ANALYSIS: What Trump’s roll-back of IRS reporting requirements for non-profits means

On Monday, July 16, the U.S. Treasury and the IRS announced that certain non-profit organizations will no longer have to file personally identifiable information on their donors, as had previously been the practice. The rule required organizations list the names and addresses of all donors who contributed $5,000 or more.

While donor information was provided to the IRS, it was redacted in public records, meaning only government agency personnel had access to the data.

In his department’s announcement, U.S. Treasury Secretary Steven Mnuchin said:

“Americans shouldn’t be required to send the IRS information that it doesn’t need to effectively enforce our tax laws, and the IRS simply does not need tax returns with donor names and addresses to do its job in this area. It is important to emphasize that this change will in no way limit transparency.  The same information about tax-exempt organizations that was previously available to the public will continue to be available, while private taxpayer information will be better protected.”

While the explanation sounds simple, the action sparked outrage in some quarters. It leads one to wonder, why? How are the reporting requirements for nonprofit organizations related to politics and why are people losing their minds over a seemingly simple procedural change?

Context

Since the Federal Election Campaign Act of 1971 (FECA) and the subsequent creation of the Federal Election Commission (FEC) in 1975, money in politics has become the concern of the government.

In the ensuing decades, various court cases and legislative actions have sought to control the amounts and circumstances under which individuals, corporations, and nonprofit organizations can use their monetary resources to affect elections and public opinion surrounding various issues and candidates.

Two of these actions, in particular, set the stage for the current debate:

McCain-Feingold Act

The McCain-Feingold Act, otherwise known as the Bipartisan Campaign Reform Act of 2002 eliminated the use of soft money by political parties to fund advertising for their candidates. Soft money refers to unregulated donations, not covered by FECA. 

At the time, many states’ campaign finance regulations allowed corporations and unions to donate sometimes unlimited amounts of money to state parties and candidates – a practice prohibited by federal regulations. This money could then be funneled to federal parties and candidates, bypassing the federal limits and restrictions on donations.

According to Sen. John McCain, (R-Ariz.) during a floor debate:

“It is a key purpose of the bill to stop the use of soft money as a means of buying influence and access with Federal officeholders and candidates. Thus, we have established a system of prohibitions and limitations on the ability of Federal officeholders and candidates to raise, spend, and control soft money.”

Citizens United Decision

The Citizens United decision by the Supreme Court in 2010, resulted in 501(c)(4) social welfare organizations and others, being allowed to engage in political activity, which had previously been prohibited. That activity included, among other things, unlimited lobbying and engaging in partisan political campaign work. However, the organization’s political activities were to be secondary to their organization’s stated purpose.

This ruling resulted in a surge in applications for 501(c)(4) recognition. The IRS responded to this new influx by establishing internal guidelines to help ensure that organizations filing for nonprofit status under section 501(c)(4) were, indeed, social welfare organizations and that their activities substantially supported their stated purpose.

The fallout

This additional scrutiny drew criticism from organizations who perceived it to be based on political affiliation. In 2013, the Obama administration was accused of targeting conservative groups applying for nonprofit status. The controversy led to an investigation by the FBI into unfair targeting of applications for non-profit recognition based on name or policy affiliation.

While the Justice Department found no grounds for criminal prosecution, the Treasury Inspector General for Tax Administration’s audit found that groups with “Tea Party” or “Patriot” in their names received more scrutiny than others on their applications for tax-exempt status. To a lesser degree, organizations with “occupy” or “progressive” in their names were also subjected to increased scrutiny.

Additionally, in the case of The National Organization for Marriage, the IRS wrongfully released confidential information regarding its donors which was subsequently published on an opposing group’s website. The IRS, which admitted wrongdoing, was ordered to pay a $50,000 settlement to the organization.

In 2017, the Trump Justice Department settled two lawsuits with conservative organizations, resulting in a multi-million dollar settlement on one and an admission of wrongdoing on the other.

The redress

Given these issues, the Center for Individual Freedom and over 60 co-signatories — from the American Family Association to Freedom Works to the NRA — sought relief from what they described as “an increase in assaults against First Amendment free speech and association rights.”

