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A Mostly Good Idea

Americans demand a lot from our government, and it costs a lot of money to deliver what we demand. So we need the Internal Revenue Service to collect the information necessary to administer and enforce the tax laws.

But nothing good can happen when the IRS collects information that it does not need in order to carry out its duties. While most of the time it does no harm, other than wasted effort on behalf of taxpayers as well as the Service, on occasion the extraneous information is going to be leaked or misused. Which is why the House recently passed a bill that it aptly named the “Preventing IRS Abuse and Protecting Free Speech Act.”

The legislation, authored by Peter Roskam, R-Illinois, and co-sponsored by 25 fellow Republicans, would prohibit the IRS from requiring tax-exempt organizations to report the names of their donors. Most organizations must disclose this information annually on Schedule B of Form 990 under current rules.

The donors’ identities are supposed to be redacted from the version of Schedule B that is released to the public, but there have been some slip-ups. In 2012, the IRS inadvertently revealed the identity of donors to the National Organization for Marriage; the mistake resulted in the government paying a $50,000 settlement to the organization.

Such leaks are a concern, but they are not the primary motivation behind the bill. Instead, it is a reaction to the Service’s political targeting of conservative-leaning not-for-profit organizations under the Obama administration.

The measure passed the House on a nearly party-line vote, 240-180. If it reaches a vote in the Senate this year, it will have a good chance of passage. However, it would have almost no chance of making it into law after a nearly certain veto by President Obama.

This is a shame, because the bill is based on a solid idea. For the most part, the IRS does not need to know who supports a tax-exempt group. In fact, the IRS itself considered eliminating Schedule B last year.

There is one big and obvious exception: the public charities and private foundations whose contributions are tax-deductible. Charities must already furnish written acknowledgements of contributions greater than $250 – donors cannot claim deductions without such an acknowledgment – and charities also must furnish acknowledgments for contributions of $75 or more when the donor receives something of value in return.

But how can the IRS most easily recognize a fraud if a donor falsely creates his own documentation of a large gift purportedly given to a charity? The simplest way is to cross-match the donation claimed by the donor against a list of donations provided by the charity in its annual filing. There is a clear public purpose in such cross-matching, or even just the potential for such cross-matching.

This rationale does not apply to advocacy groups such as the 501(c)(4) organizations that were targeted on the infamous IRS “BOLO” list. Contributions to such groups are not tax-deductible. This means the IRS has no need to know their donors’ identities, because there is no need to refer to such a list in administering the tax code.

A separate argument cited by opponents of the legislation, namely that it would create an opening for foreign governments to influence American policy and elections through contributions to these groups, is specious as well. To the extent such contributions do prevent foreigners and their governments from supporting speech, they infringe the First Amendment, not only because such guarantees are not limited to U.S. citizens, but also because Americans have a right to hear messages from anybody, regardless of origin.

Also, as the Clinton Foundation has made evident, the existing disclosure rules have not stopped foreigners from trying to curry favor with powerful American politicians through not-for-profits. And if they had been stopped via the not-for-profit rules, they could just agree to pay a fortune for a short speech, in person or by video link, with those influential Americans. Oh, I forgot. They already have.

So with a technical fix to exclude 501(c)(3) groups, the House legislation is a good idea whose time has come. Not that it will make it into law while President Obama is in the White House, or any time soon thereafter under a President Clinton. But it is worth making the point now, and hoping that a President Trump would better understand the need to bring the IRS to heel. The odds of that strike me as pretty good, just like the current version of the bill.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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