The IRS announced Monday that it would no longer require certain organizations with tax-exempt status to identify financial donors on their tax returns. The rule goes into effect for tax returns filed in 2019 and applies primarily to groups that classify themselves as “social welfare” organizations and who fall under the umbrella of section 501(c)(4) of the US tax code. Organizations classified as 501(c)(3), those operating as public charities or private foundations, are still required to report the identity of their donors on their tax returns.
Prior to last Monday’s change, tax-exempt social welfare organizations were required to report the names of donors to the government if their contribution was over $5,000. The public did not have access to who donated and what amount, but the government could keep an eye on which organizations were receiving large amounts of money and from whom they were receiving it. Now however, under the new reporting requirements, not even the IRS will know who donors are.
The change comes four years after the IRS allegedly targeted conservative non-profit groups seeking tax-exempt status. Several Republicans claimed that the scrutiny was mainly because the targeted groups were political opponents of the Democratic Party and the Obama administration. The scandal loomed over the Obama administration leading to long congressional hearings and ramped up media coverage. In response to the change, The US Treasury Department asserts that exemption of personally identifiable information of financial donors on 501(c)(4) tax returns will, “better protect taxpayers by reducing the risk of inadvertent disclosure or misuse of confidential information—an especially important safeguard for organizations engaged in free speech and free association protected by the First Amendment.” It is also a measure to save private and government resources by eliminating unnecessary paperwork and claims that the move will not limit transparency, as the information available to the public remains unchanged.
Although the US Treasury Department appears to have noble intentions implementing the new policy, the change in reporting requirements opens up the floodgates for ‘dark money’ to start pouring into 501(c)(4) organizations. While most 501(c)(4)s are non-political and do truly exist for social welfare purposes, there do exist several more politically oriented groups, such as Planned Parenthood, The American Association of Retired Persons (AARP), and the National Rifle Association (NRA). Some worry that this will leave opportunities for foreign money to make its way into financing American political interests. Previously, 501(c)(4)s were prohibited from accepting foreign donations to influence political campaigns and the former IRS reporting requirements ensured that no foreign money was used for those purposes. Now however, being that there is no requirement to report donor names at all, the government will have no way of enforcing the use of foreign money to influence American politics.
The news of this change comes at an interesting time, just one day after President Trump’s meeting with Russian President Vladimir Putin in Helsinki. On the same day, the Justice Department charged Maria Butina, a Russian national and gun rights activist with ties to the NRA, with acting as a covert agent to influence politics in the United States. There is immediate concern that this new loophole in the tax law could be a direct avenue for foreign governments and interest groups to pump ‘dark money’ undetected into organizations that hold great political influence among American voters. Left unchecked, the potential rising tide of ‘dark money’ could stealthily undermine the heart of American democracy.