The Internal Revenue Service made clear last week just how broken federal oversight of nonprofits has become when it announced that nonprofits (other than charities) no longer need to tell the agency the names of people who give $5,000 or more.
Thus the IRS has decided it does not need to know the funding sources of advocacy groups like the American Civil Liberties Union and the National Rifle Association, which have charitable arms but raise a big share of their money through related tax-exempt organizations classified under Section 501(c)(4) of the tax code. Trade associations like the Chamber of Commerce, which are tax-exempt under another part of the tax code, are also affected.
The IRS’s change was in response to intense congressional and outside pressure and so should come as no surprise. And on the surface, the tax agency’s action may seem like a benefit for nonprofits because it further promotes donor privacy.
But putting the IRS in the dark about funding sources is reckless and extremely short-sighted. The lack of disclosure will facilitate the further degradation of the nonprofit world to the benefit of foreign nationals, wealthy influence peddlers, and the outright corrupt.
Here’s what to worry about:
Meddling by Foreign Sources
First, nondisclosure of donor information will make it easier for foreign nationals to intervene illegally in U.S. elections.
Many tax-exempt groups are deeply involved in the U.S. political process and spend heavily each election cycle on behalf of candidates. Nondisclosure of donors means that the government will no longer know who is financing the political activity of those groups.
A foreign national (say, a Russian) could contribute millions of dollars to a social-welfare organization that spends up to half of its money on campaigns. The source of its funding will be a mystery.
Although the administration says the IRS can still get the information if it asks directly, the underfunded and already timid agency will have no reason to audit the organization or inquire as to its funding source as long as the organization stays within the (very fuzzy) limits on political activity.
Second, dropping donor disclosure entrenches the use of nonprofits for “dark money” while highlighting the irrational inconsistency of current law.
Donors to PACs and super PACs have long been made public because of the risk of corruption; donors that do the same thing by giving to other types of groups are now completely secret. Thus, the IRS’s change is an open invitation to use nonprofits for dark money, which will lead to further loss of the public’s trust in all nonprofits.
Undermining Trust
Third, nondisclosure of donor information will facilitate the improper use of charitable donations for political purposes, which will further undermine trust in charities.
Politically motivated donors in search of a tax deduction will find it much easier to flow political money through charities to social-welfare groups.
Previously, if a 501(c)(4) spent heavily on elections, the IRS could simply check the group’s return to see whether any of the money came from a charity and decide whether to investigate further.
But now, the IRS will be effectively clueless, making it much harder to track whether charitable money is being used for politics. As a result, we should expect that more dark money will flow through charities, some of which will be created for the purpose of laundering tax-deductible money.
Fourth, nondisclosure of donor information will facilitate the wholesale corruption of nonprofit organizations to advance donor interests instead of nonprofit interests.
For example, many 501(c)(4)s run significant businesses on behalf of their members (offering insurance products, for instance). Not much imagination is required to think that a company might donate to the nonprofit (which, wink, wink, coincidentally leads to an increase in salaries of top nonprofit personnel) in exchange for the nonprofit using the company’s services, perhaps at non-competitive prices. Self-dealing relationships like this are easier to spot if the IRS knows the identity of donors.
Further, Congress (ostensibly) believes it is important to police these transactions given that 501(c)(4) organizations are subject to the same self-dealing rules that apply to charities; yet now the IRS will not have key information to decide whether transactions with donors warrant further scrutiny.
The concern is not limited to 501(c)(4)s but includes veteran’s organizations (which are often a source of scams and which receive deductible contributions), labor unions, trade associations, and a wide array of other community-benefit groups that remain tax-exempt on the condition that insiders do not benefit financially.
Deterring Bad Behavior
Given all the damage that will be wrought by dropping the disclosure requirement, it might seem surprising that during the Obama administration, former IRS Commissioner John Koskinen appeared willing to take a similar action.
Like President Trump’s Treasury Secretary Steven Mnuchin, Koskinen seemed to agree that the IRS does not use the information and therefore could stop collecting it. However, the IRS’s failure to use donor information in a systematic way does not prove its irrelevance.
The fact that donors must disclose their identity and that the government has access to the information, should it choose to look, is a deterrent to abusive and illegal behavior.
Unfortunately, the IRS’s supine willingness to drop the disclosure requirement makes clear that the agency has little interest in monitoring nonprofits. For the IRS, there is no upside: The area is fraught with political peril (recall the efforts to impeach Koskinen) but without the promise of raising revenue.
Unfounded Fears of Harassment
All that said, it’s worth understanding and assessing the arguments for ending donor disclosure.
Proponents of the change say donors are worried about harassment. Because some nonprofits pursue ideological and political activities, if donor lists become publicly known (through unauthorized and accidental disclosure by the IRS), donors then might face harassment by those who disagree with their views.
In addition, donors fear harassment by the IRS. The (false) narrative of the past five years has been that the IRS, in the aftermath of the Citizens United decision, ideologically persecuted conservative 501(c)(4) groups because of their political beliefs. Presumably, if the IRS does not have donor information, donors have less to fear (so the argument goes) from an ideologically driven deep-state bureaucracy within the IRS.
The fear of harassment from political opponents, the press, and others would be somewhat sympathetic if there was evidence of widespread harm from an epidemic of unauthorized disclosures, but there is no such evidence.
Further, concerns about the IRS deliberately misusing the information are just a convenient and partisan justification for the change, and without merit.(Notably, donor fear of harassment does not prevent the public disclosure of political contributions, which has long been held to be in the public interest to prevent corruption.)
Regardless, given that unauthorized disclosure of donor information occasionally occurs, surely there must be rational ways to reduce donor fear that preserve the IRS’s vital oversight role. But nondisclosure as a remedy is like unilateral disarmament.
Sadly, the loss of donor disclosure is another step toward a corrupt and unregulated nonprofit arena.
If the decision has a silver lining, perhaps it is that the pressure to abolish donor disclosure for charities, which is still required, will recede. Or perhaps the scandals in the nonprofit world will become so prevalent that Congress and the IRS will finally get serious about overhauling the system.
Roger Colinvaux is professor of law at Catholic University of America, where he also directs the law and public-policy program at the Columbus School of Law. He worked as a legislative counsel at Congress’s Joint Committee on Taxation from 2001 to 2008.
