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IRS to Propose New Rules for Tax-Exempt Political Groups

The Internal Revenue Service created a new definition of political activity in its first attempt to reset the boundaries of permissible campaign involvement by tax- exempt groups.

The rules defining “candidate-related political activity” being released today would prohibit so-called social welfare groups from counting certain communications that identify a candidate and voter registration drives as satisfying their nonprofit mission.

The “initial guidance” from the IRS and the Treasury Department doesn’t answer an important question: How much political activity can such groups conduct without jeopardizing their tax-exempt status?

“This is a very good sign that the IRS is expressing an appetite to do something here,” said Paul S. Ryan, senior counsel at the Campaign Legal Center, a Washington group that has criticized the proliferation of political groups that don’t disclose their donors.

The definition has ramifications for groups organized under section 501(c)(4) of the tax code such as Crossroads GPS, an organization founded with help from President George W. Bush’s political adviser Karl Rove, that have become involved in elections over the past few years.

 

Politically active nonprofit groups spent $336 million on federal campaigns in the 2012 election, including more than $256 million by 501(c)(4) groups led by Crossroads GPS and Americans for Prosperity, according to the Center for Responsive Politics. The latter figure from the nonpartisan research group in Washington that tracks campaign giving is about three times the $92 million that it says 501(c)(4) groups spent on federal campaigns in 2010.

Other 501(c)(4) groups active in the 2012 election included Priorities USA, which was founded by former Obama White House aides, and Patriot Majority USA, led by Democratic operative Craig Varoga.

The government proposed the definition for political activity six months after the IRS said it applied improper scrutiny to small-government Tea Party groups’ applications for tax-exempt status. Those revelations led to leadership changes at the agency and congressional investigations that are continuing.

 

“This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax- exempt social welfare organizations,” Mark Mazur, assistant Treasury secretary for tax policy, said in a statement. “We are committed to getting this right before issuing final guidance that may affect a broad group of organizations.”

With the number of steps needed before a decision, the IRS doesn’t expect to issue final regulations before the 2014 congressional elections, said a Treasury official who spoke on condition of anonymity to discuss the agency’s plans.

In the U.S. tax code, groups organized under section 501(c)(4) must be operated “exclusively” for social welfare. Those groups don’t have to disclose their donors and have become a popular structure for campaign involvement.

Treasury regulations say that politics can’t be the groups’ primary purpose, and IRS officials monitor them now with a “facts and circumstances” test that looks at such groups’ activities rather than a specific definition.

“They really don’t have a definition right now,” Ryan said.

© 2015 Thomson/Reuters. All rights reserved.

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The Obama administration proposed new rules on Tuesday for certain tax-exempt groups at the center of the Internal Revenue Service's Tea Party targeting scandal this year.According to a Treasury Department news release, the proposed rules will change the definition of ...
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