In a May 15, 2018 letter to President Trump, Sec. Mnuchin and Congress, they go on to question the use of the donor information:

“Schedule B form and confidential donor information contained therein have been demanded and used by other government officials, specifically hyper-partisan state attorneys general, to harass and intimidate organizations and individual donors that do not share their ideological and political beliefs.”

The fact that this appeal followed the revelation that the FBI was investigating the possibility that Russian money was illegally funneled to the NRA to assist the Trump campaign could be cause for additional concern, although the investigation is still ongoing and no charges have been brought. 

Response from legislators

While the House passed a bill in 2016 to eliminate the requirement, the Obama administration opposed it and, with the help of Democrats, it did not become law. Without a legislative solution, the Trump administration took action through a rules change via the Treasury and IRS, which had the authority under U.S. law to do so.

The removal of the reporting requirement has received praise from the right and criticism from the left. Progressives see the change as undermining the federal government’s ability to detect illegal activities by nonprofits and conservatives see it as an affirmation of First Amendment rights to political free speech.

On the left

Sen. Ron Wyden (D-Ore.), the ranking member of the Senate Finance Committee, issued this statement shortly after the announcement:

“Trump’s Treasury Department made it easier for anonymous foreign donors to funnel dark money into nonprofits the same day a Russian national linked to the NRA was arrested for attempting to influence our elections.”

House Minority Leader Nancy Pelosi, (D-Calif), said:

“President Trump’s late-night giveaway to shady donors and interest groups makes dark money even darker. The NRA and other special interest groups can now fully operate in the shadows and push their corrupt agendas without any transparency or accountability.”

Montana Democrat Jon Tester introduced legislation to reverse the decision:

On the right

Senate Majority Leader Mitch McConnell (R-Ky.) said the move was a victory for free speech and a “straightforward, common-sense policy decision.”

“It’s particularly welcome news to those of us who are intently focused on defending the First Amendment, for those of us who raised concerns during the last administration about activist regulators punishing free speech and free association,” he said on the Senate floor. “The IRS will no longer pointlessly demand private contributor lists from whole categories of tax-exempt organizations.”

Blair Holmes, a spokesperson for the U.S. Chamber of Commerce, weighed in with this:

“This action will help ensure that sensitive donor information will not fall into the hands of those who wish to suppress the First Amendment right to free speech. The U.S. Chamber strongly supports the right of all organizations — no matter their ideological or political persuasion — to participate vigorously in our nation’s important policy conversations.”

Analysis

As Bradley Smith, a former chair of the Federal Election Commission has said, “One of the problems with campaign finance laws is that they are not nonpartisan, good government. . . . They are tools, partisan weapons to be used to attack the political power on the other side, and we should expect it to happen.”

Technically, the latest move by Treasury and the IRS does not involve a campaign finance law; however, because it affects organizations that are allowed to engage in political speech, it could be perceived as an attempt to obscure the source of money flowing into the political process.

While the donor records are still required to be maintained and can be requested as part of an audit, they will not be seen by the IRS as part of the organization’s tax return. It bears mention, however, that the IRS had no need for the donor records in executing its tax assessments on the organizations or its donors, since contributions to these organizations are not tax deductible.

It is highly doubtful that the Schedule B forms ever received much scrutiny — and certainly not at a level that could reasonably be called “oversight”.

The entity charged with oversight of elections and campaign finance is the FEC. Once the Citizens United decision opened the door for social welfare and other organizations to engage in political speech, the FEC should have moved to create comprehensive donor reporting requirements in order to ensure transparency. Instead, they instituted limited donor reporting requirements that can easily be avoided.

Perhaps the efforts and energies being directed toward the IRS and Treasury should be redirected to the entity best equipped to provide the desired result, especially with the cloud of Russian interference in our elections hanging overhead.

 

[Washington Post] [Wall Street Journal] [Politico] [NPR] [Washington Times] [Fox News] [John Samples. The Fallacy of Campaign Finance Reform, University of Chicago Press. ©2006 by The University of Chicago] [Photo courtesy Susan Walsh/AP via NPR]

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