IRS Issues Final Regulations on Donor Reporting Requirements for Tax-Exempt Organizations

On May 28, 2020, the Treasury Department and Internal Revenue Service issued final regulations changing the requirements of certain tax-exempt organizations to report donor information to the IRS.¹ Under the new regulations, tax-exempt organizations, other than private foundations and public charities described in section 501(c)(3) and political organizations described in section 527, are no longer required to report the names and addresses of substantial contributors to the IRS on annual information returns. The new rule will change donor reporting requirements for various tax-exempt organizations, including social welfare organizations described in section 501(c)(4), labor organizations described in section 501(c)(5), and trade associations described in section 501(c)(6).

Annual Information Returns for Tax-Exempt Organizations

Subject to certain exceptions, most tax-exempt organizations are required to file an annual information return with the IRS. The return provides various information about the organization's finances, governance, operations and transactions and is available for public inspection. Private foundations file a Form 990-PF return, while other types of tax-exempt organizations file a Form 990 or 990-EZ return or a Form 990-N e-Postcard depending on certain thresholds for financial activity.

On Schedule B (Schedule of Contributors) to the Form 990, 990-EZ and 990-PF, a tax-exempt organization is required to report the names and addresses of its substantial contributors and the amounts and types of contributions from each substantial contributor. For reporting purposes, a substantial contributor is generally defined as an individual or entity that contributes $5,000 or more (in money or other property) to the organization during the tax year. Other than substantial contributors to private foundations and political organizations, which are made public, substantial contributors to other types of tax-exempt organizations that are identified in Schedule B of the annual information return are withheld from public inspection.

Prior IRS Guidance on Donor Reporting Requirements

On July 16, 2018, the Treasury Department and IRS issued Revenue Procedure 2018-38, announcing that tax-exempt organizations, other than organizations described in section 501(c)(3) or section 527, were no longer required to report the names and addresses of substantial contributors to the IRS on annual information returns. On July 30, 2019, in Bullock v. IRS, a federal district court in Montana struck down the revenue procedure on procedural grounds, ruling that the guidance was not issued in accordance with rulemaking procedures required by the Administrative Procedure Act.

The IRS responded to the court ruling by proposing substantially similar guidance through a notice-and-comment rulemaking process. The IRS issued proposed regulations on September 10, 2019, held a public hearing on the proposed regulations on February 7, 2020, and issued final regulations on May 28, 2020. In Notice 2019-47, the IRS also provided penalty-related relief for organizations that, consistent with the guidance in Revenue Procedure 2018-38 prior to the Bullock court ruling, did not report the names and addresses of substantial contributors on Schedule B to the Form 990 or 990-EZ return. The relief applies to returns filed for a tax year ending on or after December 31, 2018 and on or before July 30, 2019.

Final IRS Regulations on Donor Reporting Requirements

The final regulations provide that tax-exempt organizations, other than private foundations and public charities described in section 501(c)(3) and political organizations described in section 527, are no longer required to report the names and addresses of substantial contributors to the IRS on Schedule B of the Form 990 or 990-EZ return. Since the names and addresses of substantial contributors to these types of tax-exempt organizations are required to be withheld from public inspection, the final regulations only change what donor information is reported to the IRS, not what donor information is publicly available.

Tax-exempt organizations impacted by the final regulations will continue to report the amounts of contributions from each substantial contributor on Schedule B, and these organizations will also be required to maintain the names and addresses of substantial contributors in their books and records should the IRS need this information on a case-by-case basis.

The final regulations do not change existing reporting requirements for private foundations and public charities described in section 501(c)(3) and political organizations described in section 527, which will continue to report the names and addresses of substantial contributors on Schedule B of the annual information return. Substantial contributors to private foundations and political organizations will continue to be publicly disclosed, while substantial contributors to public charities will continue to be withheld from public inspection.

Responses to the Change in Donor Reporting Requirements

The IRS cited various reasons for the change in donor reporting requirements. In the IRS' view, collecting the names and addresses of contributors on Schedule B is not needed to administer and enforce federal tax law. The IRS also expressed concerns about donor privacy and potential harassment of donors in the event that information identifying donors on Schedule B is inadvertently disclosed to the public.

Opponents of the new reporting requirements argue that the change is designed to reduce the potential scrutiny of donors to politically active nonprofit organizations, including 501(c)(4) social welfare organizations and 501(c)(6) trade associations. Opponents argue that the change will limit the ability of the IRS to regulate and enforce restrictions on tax-exempt organizations, including restrictions on private benefit and political activity.

Several states, including California and New York, require donor-related information from charitable organizations and other types of tax-exempt organizations holding charitable assets or soliciting funds for charitable purposes in the state. In some cases, states have required tax-exempt organizations to file the same complete version of Schedule B that is filed with the IRS, which the state is typically required to withhold from public inspection under state law.

Prior to the IRS issuing final regulations on Schedule B, the New York Attorney General's Charities Bureau released guidance that required tax-exempt organizations registered with the New York AG to continue filing a complete copy of Schedule B "[u]nless and until new Form 990 filing rules are adopted by the Internal Revenue Service after review and analysis of all public comments." Now that certain tax-exempt organizations are no longer required to report the names and addresses of substantial contributors to the IRS on Schedule B, states will need to determine whether and how to continue requiring donor-related information for certain tax-exempt organizations registered in the state.

Effective Date of Final IRS Regulations

The final regulations on IRS donor reporting requirements are effective as of May 28, 2020, although organizations may choose to rely on the changes to the donor reporting requirements for annual information returns filed after September 6, 2019.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.