UPDATE:

On May 28, 2020, the Dept. of the Treasury and Internal Revenue Service issued a final version of the proposed donor protection regulations discussed below. The final version did not vary significantly from the proposed regulations, but included several of the additional features proposed by the Public Policy Legal Institute’s comments.

One of the most important of the additional features requested by PPLI was to clearly instruct states and local governments of the strict limitations on the use of IRS information. The final regulations did just that:

     The Treasury Department and the IRS reiterate that the [Internal Revenue] Code limits the purposes for which states may use returns or return information obtained from the IRS. When states receive returns or return information under section  6103(d), the use of that information is limited to the administration of state tax laws. When states receive returns or return information under section 6104(c), the use of that information is limited by statute to administering state laws relating to the solicitation or administration of charitable funds or charitable assets of such organizations. Use of returns or return information received from the IRS under these sections for purposes other than those listed above (for example, for the enforcement of campaign finance laws or consumer protection laws) is not consistent with states’ authorized use under sections 6103(d) and 6104(c). While some states may use name and address information for those authorized purposes, the divergent comments from state attorneys general indicate that the desire to obtain such information, and the purpose for doing so, may differ from state to state. 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.

Since 2000, the Internal Revenue Service has required tax-exempt organizations to file lists of substantial donors on Schedule B to their Annual Information Returns, Form 990. In originally preparing Schedule B, the IRS was attempting to protect donors’ private information from disclosure. Prior to 2000, tax-exempt organizations’ donor lists were sometimes disclosed because IRS officials did not recognize the submitted donor lists as non-disclosable, protected information. The Schedule B was intended as a standard form easily recognized by IRS employees as not disclosable.

Unfortunately, Schedule B did not protect donors’ information. In fact, it became a way for state governments and outside organizations to demand information they weren’t allowed to have. As a result, state governments put thousands of donor records on the Internet, and outside organizations began to use the disclosed information for purposes other than tax administration, such as “outing” donors for supporting disfavored organizations.

In September 2019, the IRS published a Notice of Proposed Rulemaking, asking for public comments on a new plan for Schedule B. Instead of requiring all organizations to submit the names and addresses of donors, the IRS proposed not to include the names and addresses. The IRS noted in its NPRM that it did not need or use the donors’ names and addresses for tax administration, so its proposal wouldn’t cause it any difficulties. Thousands of comments were submitted to the IRS, the vast majority in favor of the update to the IRS’s rules.

The Public Policy Legal Institute submitted an 18-page set of comments, strongly supporting the proposed update, but offering five major recommendations for improvements in how the rule was explained.

The PPLI Comments included an Executive Summary, which reads:

Executive Summary and Recommendations:

The Public Policy Legal Institute strongly supports the proposed update to the regulations under Internal Revenue Code § 6033. The proposed update to the information reporting regulations is a welcome clarification and consolidation of the current regulations. Schedule B to Form 990 has been a troublesome form since it was implemented in 2000, and widespread evidence demonstrates that Schedule B can be misused and abused in a manner which violates congressional intent and Service practice and ignores important First Amendment safeguards in the Code. The danger to constitutionally- and statutorily-protected interests far outweighs any benefit from the current design of Schedule B, and the proposed update helps to remedy that imbalance and the Service’s own mistakes.

The Service requested comments on “concerns regarding the efficient administration of the Code without the annual reporting of the names and addresses of substantial contributors for tax-exempt organizations other than section 501(c)(3) and section 527 organizations.” 84 Fed. Reg. 47447, 47452 (Sept. 10, 2019)(daily ed.). This comment, in response to the Service’s request, makes five specific recommendations in three areas:

1)         Protect Donors Against Indirect Disclosure: Although welcome, the Explanation of the proposed update does not go far enough to protect donor privacy, especially in other Sections of the Code, such as Code §§ 6104 and 6110. Current Service practice and Code requirements protect not only against direct disclosure of donor names and addresses, but against indirect disclosure as well. The Service’s Explanation should stress that nothing in the proposed update is intended to supersede or weaken existing protections against direct or indirect disclosure of donor information in other sections of the Code.

2)         Protect Donors Against the Misuse of Compelled Disclosures: The Explanation of the proposed update should also stress that the ONLY intended purpose of Schedule B is the administration of tax laws, not campaign finance proposals, consumer protection, or any other non-tax-related laws. There is a widespread, and erroneous, impression that disclosures of taxpayers’ compelled tax-related speech are somehow intended or expected to be used in a variety of other contexts. The Service itself has contributed to this unwarranted expansion of the use of compelled speech in, for example, a 2001 Service staff memorandum which, unilaterally and without basis, claimed that all compelled disclosures are to be released unless donor identification is specifically protected. This memorandum reversed the interpretation of the controlling Supreme Court decision about applicable donor disclosure and conflicts with the statutory language governing disclosures and their use by third parties. A 2002 letter from then-Exempt Organizations Division Director Steve Miller attempted to mitigate this interpretation, and was incorporated into the Internal Revenue Manual, but only for internal Service actions. This staff memo and any other similar regulatory guidance should be withdrawn and corrected, and the Service should make that clarification in the Explanation of this proposed update.

