IRS Finalizes Rule Ending Donor Reporting Requirement

(Parker Tax Publishing June 2020)

The IRS issued final regulations under Code Sec. 6033 that remove the general requirement for tax-exempt organizations, other than those described in Code Sec. 501(c)(3) or Code Sec. 527, to report the names and addresses of contributors of more than $5,000 on their annual information returns. The final regulations also remove the requirement to provide the names of contributors who contribute over $1,000 for a specific charitable purpose to organizations described in Code Sec. 501(c)(7) (social clubs), Code Sec. 501(c)(8) (fraternal beneficiary societies), and Code Sec. 501(c)(10) (domestic fraternal societies). T.D. 9898.

Background

Under Code Sec. 6033(a)(1), organizations that are tax exempt under Code Sec. 501(a) must file an annual information return and keep such records as are prescribed by the IRS. The returns required under Code Sec. 6033 are Forms 990, Return of Organization Exempt From Income Tax; 990-EZ, Short Form Return of Organization Exempt From Income Tax; 990-PF, Return of Private Foundation; and 990-BL, Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Persons. This requirement also applies to certain political organizations described in Code Sec. 527(e)(1) (Code Sec. 527 organizations).

The annual filing requirement in Code Sec. 6033(a)(1) does not apply to any organization (other than a private foundation) that is described in Code Sec. 6033(a)(3)(C) whose gross receipts are not normally more than $5,000 annually. Code Sec. 6033(a)(3)(B) gives the IRS discretionary authority to relieve any organization required to file under Code Sec. 6033(a)(1) from filing an information return if it determines that such filing is not necessary to the efficient administration of the internal revenue laws. In Rev. Proc. 2011-15, the IRS exercised its discretion to provide that most organizations that are exempt under Code Sec. 501(a) with gross receipts under $50,000 are not required to file a Form 990.

Under 6033(b)(5), Code Sec. 501(c)(3) organizations generally must provide on their annual information returns the names and addresses of persons who contribute $5,000 or more during the tax year (substantial contributors). Before being revised, Reg. Sec. 1.6033-2(a)(2)(ii)(F) had extended this requirement beyond Code Sec. 501(c)(3) organizations to all organizations exempt from tax under Code Sec. 501(a). In addition, Reg. Sec. 1.6033-2(a)(2)(iii)(D) provided that organizations described in Code Sec. 501(c)(7) (social clubs), 501(c)(8) (fraternal beneficiary societies), or 501(c)(10) (domestic fraternal societies) generally must report the name of each person who contributes more than $1,000 to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals.

In Rev. Proc. 2018-38, the IRS granted tax-exempt organizations required to file the Form 990 or Form 990-EZ, other than organizations described in Code Sec. 501(c)(3), relief from reporting the names and addresses of contributors on Schedules B, Schedule of Contributors (or completing the similar portions of Part IV of the Form 990-BL). Rev. Proc. 2018-38 also provided that organizations described in Code Sec. 501(c)(7), (8), or (10) need not report the names and addresses of persons who contributed more than $1,000 during the tax year to be used for exclusively charitable purposes. Rev. Proc. 2018-38 did not affect the information required to be reported on Forms 990, 990-EZ, or 990-PF by Code Sec. 501(c)(3) or Code Sec. 527 organizations.

In 2019, the states of Montana and New Jersey sued the IRS, arguing that the issuance of Rev. Proc. 2018-38 was unlawful because the notice and comment procedures of the Administrative Procedure Act applied and Rev. Proc. 2018-38 had not been subject to those procedures. In Bullock v. IRS, 2019 PTC 290 (D. Mont. 2019), a district court agreed with the states and set aside Rev. Proc. 2018-38. However, the court stated that its ruling did not implicate the merits of the procedure and that the ultimate decision on reporting the names and addresses of contributors remained subject to the IRS's discretion.

In response to Bullock, the IRS issued proposed regulations under Code Sec. 6033 (REG-102508-16). The proposed regulations included the relief that the IRS attempted to provide in Rev. Proc. 2018-38, as well as certain other revisions to reflect statutory amendments to Code Sec. 6033 that had not been previously reflected in the regulations and certain instances (including Rev. Proc. 2011-15) where the IRS had previously exercised discretion to relieve organizations from the filing requirements in Code Sec. 6033.

Final Regulations

Last week, the IRS issued T.D. 9898, which finalized the proposed regulations with minor modifications. The final regulations provide that the gross receipts filing threshold for all tax-exempt organizations (other than private foundations and supporting organizations) formed in the United States is $50,000. The final regulations also clarify that Code Sec. 527 organizations with gross proceeds over $25,000 generally are subject to the reporting requirements under Code Sec. 6033(a)(1) in the same manner as tax-exempt organizations, and must continue to report the names and addresses of substantial contributors on Forms 990 or 990-EZ.

For organizations other than Code Sec. 501(c)(3) and Code Sec. 527 organizations, the final regulations remove the requirement to report annually the names and addresses of substantial contributors. The final regulations also remove the requirement to provide the names of contributors who contribute over $1,000 for a specific charitable purpose to organizations described in Code Sec. 501(c)(7), (8), and (10).

Observation: In Bullock, the states argued that they were affected by the donor reporting changes in Rev. Proc. 2018-38 because they used Schedule B information shared by the IRS under Code Sec. 6103(d) or Code Sec. 6104(c) to enforce state campaign finance and consumer protection laws. The IRS received comments on the proposed regulations that echoed these concerns. In the preamble to T.D. 9898, the IRS responded that when states receive Schedule B information, the use of that information is limited to the administration of state laws relating to the solicitation or administration of charitable funds or charitable assets of tax exempt organizations, and the use of returns or return information for other purposes is not consistent with states' authorized use under Code Secs. 6103(d) and 6104(c). The IRS said that, to the extent any state determines that the burdens of collecting and maintaining donor information are justified by its own needs, such state is free to require reporting of such information to the state and to maintain the information at the state's own expense.

The final regulations apply to returns filed after May 28, 2020. However, organizations may choose to apply the final regulations to returns filed after September 6, 2019.

For a discussion of the annual reporting requirements for tax exempt organizations, see Parker Tax ¶65,510.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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