American givers have traditionally enjoyed the right to donate to charities anonymously if they so wish. Some choose to do so out of a sense of modesty, for religious reasons or to avoid unwanted solicitations. In highly divisive times like we now face, some donors choose to remain private to avoid the potential for threats and harassment by those who do not share their values and goals. The U.S. Supreme Court recently confirmed the importance of the right to give privately, as a key parallel to our freedom of association, in its Americans for Prosperity Foundation v. Bonta decision.
While the IRS has historically held confidential the private information of taxpayers, including charitable foundations and individual donors, recent leaks make it all too clear: IRS data is no longer safe from the public eye. The ongoing problems with the IRS led to enforcement funding being dropped from the infrastructure bill and Congressional calls for investigations.
Why then are proponents of S. 1981, also known as the ACE Act, willing to expose the private financial information of charitable donors to the public? As we have discussed here before, S. 1981 would impose new rules and mandates on popular charitable vehicles like donor-advised funds (DAFs). In addition to the increased tax and administrative burdens on charitable organizations, there are three specific provisions in this bill that threaten donor privacy.
#1: Private foundations giving to DAFs would be required to report to the IRS annually the amount contributed to a DAF, the DAF sponsor and the “donation advice” given, if any.
There are many valid and useful ways that private foundations use DAFs to further their charitable missions. Privacy is a key driver behind some of these ways. A private foundation may use a DAF gift to protect donor information when granting to a controversial cause. Alternatively, a private foundation may wish to use a DAF to give anonymously for a one-time, off-mission grant, such as COVID relief, without opening the door for further solicitations.
It is not safe to assume that once given to the IRS, this information will not become public. Forcing disclosure of some donations may threaten the safety and well-being of donors as well as chill charitable giving overall.
#2: The bill would prohibit public charities from using anonymous DAF contributions to meet the public support test unless the donor is identified by name.
Under current law, public charities must demonstrate broad support from the public to obtain and retain public charity status. This bill would prohibit public charities from using DAF contributions to meet the public support test, unless: the DAF sponsoring organization identifies the donor by name, in which case the contribution is treated as coming from that donor; or the sponsoring organization specifies that no individual had advisory privileges over a contribution.
This bill ignores the fact that sponsoring organizations are themselves IRS-designated public charities and would also make it difficult for recipient charities to prove broad support with multiple, independent, anonymous DAF donations. With no evidence that public charities are systematically abusing DAF gifts to retain their charitable status, this provision would simply handcuff charities without solving any problem.
#3: Anonymous contributions of non-cash assets would be disallowed by requiring a formal acknowledgment that includes the name of the donor, sent to the IRS.
There are ample real-world examples of donors giving non-cash assets such as commercial real estate and operating businesses to a DAF sponsor to provide ongoing charitable funding over an extended period of time. The Communities Foundation of Texas, for example, outlines on its website several cases in which their donors were able to support their communities through the donation of such assets. In one such case, a donor with property in Dallas was able to contribute a percentage of a business into a DAF, where it can produce income that can be used for grantmaking to nonprofits. The bill is problematic in that it would force a sale of such an asset at the time of donation, which is likely to yield less money for charities overall.
Further, the bill disallows anonymous contributions of non-cash assets by requiring a formal acknowledgment that includes the name of the donor. Beyond the significant donor privacy concerns, the acknowledgment itself would impose new compliance costs onto DAF sponsors—themselves public charities.
Such forced disclosure of some donations and the intent behind them may threaten the safety and well-being of donors as well as chill charitable giving overall. This runs counter to the purported goal of the bill: to accelerate charitable giving. As the Supreme Court decision stated, “Each governmental demand for disclosure brings with it an additional risk of chill.” That is the last thing our vibrant charitable sector needs as it works to help our communities.