Charities Worried About 'Dangerous' IRS Proposal
In late September, the Internal Revenue Service (IRS) proposed a new substantiation rule that would allow charities to self-report donations of more than $250. Under current rules, donors wishing to claim a charitable income tax deduction are required to obtain and submit a contemporaneous written acknowledgement (CWA) from the nonprofit receiving the donation. It's a fairly straightforward system, but it places reporting responsibilities on the donor—if the donor loses the receipt or the charity fails to provide one, the claim won't pass an IRS audit.
The new proposal aims to fix that issue, but there's a catch: The reporting charity would be required to collect donors' names, addresses and Social Security numbers.
That last item has U.S. nonprofits worried. Critics of the proposal have pointed out that collecting and safeguarding donors' Social Security numbers would be incredibly difficult for many organizations, and more importantly, would put sensitive donor information at risk. The National Council of Nonprofits, one of the most outspoken opponents of the new rule, voiced those concerns in a statement:
The National Council of Nonprofits’ position is that the proposed voluntary reporting regime is inappropriate because the process could impose significant costs and burdens on nonprofit organizations, would create public confusion and disincentives for donors to support the work of nonprofits, and could lead fraudulent actors to increase targeting donors and reputable nonprofit organizations. Moreover, Treasury and the IRS state in the proposed rule that the current system of contemporaneous written acknowledgement of donations “works effectively, with the minimal burden on donors and donees.” Adding a potentially confusing parallel reporting regime that needlessly introduces the risks of fraud, identity theft and decreased donations to the community should be rejected.
It's a laundry list of concerns, but one in particular—the potential for a huge drop-off in donations should donors feel uncomfortable handing out their Social Security numbers—is causing existential dread for nonprofits, and understandably so. Donor retention is an ongoing struggle, and it's not getting any easier. Charities fear that asking for sensitive information would only make things worse. "The proposed substantiation requirement is a terrible and dangerous idea," said one commenter on the proposal's Regulations.gov page. "With identity theft being a major and potentially disastrous problem today and for the future, creating a requirement that requires sharing sensitive personal information in the form of a [Social Security account number (SSAN)], or even an address will chill donors to not-for-profit organizations. As a small but significant donor to many organizations, I would certainly have to rethink my willingness to share my SSAN with the world through this reporting mechanism. I can't believe this hasn't crossed the minds of those proposing this unnecessary regulation. Please do not institute this new rule."
Much of the issue is seemingly rooted in an inherent distrust for the IRS within the nonprofit sector, no doubt stemming from the organization's still-simmering targeting controversy. The new substantiation rule would be voluntary—charities that do not wish to report donations could simply keep using the CWA system—but many nonprofits fear it lays the groundwork for mandatory reporting. "The voluntary nature of the proposed disclosure does not make it less dangerous," said the National Legal and Policy Center in a statement. "Should the IRS at some future time deem voluntary disclosure a 'success,' it will no doubt propose mandatory disclosure." Almost a third of the 600-plus comments on Regulations.gov expressed similar concerns.
And while those fears are predicated on a slippery slope argument, the IRS has done itself no favors. The organization itself advises against sharing Social Security numbers unless "absolutely necessary," yet the new rule would require it. And, as mentioned above by the National Council of Nonprofits, the IRS explicitly noted that there was nothing wrong with the old system, and that there were virtually no calls from nonprofits or donors to amend it. "The present CWA system works effectively, with minimal burden on donors and donees, and the Treasury Department and the IRS have received few requests since the issuance of TD 8690 to implement a donee reporting system," reads the proposal.
Why fix something that isn't broken? For most nonprofits, it doesn't add up.
The Senate on Friday introduced a bill that would block the rule change. But the IRS, for its part, has maintained that the proposal is intended as no more than an alternative, and has actively encouraged discussion on the issue. “The IRS is sensitive to the concerns expressed to this point, and encourages comments from the charitable community and other affected parties,” said the organization in statement, according to Accounting Today. “The IRS continues to review public comments as they are received, and the comment period remains open until Dec. 16, 2015.”
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