A recent proposal by the Internal Revenue Service, if adopted, would permit (but not require) 501(c)(3) nonprofit organizations to report the details of charitable contributions directly to the IRS. If the proposal were adopted, nonprofit organizations that decide to report contribution information to the IRS would be required to obtain taxpayer identification numbers (Social Security numbers) from donors and include them in the reports to the IRS.
This optional method of reporting contribution information was proposed by the IRS as a way to address the unfortunate situations in which donors lose charitable contribution deductions. In recent years, numerous donors have lost large tax deductions to which they would have otherwise been entitled because they did not obtain proper acknowledgments in a timely manner as required by law from their donee organizations. Under the IRS proposal, a donor would be able to meet the documentation requirements for a charitable contribution if the organization to which he/she contributed reported the details of the contributions to the IRS.
Ironically, the proposal includes a provision that, if adopted, would require the nonprofit organization to file the reports with the IRS and provide copies to donors in a timely manner – so it is difficult to understand why the IRS believes that the proposal would address the problem cited. If the problem is that donors are not obtaining proper acknowledgments of their contributions from the organizations to which they contribute under current law, how does a different method of doing the same thing overcome the problem?
Concerns and Confusion
Many commentators have expressed concerns about the proposed reporting option, and unfortunately, much of the communication in the news media about the proposal has been incorrect and misleading. Understandably, much concern has been expressed over the idea of nonprofit organizations obtaining (or attempting to obtain) Social Security numbers from their donors. We share such concerns. We believe any attempt by nonprofit organizations to obtain Social Security numbers from their donors would be a colossal failure, and an obstacle to encouraging contributions.
Many of the news media accounts have stated or implied that the proposed contribution reporting option would be a requirement, which is simply not true. The misleading reports have created alarm on the part of many. Some of the concern is understandably based on the belief that any such reporting option, while initially voluntary, could eventually become mandatory.
Commentary – Reality Check
Given the rampant problems in our country (including within the IRS) with identity theft, the IRS proposal is a nonstarter. Proposed as a solution to help donors who do not obtain proper contribution acknowledgments in a timely manner, the approach is impractical overkill. The security concerns alone are enough to keep most nonprofits from having any interest in gathering donors’ Social Security numbers.
A better solution to the problem the IRS is trying to address would be to offer some relief to donors who do not obtain proper acknowledgments for their charitable contributions in a timely manner. Rather than disallowing such contributions entirely, it would be reasonable to permit donors to obtain and provide adequate documentation in the event of an IRS examination to show that a contribution was actually made and that it qualifies for a deduction. That is the approach used by the IRS in virtually every other area of tax law. Such a change may require a slight modification by Congress of the very strict language in the current law. We believe that would be a fair and much safer way to solve the problem.