Gift Substantiation Proposed Regulations | Key Considerations and Concerns

In preparing comment on the Gift Substantiation Proposed Regulations, the following considerations and concerns are offered as a guide:

• “Never” is the better answer.

A charitable nonprofit should never be asking a donor for her or his Social Security number when soliciting donations; if someone is asking in relation to a donation, that should be considered a sign of a scam or fraudulent solicitation. Rather than create a regime in which some nonprofits require donors to provide their SSNs, Treasury and the IRS would better serve the public by getting behind a consistent message that donors should never be asked to provide their SSNs for gift substantiation purposes.

• The proposed Donee Reporting Rule conflicts with the IRS’ advice to taxpayers.

The Internal Revenue Service advises taxpayers on its website and on a YouTube video to only give out their Social Security numbers when “absolutely necessary.” Yet the IRS proposed voluntary system essentially requires nonprofits to do just that: ask donors to give out their SSNs when it is not absolutely necessary.  Voluntary and “absolutely necessary” are polar opposite instructions that undermine taxpayer protections and public confidence – public confidence in both the IRS and innocent charitable nonprofits.

• Requests for Social Security numbers could result in reduced charitable contributions.

Numerous individuals commenting on the proposed rule have raised the concern that donors will be unwilling to contribute more than $250 to a charitable nonprofit if it asks for Social Security numbers. This concern was expressed by the Government Accountability Office in May 2009 when it considered an earlier proposal to make such a reporting regime mandatory. Under the heading, “,” GAO provided the following points:

• Taxpayers may reduce giving because they are reluctant to provide Social Security numbers to charities given concerns over identity theft
• Social Security numbers are generally required on information returns and IRS uses Social Security numbers to match information returns to tax returns
• Donors may perceive that charities will not adequately safeguard their Social Security numbers
• Many charities rely on volunteers, to whom donors may not want to provide their Social Security numbers
• An alternative means to uniquely identify donors, that is, for IRS to provide separate, unique numbers for this purpose, could alleviate donor concerns about identity theft but could be burdensome to implement
• Concerns about identity theft are very real.

Just this year, hackers have accessed sensitive employee data at the federal Office of Personnel Management and the Central Intelligence Agency, two sophisticated entities with the resources and commitment to fighting intelligence breaches. And yet, hackers could not be thwarted. It is irresponsible for Treasury and the IRS to propose a system that calls on nonprofits to collect, store, and protect SSNs when identity theft is a growing challenge that even the federal government is not yet able to overcome. The observation by the Government Accountability Office in 2009 remains valid today: “An alternative means to uniquely identify donors, that is, for IRS to provide separate, unique numbers for this purpose, could alleviate donor concerns about identity theft but could be burdensome to implement.” Unfortunately, Treasury and the IRS have ignored that warning and continue to promote their own administrative convenience at the expense of donor, nonprofit, and public wellbeing.

• The current contemporaneous written acknowledgement system is working.

The proposed regulations make several admissions that raise the question: why are Treasury and the IRS bothering to create a new, optional, parallel reporting regime that will require more administrative burdens on both nonprofits and government personnel? The background description of the status quo states that the present contemporaneous written acknowledgement (CWA) “system works effectively, with minimal burden on donors and donees, and the Treasury and the IRS have received few requests … to implement a donee reporting system.” Treasury and the IRS even repeat their key admission: “Given the effectiveness and minimal burden of the CWA process, it is expected that donee reporting will be used in an extremely low percentage of cases.” Since there is not an overriding need for an alternative system, the flawed proposal to adopt a confusing and potentially dangerous Donee Report Rule should be rejected.

• Just because the proposal is voluntary now is no reason to ignore its potential adverse impacts.

Some might say they are not concerned about the proposed Donee Report Rule because it is purely voluntary at this time. But being silent now is not the answer; overt opposition to the proposed rule is needed for three important reasons:

1. The IRS attempted to implement a mandatory system in 2008, but that effort was thwarted by nonprofits and the Government Accountability Office. The principal obstacle then, as now, was the unwarranted inclusion of Social Security numbers in the gift substantiation process. Nothing has changed in the intervening seven years to make the proposal less objectionable. Making a bad idea voluntary in the first step gets the IRS closer to the initial plan of making the bad idea mandatory in a second step.
2. This voluntary reporting system could well become a watchdog group’s idea of a “best practice” that all “good” nonprofits are then prodded to adopt. The revised Form 990 that most charitable nonprofits submit to the IRS each year includes several questions about governance practices that are considered best practices but that are not mandated by statute. The manner in which nonprofits answer those questions is addressed in media stories and perhaps evaluations by donors and watchdog groups. This proposal encouraging nonprofits to seek sensitive and private Social Security numbers should not be allowed, however well intentioned.
3. Most importantly, it is in the best interest of donors and the nonprofit community for there to be a clear, unambiguous rule: A charitable nonprofit should never be asking a donor for her or his Social Security number to substantiate a donation; if someone is asking, that is likely the sign of a scam or fraudulent solicitation. Indeed, even the IRS website materials on identify theft exhorts taxpayers: “Don’t give a business your SSN just because they ask – only when absolutely necessary.” This mixed message is sure to confuse the public and undermine public confidence in nonprofits.

Submit Comments

The IRS is accepting public comments on the proposed rule change through December 16.

• See Tips for Submitting Effective Comments from the Internal Revenue Service
• Read Taking the Mystery Out of Filing Comments on Proposed Rules from the National Council of Nonprofits
• View comments already submitted by concerned citizens.