After a great deal of whipsawing as the rules flipped back and forth, the nonprofit sector now has certainty from the IRS: section 501(c)(4) and 501(c)(6) organizations will not have to disclose the identity of their donors on their annual Form 990 filing with the IRS. However, some states are already beginning to require this information separately, and others may soon follow suit.
On May 26, the IRS issued final regulations on donor disclosure providing that social welfare organizations under section 501(c)(4), professional and trade associations under section 501(c)(6), and many other types of organizations required to file a Form 990 series return are no longer required to disclose their large donors ($5,000 or more) on Schedule B of the Form 990. The major exceptions are section 501(c)(3) organizations and section 527 political organizations, both of which are subject to statutory requirements for donor disclosure that the IRS could not waive.
These final regulations adhere closely to the proposed regulations released on September 6, 2019. The proposed regulations in turn followed previous guidance from the IRS that was overturned by a federal judge after the states of Montana and New Jersey challenged it on procedural grounds, as discussed in our prior alert.
Many commentators viewed the original IRS guidance as facilitating the use of undisclosed donations for political purposes, including contributions from foreign nationals which are prohibited in connection with federal, state, and local elections. These concerns with so-called "dark money" spurred two states to challenge the rules in federal court. When the proposed IRS regulations were subsequently issued, the attorneys general of nineteen states plus the District of Columbia filed comments opposing the regulations, on the grounds that states need Schedule B information for purposes related to state tax administration, enforcement of state campaign finance laws, and enforcement of state consumer protection laws. On the other hand, eleven state attorneys general filed comments asserting that states would not be negatively impacted by the proposed regulations.
In the preamble to the final regulations, the IRS responded that states may not use federal tax information for enforcement of state campaign finance or consumer protection laws. It further stated that:
"To the extent that any state determines that the burdens of collecting and maintaining such information are justified by its own needs, such a state is free to require reporting of such information to the state and to maintain the information at the state's own expense."
Nonprofit organizations should expect the states to take the IRS up on that invitation to adopt their own reporting requirements. Following the IRS's proposed regulations, New Jersey amended its regulations to require charitable organizations registered with the state to submit a copy of the organization's most recent Form 990 with a completed Schedule B, even though the organization is not required to file Schedule B with the IRS. It is actively reaching out to organizations, including 501(c)(4) organizations, that have simply provided their federal Form 990, which did not require that information, and requesting that a completed Schedule B be submitted. If organizations refuse to provide the contributor information, New Jersey has thus far proved unwilling to renew the organization's registration to solicit contributions in the state.
Similarly, New York recently passed the state's 2020-2021 budget legislation, which has used the requirements for 501(c)(3) donor disclosure to find a "back door" into donor disclosure for 501(c)(4) organizations by requiring a completed Schedule B to be filed by certain charitable organizations registered with the state that engage in lobbying or other reportable covered communications if the organization is not otherwise required to file a completed Schedule B with the organization's annual financial report. The law also directs the state to review all reports filed to determine whether the organization's spending is inconsistent with the organization's charitable purposes. Both New Jersey and New York have stated that donor information submitted will not be made public.
These differing state rules, which are likely to increase, are a trap for the unwary. Nonprofits active nationally (other than 501(c)(3) and 527 organizations) may well now have to prepare two versions of their Form 990, one with donor identities shown on Schedule B and one without, and track the variety of filing requirements in different states. We will continue to follow the evolving state requirements closely and are available to advise as needed.