Update on IRS Proposed Schedule B Regulations to Protect Donors

Update on IRS Proposed Schedule B Regulations to Protect Donors

Internal Revenue Service rules have long protected the privacy of donors to tax-exempt  organizations, but in 2000, the IRS created a new form, Schedule B to a tax-exempt organization’s annual Form 990, which required many organizations to disclose names and addresses of donors to the IRS. Ironically, the IRS issued Schedule B to protect donor privacy, because its employees did not always recognize when donor information was being filed, and then inappropriately disclosed the protected donor information.

Gradually, governments and private organizations discovered the donor information being filed on Schedule B, and what began as a donor protection mechanism became a method to target donors. Courts, including in New York and California, have upheld state efforts to require tax-exempt organizations to file copies of their Schedule B forms, even though the protected information was leaking out of their offices.

On Sept. 10, 2019, the Internal Revenue Service issued a notice to the public that it was proposing to end the requirement of disclosing donor information on Schedule B forms filed by many tax-exempt organizations, and asked for comment. Donor information would still be required on Schedule B forms filed by 501(c)(3) charities and Section 527 political organizations.

More than 8,000 comments were filed, virtually all of which supported the proposed donor protection regulation; many of the comments, however, were short and non-technical public responses. The Public Policy Legal Institute filed a lengthy and detailed comment, supporting the proposed regulation and looking at the tax-related aspects of the proposed regulation; other organizations cited the PPLI tax comments.

Read the PPLI Comment here: Sched B donor disclosure comments final.

Many state governments also commented on the proposed regulations, but split between those who supported and opposed the regulations. Some states, led by New York and New Jersey, argued that they needed data from the IRS to enforce their own state laws. Other states said they did not need IRS data; for example, Arizona Attorney General Mark Brnovich said:

Forty-seven states and the District of Columbia regulate non-profit organizations without requiring them to report the names of their donors, a practice that satisfies these jurisdictions’ commitment both to detecting unscrupulous non-profit activity and to protecting citizens’ First Amendment right of association. The experience
of these jurisdictions—every state in the Union except California, Hawaii, and New York—demonstrates that effective enforcement can be carried out without such a broad disclosure regime.”

On Feb. 7, 2020, the IRS held a public hearing on the proposed regulation. Sixteen organizations presented testimony at the hearing; again, the vast majority of comments supported the proposed regulation. The IRS is now considering the public comments, and it’s not clear when it will make a final decision on whether or not to issue the proposed Schedule B regulations.

Meanwhile, the Supreme Court of the United States is scheduled in the next few months to consider whether to review one or more of the lawsuits brought by organizations challenging state governments’ requirements to file Schedule B. If the Supreme Court decides to review those cases, briefing and oral arguments would be held in the next Supreme Court Term, beginning in October 2020.