How a Nonprofit Can Attract A Regulatory Probe … Fast
06.08.2023 | Linda J. Rosenthal, JD
The Internal Revenue Service has been tinkering around with the rules about substantiating charitable donations of more than $250. The agency wants to know what you think – by December 16, 2015.
exercise their rights to submit comments to the proposed regulations in order to explain the real-world consequences of the rule to help inform government officials before a final decision is made.
In other words, this influential group wants you to tell these regulators to ditch the proposed regulations. First, they aren’t needed; government officials admit (in the Federal Register announcement of the rule change) that the current system of documenting charitable donations works just fine in most cases, and the proposed fix “creates entirely unnecessary burdens, risks, and problems – not the least of which is the requirement to “ask for, store, and report donor Social Security numbers”:
The Internal Revenue Service is proposing a voluntary nonprofit reporting regime that encourages nonprofits to ask for, store, and report donor Social Security numbers. The proposed regulations would give nonprofits the option of filing a separate new information return with the IRS and individual donors by February 28 every year to substantiate contributions of more than $250. A similar mandatory proposal was considered and rejected in the past based on numerous legal, policy, and confidentiality problems it raised.
The National Council of Nonprofits has published a thoughtful, detailed analysis; here, though, we’ll summarize what’s it all about and why NCP thinks the proposed regulation is a bad idea.
[t]he present [contemporaneous written acknowledgement] system works effectively, with minimal burden on donors and donees, and the Treasury Department and the IRS have received few requests since […the 1990’s…] to implement a donee reporting system.
So what prompted action in 2015 to implement this alternative of a donee reporting form?
In recent years, some taxpayers under examination for their claimed charitable contribution deductions have argued that a failure to comply with the CWA requirements of section 170(f)(8)(A) may be cured if the donee organization files an amended Form 990, “Return of Organization Exempt From Income Tax,” that includes the information described in section 170(f)(8)(B) for the contribution at issue. These taxpayers argue that an amended Form 990 constitutes permissible donee reporting within the meaning of section 170(f)(8)(D), even if the amended Form 990 is submitted to the IRS many years after the purported charitable contribution was made.
To help out “some taxpayers,” the Treasury Department decided to go ahead and propose regulations “prescribing the method by which donee reporting may be accomplished.”
Having decided that “…the form 990 is unsuitable for donee reporting” because “…the form 990 doesn’t protect donor privacy sufficiently,” the government now proposes an alternate donee reporting form – which, by the way, it hasn’t yet developed.
The National Council of Nonprofits does a good job of summarizing the change:
[The Treasury Department has] published proposed regulations … that would permit, but not require, charitable nonprofits to file a new, separate information return with the IRS (in addition to the Form 990) by February 28 every year to substantiate contributions of more than $250 in value. The new informational tax return (“Donee Report”) would require the nonprofit to collect the donor’s name, address, and Social Security number or other taxpayer identification number. Nonprofits taking this option would also be required by that date to provide a copy to each donor listed (but only the portion that contains “information related to that donor”).
The proposed regulations seek to create the process through which nonprofits report contributions directly to the IRS. It is important to note that any new Donee Report form proposed in the rulemaking would include the existing requirements for gift acknowledgements, but adds a fourth requirement: reporting the taxpayer’s Social Security number or other taxpayer identification number.
The proposed voluntary reporting regime is inappropriate because the process could impose significant costs and burdens on nonprofit organizations, would create public confusion and disincentives for donors to support the work of nonprofits, and could lead fraudulent actors to increase targeting donors and reputable nonprofit organizations. Moreover, Treasury and the IRS state in the background description of the proposed rule that the current system of contemporaneous written acknowledgement of donations “works effectively, with the minimal burden on donors and donees.” The proposal to add a potentially confusing parallel reporting regime that needlessly introduces the risks of fraud, identity theft, and decreased donations to the community should be rejected.
These critics point specifically to a 2009 GAO analysis of an earlier proposal to make this type of donee reporting a mandatory requirement. The report title says it all: “Requiring Information Reporting for Charitable Cash Contributions May Not Be an Effective Way to Improve Compliance.”
05.31.2023 | Linda J. Rosenthal, JD