INQUISITION NEWS: IRS sizes up groups' tax-exempt status

The National Debt Clock, which displays the current United States gross national debt and each American family's share, hangs on a wall next to an office for the Internal Revenue Service near Times Square in New York May 16, 2011.
Photo: Reuters In English

The Internal Revenue Service may be weighing changes to how it polices tax-exempt political groups amid charges the tax agency has been lax on enforcement for a new breed of campaign funding organizations with vast resources.

Tax-exempt groups are raising and spending record amounts of money in attempting to sway the November 6 elections, bolstered by the Supreme Court's landmark "Citizens United" ruling in 2010, which lifted some political contribution limits in federal elections.

Consumer groups have been pushing the IRS to clarify the standards for these so-called "social welfare organizations," as Section 501(c)(4) of the U.S. tax code calls them, to ensure that they are not abusing their tax-exempt status.

"We will consider proposed changes in this area," Lois Lerner, director for tax-exempt groups at the IRS, said in a July 17 letter to public interest groups.

The significance of the letter is unclear, with one former IRS official in the tax-exempt division calling it a standard response.

"The standard practice is to send a formulaic letter," said Marc Owens, who led the IRS tax-exempt division from 1990 to 2000.

The Campaign Legal Center, one of the groups seeking IRS action, said the letter was a recognition of the problem after more than a year of silence.

"I've been referring to the IRS as a black box," said Paul Ryan, a lawyer at the Campaign Legal Center, one of the protesting groups. "We for years have been sending correspondence and have never received a single word back from the agency until now."

One of the biggest of these new groups is American Crossroads, co-founded by Republican strategist Karl Rove. Crossroads plans, with a sister organization, to raise $300 million to help defeat Democratic President Barack Obama.

Democrats, who also run 501(c)(4) groups, have been far less successful at fundraising. The Democrats' Priorities USA aims to raise just a fraction of the amount targeted by Rove's group.
DEFENSE?

The letter said the IRS would work with the Treasury Department and the IRS Office of Chief Counsel to "identify tax issues that should be addressed through regulations" and other means surrounding the issue.

The IRS tax-exempt division is "taking the heat for the state of the law," said Beth Kingsley, a tax-exempt lawyer at the firm of Harmon, Curran. "They don't really have the power to make changes and they may want to make that point."

The advocacy groups want a rule-making process to clarify the meaning of "social welfare" and how groups can meet the tax-exempt test.

The 501(c)(4) groups themselves argue that as long as the majority of their work is not overt political campaigning, they qualify for tax-exempt status.

In a potential show of new enforcement, the IRS denied tax-exempt status to two small political groups in recent months, prompting concern among the organizations that they could lose the ability to collect anonymous donations, tax attorneys say.

(Reporting By Kim Dixon and Patrick Temple-West; editing by Kevin Drawbaugh and Andre Grenon)

IRS Exemption Requirements - Section 501(c)(3) Organizations

To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.
Organizations described in section 501(c)(3) are commonly referred to as charitable organizations. Organizations described in section 501(c)(3), other than testing for public safety organizations, are eligible to receive tax-deductible contributions in accordance with Code section 170.
The organization must not be organized or operated for the benefit of private interests, and no part of a section 501(c)(3) organization's net earnings may inure to the benefit of any private shareholder or individual. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction.
Section 501(c)(3) organizations are restricted in how much political and legislative (lobbying) activities they may conduct. For a detailed discussion, see Political and Lobbying Activities. For more information about lobbying activities by charities, see the article Lobbying Issues; for more information about political activities of charities, see the FY-2002 CPE topic Election Year Issues.
Additional Information

Application Process Step by Step: Questions and answers that will help an organization determine if it is eligible to apply for recognition of exemption from federal income taxation under IRC section 501(a) and, if so, how to proceed.

Page Last Reviewed or Updated: January 30, 2012

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