June 20, 2016; Wall Street Journal
Last week, the House passed a bill that would block the IRS from accessing nonprofit donor lists in the hopes that Americans wouldn’t “be singled out by the IRS for their political beliefs,” according to bill sponsor Rep. Peter Roskam (R-IL). While both the opposition and supporters have strong arguments, a loss of transparency—even, in this case, confidential donor information held in trust by the IRS—is seldom a good thing.
Currently, nonprofit organizations are required to submit a list of every donor who has gifted $5,000 or more; however, it isn’t clear if and how the IRS is using this information. The IRS indicates that the idea behind donor disclosure was to determine “whether or not the people who make large contributions have undue influence over the operation of the organization.” With the passing of the Preventing IRS Abuse and Protecting Free Speech Act, 501(c) organizations will no longer be required to send this information to the IRS; however, donations of $5,000 or greater made by employees, directors or officers of nonprofit organizations will still need to be disclosed. For more information, please refer to the NPQ Newswire’s previous coverage.
This legislation comes in the wake of the 2013 scandal in which the IRS scrutinized Tea Party and other conservative organizations more than other applicants for tax-exempt status because of their political ideology, as well as leaked donor information without the authorization of the nonprofit organizations. One case that is often referenced concerns the National Organization for Marriage, which is a group that opposes same-sex marriage. As NPQ reported in 2013, the organization claims that in 2012 the IRS leaked confidential donor information to groups that supported same-sex marriage. The leakage at the very least cost the nonprofit organization some donors, and at the most influenced the 2012 presidential election when it became public that a group with ties to nominee Mitt Romney had donated $10,000 to NOM. The IRS ended up settling the lawsuit for $50,000, saying it had unintentionally released the donor information.
On the other side of this argument, the legislation also comes shortly after the release of the infamous Panama Papers. In opposition to this bill, Rep. Xavier Becerra (D-CA) said, “No need to go offshore anymore. You could just put it in a not-for-profit organization in any quantity, because your name would never be disclosed by that organization if this bill were to take effect.” The Obama administration also opposes the bill, and in the Statement of Administration Policy said, “By permanently removing the IRS from requiring reporting or donor information by 501(c) organizations, H.R. 5053 would constrain the IRS in enforcing tax laws and reduce the transparency of private foundations.”
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The opposition’s argument is even more convincing when we look at how outside spending by 501(c) organizations has increased in just the past few years. The Center for Responsive Politics (CRP) tracks how money is spent in U.S. politics. Their research shows that outside spending by nonprofit organizations in the 2016 election is three times what it was for the 2012 election. Where this money comes from and how it is spent allows groups such as the CRP to track the political activity of nonprofit organizations. For instance, the list of donors allows the CRP to determine whether a group claiming to offer grassroots support in an election is funded by a large number of small donations, or whether funding comes from one multimillion-dollar donation. The disclosure is also important in determining whether groups are receiving illegal foreign donations.
Traditionally, confidentiality provisions have been recognized as part of First Amendment protection for supporters of controversial organizations. In a 1958 case, the U.S. Supreme Court has protected the confidentiality of membership and support of the NAACP, and the IRS has refrained from collecting information on donors and members of the Socialist Workers Party, which claimed that its supporters would face harassment should its list become public.
While protecting donor confidentiality is critical for nonprofit organizations, it is unclear whether public disclosure of contributions will actually have a negative impact on contributions from new or current donors. For instance, will donors be comfortable gifting to organizations that are suspected of using foreign contributions to influence U.S. politics? Without any way of proving these suspicions false, potential donors might just keep their distance. Additionally, some individuals are encouraged to donate to an organization when their donor list shows reputable community members.
At the end of the day, this legislation appears to have been written for and has the greatest effect on 501(c)(4) organizations; however, its impact might be felt downstream on all 501(c) organizations. We’ll have to wait and see how this plays out.—Sheela Nimishakavi