Donor disclosure protection should be the Service’s default position, as it is in the statute and Constitution, not a Service-monitored and –controlled privilege. The Service’s exchange of that information with other agencies, Federal and state, should not weaken or abrogate that donor disclosure protection. In addition to the proposed update, the Service should change the Internal Revenue Manual and other sub-regulatory guidance to resolve conflicts and contradictions which could lead to weakening donor privacy protections.

In addition, the Service should clarify for other agencies, including states and private organizations, that its rules against the misuse of information it gathers from taxpayers will be respected and enforced, even against those agencies which receive information from the Service. In particular, Service-compelled information may not be used for such non-tax-related activities as campaign-finance law enforcement or consumer protection. The Explanation of the proposed update should include a clear statement that, absent court order or similar due process-satisfying mechanisms, the use of compelled disclosure information is limited to tax administration-related purposes.

3)         Balance the Burdens and Risks of Schedule B Against the Lack of Need for the Compelled Disclosures: Schedule B was well-intended, but has proven to be a waste of government and private resources, a threat to constitutionally- and statutorily-protected rights, and an invitation to misuse IRS information. Schedule B was always intended only to be a mechanism to strengthen donor protection, by, among other things, standardizing the presentation of required information in a manner that would prevent Service officials from inadvertently disclosing donor information reporting. Unfortunately, Schedule B has become a mechanism which is misused by state governments and others for purposes far afield from the efficient administration of federal tax laws. The Service itself admits that the information on this Schedule is not needed for tax administration, and can be easily obtained from original sources if needed. The Service should consider whether the statutory requirement to obtain names of substantial donors is adequately fulfilled by other Schedules in the Form 990, and the paperwork waste, constitutional risks and managerial burdens of having this particular Schedule far outweigh the utility of having a Schedule B at all.

The Background section of the PPLI Comments reads:

Background:

            Since 1976, congressional policy has been that taxpayer information is to be kept confidential except in “limited situations.” The Supreme Court ratified that interpretation in 1987 against a request to release even redacted information. In 2000, facing repeated instances of Service personnel releasing this confidential information, the Service adopted Schedule B, as an attempt to clearly identify for its own employees the information that could not be released.

But Schedule B failed, in large part because Service employees reversed the congressional and Supreme Court interpretation in a 2001 staff memorandum. In 2002, the Service decided just to ignore its own mistake and require people to request the information twice. That non-compliant policy has continued since, with the requests for non-compliant, non-tax administration-based use of Schedule B increasing. Those increasing requests have caused untold, but very real damage to tax-exempt organizations and individuals, with unrebutted court records of harassment and donor loss of privacy caused directly by the requests of state governments and Service leaks.

            This has been the confused and confusing situation for almost twenty years, until this proposed update. In this proposed update, the Service would cut the Gordian knot by simply not requiring the name and address to be filed. The stated rationale is that the information is not needed, but the real answer is that the proposed update finally returns the Service position to what it was after Scientology and its progeny explained the correct interpretation of the legislative language and intent.

Other commenters on the update proposed in this NPRM have amply demonstrated the constitutional nature of the requirement to protect donor confidentiality and the unrebutted failure of various state government recipients of Schedules B. See, e.g., Comments to this NPRM from the Institute for Free Speech and Americans for Prosperity Foundation. Cases such as Ams. for Prosperity Found. v. Harris, 182 F. Supp. 3d 1049 (C.D. Cal. 2016), rev’d sub nom. Ams. for Prosperity Found. v. Becerra, 903 F.3d 1000 (9th Cir. 2018), petition for cert. filed, No. 19-251 (filed Aug. 26, 2019), No. 19-251, https://www.supremecourt.gov/search.aspx?filename=/docket/docketfiles/html/public/19-251.html, detail extensive disclosures and other violations of donor protections by state governments.  Neither this constitutional and statutory analysis nor the recitations of unrebutted factual records of abuse have been challenged or answered in the comments to this NPRM.

Nor have any comments to this NPRM challenged the unrebutted statements of state governments that they don’t need Schedule B filings. Fourteen state governments recently told the Supreme Court that neither they nor any other state government needed Schedule B to be filed with their tax authorities to effectively enforce their tax or other legal priorities. https://www.supremecourt.gov/DocketPDF/19/19-251/116963/20190925121200818_19-251%20Arizona%20Amicus%20Brief–PDFA.pdf, see, pp. 5-8. The state governments also noted that the required filing of Schedules B with state governments creates a threat that the filings and the information they contain will be illegally released, and that the threat affects citizens nationwide. Id., at 8-10.

Thus, no comments provided in response to this NPRM have indicated that the Secretary’s discretion in promulgating this update is either arbitrary or capricious. The available record, therefore, is that the update is justified in both legal and factual terms. PPLI urges the expeditious adoption of the proposed update.

The full PPLI Comments are available here: Sched B donor disclosure comments final