It is possible that after nearly 30 years of lax enforcement, the IRS may begin taxing individuals who make donations to social welfare groups. These individuals who have not filed gift tax forms when filing tax returns may find themselves owing back taxes for donations made under Section 501(c)4 of the tax code. This classification has made it possible for recipients of donations to protect the anonymity of individuals or groups whose donations are used to fund advertisements for political campaigns.
After five individuals received notification from the IRS recently regarding possible back taxes owed on donations, lawyers for non-profit groups are paying close attention to the actions of the IRS.
The IRS has defended their move, providing this statement to Politico’s Jennifer Epstein: “These examinations were started by employees of the Estate and Gift Tax Unit at the IRS as part of their increased efforts in the area of non-filing of gift and estate tax returns…All of the decisions involving these cases were made by career civil servants without any influence from anyone outside of the IRS.”
This could have costly consequences for both donors and the social welfare groups who count on donations for funding. As it stands, individual donors can contribute up to $13,000 each year without being hit with the 35% gift tax, according to the IRS. Many donors however are known to give much more than that each year, a practice which is now threatened by new enforcement of old rules. In addition to the high cost of donating due to gift taxes, anonymous donors may be deterred by the fact that their identity may no longer be kept secret.
Moving forward, individual donors are strongly advised to discuss any possible donations to social welfare groups with their attorneys before making a financial commitment. If gift tax rules are upheld by the IRS, donors exceeding the $13,000 threshold for tax-free gifting may find themselves owing a hefty tax liability on donations.
Lawyers representing the individual donors who have received notice from the IRS regarding possible back taxes owed on donations are concerned over the long term fallout of increased enforcement of the gift tax rules.
As stated in an article published on LATimes.com: “Gregory L. Colvin, a San Francisco attorney at the firm Adler & Colvin, who represents one of the audited donors, said he suspected the IRS action could reach many donors. Colvin said he’d spoken with at least 4 other lawyers whose clients had received letters.” Colvin went on to say, “If they are going to collect this, they should make an announcement”.
Without a specific announcement notifying individuals of definite plans to enforce the gift tax rule across the board, donors are lacking the information needed to make informed decisions regarding donations. Regardless of how this pans out in the future, contributions to political campaign’s are unlikely to end anytime soon. Millions of dollars are funneled into elections and most individuals in a position of power seeking political influence will continue to find a way to make that happen, regardless of tax rules.
This post was published on May 24, 2011