A proposed rule from the IRS has stirred up controversy in the world of philanthropy, raising concerns over an absence of donor privacy that could ultimately discourage major gifts.
The proposed rule would create an optional form for charities to report major gifts to the IRS, with the intention of shifting liability to nonprofits for full gift reporting for tax purposes. This – in theory – would lower the risk that individuals would miss out on tax deductions due to incomplete or improper tax filings.
During the official comment period, which ended on December 16, the nonprofit sector voiced strong opposition, particularly with regard to the provision requiring donors’ social security numbers.
This method of gift reporting, however, would be optional, a point reenforced by the IRS’ official explanation to the public, which stated that
any burden associated with the collection of information under the proposed regulations is minimized by the fact that donee reporting under the proposed regulations is optional on the part of any donee, including small entities. Donees need not use this donee reporting process and donors can continue to use the current CWA process…it is expected that donee reporting will be used in an extremely low percentage of cases.
Essentially, the proposed rule is meant to make things easier for lax donors. Up until now, the IRS has required that donors submit a “contemporaneous written acknowledgement” (CWA) – a gift receipt prepared by the receiving charity. Donors have, on occasion, missed out on tax deductions due to improper filings of CWAs or because they simply lost the receipt for their gift.
Critics of the proposed rule expressed concern over the increased legal liability thrown unto nonprofits, as well as the potential for the optional rule becoming the de facto standard for reporting. If this were to happen, higher volumes of official correspondence between nonprofit charities and the IRS would include donors’ social security numbers, consequently increasing the risk of identity theft – a potential deterrent for donors making gifts.
The likelihood of implementation is minimal. There is virtually no public demand for the option – meant to provide alternate means of reporting to tax payers. Furthermore, the opposition has gained momentum, most clearly evidenced by proposed legislation from Sen. Pat Roberts (R-Kansas) that would block the proposed rule.
Key Elements Group LLC will report on the final outcome of the debate.