Schedule B Target Of Federal Legislation

May 4, 2016       Mark Hrywna      

Federal legislation released by the House Ways and Means Committee would eliminate the requirement of nonprofit organizations to identify major donors when filing annual tax returns with the Internal Revenue Service (IRS).

“Preventing IRS Abuse and Protecting Free Speech Act” (H.R. 5053) was introduced in the House on April 26, sponsored by Rep. Peter Roskam (R-Ill.), chairman of the Ways and Means Subcommittee on Oversight. Two days later, the committee approved the bill by a party-line vote of 23-15, with Republicans voting in favor and Democrats against. No word on whether the legislation will be scheduled for a floor vote anytime soon.

The bill would amend the Internal Revenue Code of 1986 to prohibit the Secretary of the Treasury from requiring that the identity of contributors to 501(c) organizations be included in annual returns. The Joint Committee on Taxation estimated the bill would reduce federal revenue by about $16 million over a decade.

Schedule B typically identifies donors who have given $5,000 or more to an organization. The document has become a legal battleground in California and New York as organizations fight attorneys general trying to require organizations to file the document with charitable registrations. Nonprofits file Schedule B with the IRS as part of their annual Form 990 that’s not disclosed publicly.

“The IRS has a miserable track record when it comes to safeguarding sensitive data and a history of targeting nonprofit groups that disagree with the Obama Administration’s policies,” Roskam said via a statement. “There is no reason we should require charities to expend valuable resources to compile and send any more information than the IRS needs to do its job. We’re not changing the law, just eliminating the requirement to file an extra form the IRS doesn’t need anyway,” he said. “Anyone looking to circumvent the law would not file a Schedule B in the first place or would file one with incorrect information. Schedule B does not play a role in the enforcement of our nation’s election laws,” he said.

Proponents of the bill point to the IRS even considering eliminating the requirement of Schedule B, referring to comments Exempt Organizations Division Director Tamara Ripperda made last December during an Urban Institute panel discussion about nonprofit regulation.

“Certainly the IRS and Treasury – and Congress which enacted the original requirement – considered donor information to be important for purposes of assessing the nature and purpose of a tax-exempt organization, a fact confirmed by the U.S. Tax Court in the American Campaign Academy decision years ago, among others,” said Marc Owens, a partner at the law firm of Loeb & Loeb and a former director of the IRS Exempt Organizations Division. “As noted in that case, the source and amount of funding can be an important indicator of private benefit in the (c)(3) and (c)(4) context,” he said.

U.S. Rep. Xavier Becerra (D-Calif.) said during last week’s hearing that he feared the bill would create a loophole for foreign governments or drug traffickers to use their money to influence government without disclosure. “The last thing we should do is give donors a license to hide their money. Who knows what they’ll do with it. For the most part, we’ve seen this process work very well. Most Americans don’t have wherewithal to be giving $5,000 to select organizations,” he said.

The Center for Competitive Politics (CCP) President David Keating thanked Roskam in a letter supporting the legislation. CCP has been in a legal battle with California Attorney General Kamala Harris over requirements that it file Schedule B with the state. He said the argument of undue influence by outside groups is only meant to “whip up hysteria,” as the reporting requirement does not stop organizations that want to launder foreign money into federal elections.

“The bill is a step backward for transparency and disclosure of politically active nonprofits, and would throw the IRS’s ability to enforce the law into serious doubt,” Sunlight Foundation Director John Wonderlich said in a statement. “The IRS is an important line of defense against a potential foreign company, foreign individual or foreign government donating to a nonprofit that can pour unlimited, undisclosed money into our elections,” he said.

The Sunlight Foundation sent a letter to members of the House Ways and Means Committee that also was signed by the Brennan Center for Justice, Campaign Legal Center, Common Cause, CREW, Public Citizen, and The Rootstrikers project at Demand Progress.