Donor disclosure updates and new mandatory e-filing requirements

NONPROFIT NEWS

As tempted as I was to dedicate this whole column to covering the ongoing saga at the National Rifle Association, I decided to focus on several more mundane, and likely practical, updates instead. We've seen some recent updates on various donor disclosure requirements worth noting, including an attempt to take the fight over the California attorney general's demand for the unredacted Schedule B up to the Supreme Court. We also saw a federal district court overturn the move by the IRS and Treasury Department last year to relieve exempt organizations other than 501(c)(3)s from Schedule B donor disclosure requirements, to which the IRS responded by issuing new proposed regulations, following administrative procedures this time. Should the final regulations be implemented, I suspect this is an issue that will be back in the courts before too long. Finally, I've included an update on the recently enacted law mandating electronic filing of all exempt entity returns in the near future. Maybe I'll get to the NRA next month.

Court Overturns IRS Rules on Donor Disclosure Requirements

I've previously written about, and criticized, the politically motivated move by the IRS and Treasury Department last year to relieve exempt organizations other than 501(c)(3)s from the requirement of including personally identifiable information about their donors with their Forms 990 in Schedule B. As I've also previously discussed, Montana Gov. Stephen Bullock and the Montana Department of Revenue promptly filed a lawsuit against the IRS and Treasury, which the State of New Jersey later joined, claiming that the new procedure unlawfully interfered with the state's ability to gather data that it requires to administer its tax laws and was promulgated in violation of the Administrative Procedure Act.

At the end of July, the judge presiding over the case, Judge Brian Morris of the U.S. District Court for the District of Montana, agreed with the states and issued a decision overturning the new rules set forth in Revenue Procedure 2018-38. More specifically, the court granted the plaintiffs' motion for summary judgment of their claim that the IRS failed to observe the required rulemaking procedures under the Administrative Procedure Act. The court held that the IRS and Treasury acted unlawfully and should have provided public notice and an opportunity for comment before implementing the new donor disclosure rules.

Last week, in response to the court's decision and to no one's surprise, the IRS issued proposed regulations that would officially incorporate the exemptions from donor disclosure requirements set forth in the earlier Revenue Procedure. In light of the court's ruling, the IRS and Treasury are providing an opportunity for notice and public comment on the proposed regulations. Comments from the public and requests for a public hearing may be submitted by mail or electronically at http://www/regulations.gov (indicate IRS REG-102508-16 when submitting comments), and must be received by no later than December 9, 2019.

At the same time, the IRS also issued Notice 2019-47, providing relief from penalties for exempt organizations, other than 501(c)(3)s, that fail to include donor names and addresses in their Schedule B of the Form 990 or 990-EZ for a taxable year ending after Dec. 31, 2018 and on or before July 30, 2019. The notice further clarified that, for any exempt organization other than a 501(c)(3) that filed a return before the court order was issued on July 30, not reporting the names and addresses of donors would have been consistent with the guidance and instructions for Schedule B in effect at the time of filing. The agencies are apparently not backing down in their efforts to make it easier for dark money to flow through exempt organizations.

California AG Schedule B Update

In other Schedule B news, Americans for Prosperity Foundation recently filed a petition with the U.S. Supreme Court for a writ of certiorari. The organization is seeking a reversal of the 9th U.S. Circuit Court of Appeals' decision upholding the California attorney general's right to demand unredacted Schedule B information from those organizations required to register with the attorney general's Registry of Charitable Trusts. Americans for Prosperity Foundation v. Becerra, 903 F.3d 1000 (2018). Americans for Prosperity Foundation had generally challenged the requirement on the basis that it violated First Amendment rights, including the freedom of association. Should the Supreme Court grant cert, it seems plausible that the court could decide to overturn the 9th Circuit, particularly in light of the current composition of the court and the recent rollbacks on donor disclosure requirements by the IRS.

Mandatory Electronic Filing of Annual Returns

The Taxpayer First Act (H.R. 3151) was signed into law on July 1. The new law requires all tax-exempt organizations that are required to file an annual information return with the IRS to do so electronically. It applies regardless of whether the organization is filing Form 990, 990-EZ, 990-PF, and/or 990-T. However, it does not affect organizations that are exempt from filing information returns, such as churches. The electronic filing requirement also extends to periodic contribution and expenditure reports, filed on Form 8872, filed by Section 527 political organizations.

Under the new law, electronic filing will be required for all returns covering 2020 for organizations on a calendar year, which returns will be due May 15, 2021 unless an extension is obtained. For organizations on a fiscal year, the electronic filing requirement will apply to all returns covering tax years beginning on or after July 2, 2019, which are due the 15th day of the fifth month after the end of the fiscal year unless the organization obtains an extension.

The new law also requires the IRS to disclose information returns that are electronically filed to the public as soon as is practicable in machine-readable format, so that the data can be more easily processed and shared. It is expected that this will make it simpler for regulators, journalists, academics, and others who review exempt organization activity to gather and analyze return data. It may also make it easier for exempt organizations that look to the returns of other entities for comparability data, such as with respect to employee compensation, to do so. As the IRS moves further and further toward data-driven review and audit processes, the collection of electronic returns will no doubt also make that process simpler.

Importantly, the new law also requires the IRS to notify organizations that are required to file an annual information return, but have not done so for two consecutive years, of the automatic revocation of exemption that occurs when an exempt organization fails to file a required return for three consecutive years. Of course, this notification is unlikely to be of any help for organizations that fail to appropriately update their contact information on file with the IRS. 