Anonymous Donations Can Remain Secret Despite IRS Requirement to Disclose

Photograph by Dennis Brack/Bloomberg

The Internal Revenue Service headquarters in Washington.

The handwringing over disclosure of who is giving money to 501(c)(4)’s in the run-up to the 2012 presidential election has increased, as donors seeking anonymity try to bring a cone of silence down around their contributions.

Social welfare organizations that are tax exempt under Section 501(c)(4) of the tax code offer a vital benefit to donors that want anonymity: unlike PACs they do not have to disclose their donors to the public.

Always an issue around election time, the identity of those contributing to these groups that funnel funds into candidate-related activities is more pronounced than ever, with the Republican-led Crossroads GPS and Democratic-led Priorities USA, two of the best known super-PACs, pledging to raise millions for issue advocacy related to their respective candidates. They are expected to have a major impact on the 2012 election.

Since Crossroads GPS first paved the way for attracting anonymous donations in the 2010 midterm elections, eyes have been focused on these social welfare organizations as potential harbingers of secret money.

Organizations receiving money from so-called anonymous donors are supposed to tell the Internal Revenue Service what they know about their identity. While no one else knows who their donors are, the IRS does. And the IRS has some pretty strict rules about it.

But even then, there are ways to get around full disclosure, attorneys said.

The Schedule B instructions to the Form 990 tell the advocacy groups to report the donor as “anonymous” only if the organization does not know the donor’s identity. According to IRS official Stephen Clarke, they are doing so under penalty of perjury. An organization should not report a donor whose identity it knows as anonymous simply because the donor wants to remain anonymous, the IRS cautions.

Happy as the 501(c)(4)s may be that the dollars are rolling in, the advocacy groups receiving them are left asking the question: if they don’t know who gave the money, how far do they have to go to find out?

“People ask pretty frequently how you deal with this,” Ofer Lion, an attorney in the Los Angeles office of Hunton & Williams said. “Schedule B is the one piece of the Form 990 that is not made available to the public.” If an organization receiving money does not know where the money came from and can’t easily find out, it can put anonymous, “but how you get to that point is the real question,” Lion said.

“The IRS doesn’t say you literally have to conduct an investigation. What it says is, if you know, you have to report,” Marc Owens, a former IRS Exempt Organizations director and now partner with Caplin & Drysdale said.

The favored way of handling this is through client trust accounts, Lion and Owens said. Donors who truly want to remain anonymous will make contributions through a law firm which is set up as the agent. The law firm transmits the money to the organization, and it is the law firm’s name that appears on the Schedule B which goes to the IRS, Lion said. In that instance even the IRS will not know who is involved, because it could be the law firm itself that has made the donation.

There are also cashier’s checks and bank wire transfers, both of which do not say where the money came from. The IRS could trace those funds, but it would take a lot of investigative work, they said.

Some have questioned whether a donor can ever really be anonymous to the organization to which it is giving. “You have to think they probably have an idea,” Owens said. “My guess is that the big contributions probably are cultivated.” Few cashiers checks for a million dollars arrive in the morning mail, he said.

What is more likely is that a cocktail party where wealthy individuals with a common cause mingle is likely to result in a check in the mail come Monday. If a check is placed in someone’s hand, and the 501(c)(4) receives that check, it must tell the IRS who it came from. “You can’t have willful blindness,” Owens said. “If the name is on the check, you can’t pretend you didn’t see it.”

“If a 501(c)(4) is talking to a potential donor about how to structure a contribution so it can be listed as anonymous or coming from another source, the organization probably already knows too much to avoid listing the donor,” Jeffrey Altman, an attorney with Whiteford Taylor Preston in Washington said. There shouldn’t be any conversations about who an anonymous donor is, he added, and donors can’t ask for credit or recognition if they want to be treated as anonymous.

However Lion said there are many non-nefarious reasons for wanting a donation to be anonymous, including that parents sometimes do not want their children to know how much their inheritance has been reduced.

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