark money” donations to politically active groups.

In a letter from several nonprofits, including Public Citizen and Sunlight Foundation, to the House Ways and Means Committee regarding an earlier bill proposing a similar change to the disclosure requirement explains:

Eliminating the existing requirement for disclosure to the IRS of donations to 501(c)(4) “social welfare” groups would open the door wide for secret, unaccountable money from foreign governments, foreign corporations and foreign individuals to be illegally laundered into federal elections through 501(c)(4) groups.

While foreign money cannot be legally given or spent in our elections, the only real protection we currently have against the use of 501(c)(4) groups to launder foreign money into federal elections is that 501(c)(4) groups must disclose their donors, including foreign donors, to the IRS. This requirement means that 501(c)(4) groups know they can be held accountable if they illegally spend foreign money in U.S. elections.

However if donor disclosure to the IRS is eliminated, no one will know whether a 501(c)(4) group has received foreign funds and is illegally spending them in our elections, other than the foreign donors and 501(c)(4) groups involved. There will be no way to hold them accountable for illegally spending foreign money in federal elections.

It seems clear that the Proposed Rule is motivated more by political reasons than administrative reasons. Dark money funding politicians and political parties has been, and continues to be, a big threat to our country and its democratic principles. Nonprofits and individuals should understand the issues and dangers associated with the Proposed Rule and why those in power who rely upon anonymous donors and dark money are making this proposal. We hope to see a great upswell of comments to help ensure fair elections.