Question: Recently, a nonprofit organization I personally support was attacked by a partisan political group, which used the nonprofit’s IRS Form 990 to learn that I had contributed to this organization whose work it opposes. I thought nonprofits did not reveal the names of individual donors on their Form 990s, but this nonprofit tells me recent changes in IRS reporting laws have exposed all donors, and especially individuals, to public scrutiny. Why did the nonprofit have to disclose my name to the IRS, and what can I do to protect myself in the future?
Answer: For most nonprofit groups, information on their financial supporters is very sensitive and is generally held confidential. In fact, the First Amendment protects donor information against disclosure under most circumstances. But two years ago, a serious problem arose that jeopardizes the anonymity of individual donors (they are more affected than private foundations, which have to report their grants publicly). Up to and including the year 2000 (that is, for Form 990 tax returns for years 1999 and before), the IRS clearly permitted nonprofit groups to submit any required donor information on an attachment that was not disclosed to the public.
In 2001, however, the IRS began requiring nonprofits to list any donor information that previously would have been attached on separate pages on Schedule B of Form 990. Although Schedule B said at the top, “This form is generally not open to public inspection except for [political] organizations,” the IRS nonetheless released Schedule B information to the public when it routinely made Form 990s available to Guidestar (an Internet public disclosure site: www.guidestar.org). Although Guidestar did not post some of the Schedule B information it received, many organizations became concerned when they learned that groups could access Schedule B information in other ways and identify a nonprofit’s donors. The IRS, relying on an internal memorandum, now maintains that it had to make publicly available at least some information on Schedule B, though some information may remain confidential.
The newly available information is apparently being used in a manner that is objectionable to some groups. For example, a recent report to the American Bar Association’s Tax Exempt Organizations Committee indicates that some persons are apparently conducting opposition research using Schedule B to “piece together profiles of the major donors to charitable organizations whose ideologies or causes they wish to disrupt and disparage. This growing industry involves the use of expanding Internet databases, pretext telephone calls from investigative reporters, and information matching techniques that surpass the capacity of the IRS itself.”
Putting it bluntly, former IRS Director Marcus Owens and attorney Greg Colvin recently wrote, “In essence, we suspect that the IRS has unwittingly permitted itself to become an accomplice to a massive invasion of taxpayer privacy through the release of exempt organization information.”
For donors, the good news is that this was primarily a Tax Year 2000 filing issue. Although the initial error was the IRS’s in printing forms with inconsistent (and incorrect) instructions, the errors were compounded by confusion in the exempt organizations community. The IRS has changed the forms and somewhat clarified the instructions, but the bad news is that the IRS still insists that it must disclose information which tax-exempt lawyers believe should still be private. Despite the IRS correction to the form, however, a significant concern remains for those nonprofits that list donors when they file the Form 990, especially given the IRS’s shifting instructions.
Opinions about this problem vary among nonprofit attorneys and other experts. Some believe that the changes to the latest IRS forms resolve the disclosure problem. Others believe there is still reason to suspect the IRS will disclose at least some Schedule B information.
Donors should be reassured that their personal information will not be disclosed unless legally required, but they should still take steps to be sure that the organizations which actually do the reporting are both aware of the issue and taking steps to comply in the proper spirit. This is an improvement over last year, but we still aren’t at a safe harbor where vigilance can be relaxed. If you have a specific question about how your information is reported, you should consult an attorney who understands these specialized tax issues.
Barnaby Zall is an attorney with th firm Weinberg & Jacobs, LLP, in Rockville, Maryland. The questions and answers presented here are illustrative only and should not be considered tax or legal advice. Please consult with a nonprofit attorney or other qualified adviser for answers to specific questions.