The IRS has proposed a rule to allow a second way to permit donors to claim tax deductions for their charitable gifts which would make use of donor social security numbers. Many charity leaders are alarmed at what they see as an additional paperwork burden, and privacy advocates see danger. There is also much misinformation about the proposed regulations, mainly due to the mistaken belief that the reporting details of all gifts to the IRS will become mandatory for charities.
The IRS’s proposed rule would create an optional reporting form for charities to document to the IRS all gifts received from donors. The form, once designed, would allow charities to assume the burden of reporting all donors’ charitable gifts to the IRS as an alternative to the donor providing the required receipts. The federal web site regulations.gov provides a summary of the history and the proposed rule.
According to regulations.gov, 37,977 comments were submitted on the proposed rule during the 90-day public comment period, which closed on December 16th, 2015. A brief review of the comments submitted indicates that most commenters are strongly opposed to the proposed rule, with many referring specifically to the collection and transmission of donors’ Social Security numbers by charities. Industry organizations BoardSource and the National Council for Nonprofits (NCN) prepared articles and issued “action alerts” to members encouraging comments opposing the proposed.
The opposition isn’t surprising. Charity reporting of donor gifts hasn’t been a big issue, and the IRS itself says that “The present…system works effectively, with minimal burden on donors and donees, and the Treasury Department and the IRS have received few requests since the issuance of TD 8690 [in 1997] to implement a donee reporting system.”
Since 1994, the IRS has required taxpayers claiming deductions for charitable gifts to provide a “contemporaneous written acknowledgement” (i.e., a gift receipt) prepared by the charity and including specific information showing who gave, what was given, what (if anything) the donor may have received in exchange for the gift, and the identifying information for the charity (see IRS Publication 1771 for specifics).
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Failure to have proper and complete gift receipts has caused some taxpayers’ deductions to be disallowed. NPQ reported on one Texas couple who lost the opportunity to claim just over $25,000 in gifts to their church due to incomplete receipting. The couple argued that the receipts were “substantially complete” and the church even provided complete receipting after the IRS issued its challenge. However, the U.S. Tax Court held that the receipting regulations are absolute and that the couple had to pay an additional $9,000 in taxes and penalties.
The 1994 changes included a provision for the IRS to develop rules that would allow donors to qualify for charitable gift deductions if the charity itself provided the required reporting information to the IRS. Advocates for donors whose deductions were disallowed cite the rulemaking authority and suggest that the IRS Form 990 information return that charities must file annually would satisfy the need. The IRS disagrees, saying that the Form 990’s Schedule B (where certain large gifts are reported) does not include all the information it would need to substantiate a deduction. In addition, since a charity may file an amended Form 990 years after a gift was received, the 990 reporting would lack the required “contemporaneous” element.
Designing a form for charities to file wouldn’t be difficult for the IRS. Some industry analysts have pointed to the Form 1098-C, used for reporting gifts of boats, planes, and motor vehicles, as a potential model. The challenge, according to NCN, is the potential for disclosure of donors’ Social Security numbers by charities and by the IRS. NPQ has reported about past public disclosures of private taxpayer information by the IRS. Donors concerned about the potential for hacking and identity theft may be less willing to give if charities ask for personal information, especially if they cite IRS requirements, causing a “chilling effect” on gifts.
But, the presence of a charity reporting option may also increase the legal liability for charities that issue incomplete or defective gift receipts to donors. Those donors may cite the presence of the option as a factor increasing a charity’s liability for failing to provide adequate receipting to a donor denied a deduction. Some opponents also fear that a implementing a permissive IRS option for donee reporting may eventually become a requirement for most or all charities.
There is only a remote likelihood of the IRS proceeding to a final rule and initiating design of a reporting form. The IRS doesn’t see a strong demand for the option, public comments are overwhelmingly negative about the concept, and the IRS is strapped for cash as Congress continues to punish the agency for the IRS scandal involving nonprofit organizations and the IRS’s perceived lack of cooperation and accountability in the various investigations. In addition, Sen. Pat Roberts (R-KS) has introduced legislation to prohibit the IRS from collecting Social Security numbers of charitable donors, effectively blocking the IRS-proposed initiative.
