NTUF to Ways & Means: IRS is Ill-Equipped to Regulate Expanded Nonprofit Donor Disclosure

Should the federal government expand regulation of political activity? If so, should this power be given to the IRS? Should all non-profits be subject to additional disclosure requirements? These are questions we answer in a submission to the U.S. House Committee on Ways & Means in response to a Request for Information (“RFI”) asking about expanded donor disclosure. 

The IRS is a tax agency, focused on collecting revenue. But it currently must define political activity, as it grants or denies tax-exempt status to organizations in part based on how much political the nonprofit engages in. The Internal Revenue Code does not define “political activity” so the IRS has come up with an eleven factor “facts and circumstances” test that is ambiguous enough to be likely unconstitutional and in practice unworkable in the real world.

The IRS itself cannot apply these rules consistently or correctly. Ten years ago Lois Lerner’s “Exempt Organizations” branch defaulted to key word searches and other arbitrary methods to enforce the political activity rules. The so-called “Tea Party” groups were the hardest hit with denial of tax exempt status, audits, and enforcement. The Treasury Department’s Inspector General for Tax Administration determined that Tea Party groups were unfairly targeted. Worse, because of restrictions on access of taxpayers to courts, the Tea Party groups struggled to defend themselves against Lois Lerner’s wayward bureaucrats. 

Instead of handing more power to the IRS to oversee political activity, Congress should recognize that other agencies have greater expertise in these matters. If the worry is about foreign influence, for example, then the Foreign Agents Registration Act (“FARA”) gives the Attorney General oversight, not the IRS. Or if it is more serious espionage-like activity, then our national security apparatus is better suited to detect and counter any threat than the IRS will ever be. And if the worry is about political activity generally and when donor disclosure is appropriate, then Congress already told the IRS to work closely with the Federal Election Commission (FEC). The FEC has spent decades writing policy, hearing comments, and defending itself in court on the nuances of regulating political speech—which lies at the core of the First Amendment. 

As for new reporting requirements to be placed on all nonprofits, we have long argued that nonprofit tax forms (Form 990) are too complicated as it is. We should not add new things to track and disclose on the bloated and outdated form. Instead we should be simplifying Form 990 and focusing on what is essential for good oversight of nonprofit organizations.

Much of the RFI asked about expanded donor disclosure. The U.S. Supreme Court has long protected the right to privately associate because if the government can compel donor or member lists to organizations, it can also pressure these groups to quiet their speech or change their message. Even the mere public disclosure of donors can be enough for private citizens to bring pressure too. This danger is not limited to one ideology. Whatever group is out of power at the moment would face danger. 

In short, we write that the IRS is ill equipped to navigate these rough constitutional waters. The IRS should focus on collecting tax revenue and helping taxpayers. Giving the IRS new powers to police speech is a bad idea.

Read our full submission here.