Editor: Susan Minasian Grais, CPA, J.D., LL.M.
The IRS recently issued proposed regulations (REG-102508-16) to clarify and update the reporting requirements that apply to tax-exempt organizations. The proposed regulations follow in the wake of a court decision that set aside the Service's attempt to change donor-reporting rules for most non-501(c)(3) organizations (Rev. Proc. 2018-38). The federal court held that if the IRS wishes to stop requiring certain data about substantial financial donors, it must follow a more formal rulemaking procedure. In response to the ruling, the IRS initiated this notice-and-comment process. The proposed regulations would generally reiterate the guidance previously issued in Rev. Proc. 2018-38, while also incorporating certain other subregulatory guidance and statutory changes.
Concurrently, the IRS issued Notice 2019-47 to provide penalty relief for non-501(c)(3) organizations exempt from tax under Sec. 501(a) that did not report contributors' names and addresses in reliance on Rev. Proc. 2018-38 before it was set aside by the court.
In July 2018, the IRS issued Rev. Proc. 2018-38, announcing that it was ending the requirement for Sec. 501(a) tax-exempt organizations, other than Sec. 501(c)(3) organizations and Sec. 527 political organizations, to report the names and addresses of their contributors on Schedule B of Form 990, Return of Organization Exempt From Income Tax, or 990-EZ, Short Form Return of Organization Exempt From Income Tax. The revised reporting requirements described in Rev. Proc. 2018-38 were stated to apply to returns for tax years ending on or after Dec. 31, 2018.
On July 30, 2019, the U.S. District Court for the District of Montana released its decision in Bullock, No. 4:18-cv-00103-BMM (D. Mont. 7/30/19), in which it determined that the IRS should have followed the notice-and-comment procedures of the Administrative Procedure Act in issuing the guidance in Rev. Proc. 2018-38. Accordingly, the court set aside the revenue procedure, holding that it was unlawful.
The proposed regulations would modify the existing regulations under Sec. 6033 to generally adopt the guidance issued in Rev. Proc. 2018-38, as well as to update the regulations to reflect certain other subregulatory guidance and statutory changes. As such, the proposed regulations are intended to more accurately and comprehensively reflect current reporting requirements applicable to exempt organizations.
The regulations are proposed to be effective as of the date of publication of final regulations adopting the rules. The IRS states that tax-exempt organizations may choose to apply those final regulations, once effective, to returns filed after the date of filing of the proposed regulations.
The proposed rules include the following provisions.
Items required in annual information returns: The proposed regulations would amend Regs. Sec. 1.6033-2(a)(2)(ii) to add two annual reporting requirements that are mandated by statute but were not previously mentioned in the regulations, specifically:
- Sec. 6033(b)(10), relating to taxes imposed on certain lobbying and political expenditures by organizations described in Sec. 501(c)(3); and
- Sec. 6033(b)(11), relating to taxes imposed with respect to an organization, an organization manager, or any disqualified person on any excess benefit transaction under Sec. 4958.
In addition, the proposed regulations would incorporate the statutory reporting requirements in Sec. 6033(h) for controlling organizations, Sec. 6033(k) for sponsoring organizations, and Sec. 6033(l) for supporting organizations.
Gross receipts filing threshold: The proposed regulations would amend Regs. Sec. 1.6033-2(g)(1)(iii) to reflect the $50,000 gross receipts filing threshold currently in effect under Rev. Proc. 2011-15 (rather than the $5,000 gross receipts threshold found in Sec. 6033(a)(3)(A)(ii)). The proposed regulations would also make clear that the $50,000 threshold applies to organizations other than those listed in Sec. 6033(a)(3)(C). Accordingly, they would specify that the gross receipts filing threshold for all organizations (other than private foundations and supporting organizations) formed in the United States would be $50,000.
Clarifying reporting requirements of Sec. 527 organizations: The proposed regulations would add Regs. Sec. 1.6033-2(a)(5) to state that Sec. 527 organizations, subject to certain specified exceptions, generally must follow the reporting requirements under Sec. 6033(a)(1) in the same manner as tax-exempt organizations. The proposed regulations would further state that Sec. 527 organizations, like organizations described in Sec. 501(c)(3), must continue to report the names and addresses of substantial donors on their annual Forms 990 or 990-EZ.
Reporting donors' names and addresses: The proposed regulations would state that the requirement to report the names and addresses of substantial contributors would generally apply only to exempt organizations described in Secs. 501(c)(3) and 527. By reducing the number of organizations providing the names and addresses of contributors, there is less potential for inadvertent disclosure of information not open to public inspection. However, tax-exempt organizations must still file Schedule L, Transactions With Interested Persons, of Forms 990 or 990-EZ identifying transactions between the organization and interested persons (including substantial contributors) that may indicate possible risks of private benefit or inurement.
Importantly, tax-exempt organizations would still be required to report the dollar amounts of contributions from each substantial contributor and maintain the names and addresses of substantial contributors in their books and records should the IRS need this information on a case-by-case basis.
Notice 2019-47 provides penalty relief under Sec. 6652(c) for organizations that relied on Rev. Proc. 2018-38 before it was set aside by the court in Bullock. The notice states that the IRS will not impose those penalties for non-501(c)(3) organizations exempt from tax under Sec. 501(a) for failure to report the names and addresses of their contributors on the Schedule B, Schedule of Contributors, of their Forms 990 or 990-EZ filed for a tax year ending on or after Dec. 31, 2018, and on or before July 30, 2019. Exempt organizations may still be liable for penalties under Sec. 6652(c) for failure to report any information required under Sec. 6033(a) that is unrelated to the donor information described in Rev. Proc. 2018-38.
Treasury's decision to issue proposed regulations that substantially mirror the substance of Rev. Proc. 2018-38 confirms its intention to help decrease compliance burdens and protect donor privacy for affected organizations. Treasury has retained, however, the name-and-address disclosure requirement for Sec. 501(c)(3) organizations and Sec. 527 political organizations.
The additional changes included in the proposed regulations largely serve to bring some of the related disclosure requirements and thresholds in line with current statutory requirements. This should help to further simplify and standardize the compliance process.
Given the public discourse that has arisen after the initial publication of Rev. Proc. 2018-38, as well as the decision in Bullock, the possibility exists that the final regulations will contain significant changes following the notice-and-comment period, which ended Dec. 9, 2019.
Finally, the penalty relief provided in Notice 2019-47 is automatic in nature and does not require any additional action or documentation on the taxpayer's part to take advantage of it. Although the IRS has provided penalty relief for taxpayers, organizations should continue to keep records of contributor information because the IRS can still require access to these names and addresses during an examination or enforcement proceeding.
Susan Minasian Grais, CPA, J.D., LL.M., is a managing director at Ernst & Young LLP in Washington, D.C.
For additional information about these items, contact Ms. Grais at 202-327-8788 or firstname.lastname@example.org.
Contributors are members of or associated with Ernst & Young LLP. Versions of many of these items were previously published as Ernst & Young Tax Alerts.