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As IRS Increases Scrutiny of 527s, Watchdogs Criticize FEC

Even as the Internal Revenue Service announced this week that it is stepping up its monitoring of 527 groups, the Federal Election Commission came under fire from some advocates of campaign-finance reform for not being tough enough on 527s when it unveiled a new initiative Thursday.

On Thursday, the IRS said it would contact 527s “whose filings appear to be incomplete, were filed late, or were amended and are materially different from the original filing.”

“This effort will help improve the completeness and accuracy of these important public disclosures,” said Steven Miller, commissioner of the IRS tax-exempt and government entities division.

The disclosure crackdown was purposely timed in advance of “key upcoming filing dates so that correct information is available to the public as intended by Congress,” according to an IRS press release.

Unless they can provide a “reasonable cause,” groups that fail to file reports on time or include all requested information on contributions or disbursements on their filings are subject to a fine of 35 percent of the amount in question.

Meanwhile, campaign finance lawyers and reform groups blasted the six-member FEC for failing to issue definitive new rules clarifying when section 527 groups — whose purpose as defined by the IRS is to engage in political activities — should be treated as political committees under campaign finance laws.

A leading Democratic election lawyer who advises Democratic presidential candidate John Kerry (D) said the FEC’s actions will allow controversial groups like the “Swift Boat Veterans for Truth” to operate unfettered this election cycle and will leave broader questions to be answered through the courts or other advisory processes.

After several months of delay, the FEC on Thursday revisited a controversial rulemaking on 527 groups, concluding in a split vote that, as of Jan. 1, 2005, such groups may only raise hard money if in their solicitations they state that the purpose is to oppose or support a federal candidate.

The watchdog agency also ruled that such tax-exempt groups — called 527s after the section of the Internal Revenue Code under which they’re organized — may no longer finance they entirety of their operations with soft money but will have to finance at least 50 percent of activities and expenses with money raised under hard money limits.

But the commissioners rejected proposals drafted by the FEC general counsel and Commissioners Scott Thomas and Michael Toner that would have provided specific guidelines for when groups activities cross the line into influencing federal elections.

“It could not have escaped observers of the process that the FEC concluded this proceeding yesterday, in the thick of the ongoing controversy over advertisements produced by the ‘Swift Boat Veteran’ 527 financed by large individual contributions,” Democratic election lawyer Bob Bauer wrote in a posting on his Web site.

But Bauer concluded that the FEC’s failure to come up with a so-called “major purpose test” for defining when a group achieves political committee status in the eyes of the federal campaign finance authorities casts an aura of uncertainty over the political arena.

“There was a view that the ‘major purpose’ test lives on, awaiting implementation in specific enforcement matter or in Advisory Opinions,” he wrote, while adding that “a course of decision-making of this kind is certain to produce disparate results stitched together largely by raw intuitions about the significance of factual differences between cases.”

While FEC Vice Chairwoman Ellen Weintraub told The Washington Post that the commission’s actions were “huge,” campaign watchdog groups criticized the FEC’s limited ruling.

“No one should be fooled by claims that yesterday’s limited action by the FEC was ‘huge’ or by other claims that this small step, however small, was better than nothing,” Democracy 21 President Fred Wertheimer and Campaign Legal Center President Trevor Potter said in a joint statement released today.

“The allocation rules adopted by the Commission will have zero effect on the ongoing soft money violations in this year’s election because the FEC decided to only make them effective after this election thereby leaving 527 groups to wrongly claim that they have a free pass for their current activities,” Wertheimer and Potter wrote.

Wertheimer and Potter currently have complaints pending with the FEC against numerous 527 groups at both ends of the political spectrum including the Democratic-leaning groups America Coming Together and the Media Fund, as well as the conservative-leaning Leadership Forum, Swift Boat Veterans for Truth and Progress for America Voter Fund. They contend such groups are circumventing campaign finance laws and funneling soft money into the federal elections. The groups subjected to those complaints have denied the allegations.

In an interview Friday, Wertheimer said the “next question here is going to involve the options of Congress and/or the courts.”

Wertheimer said his group would examine the option of a potential lawsuit challenging the FEC’s actions.

In an unrelated move, the FEC on Thursday also approved a request from Sen. Jon Corzine (D-N.J.), who had asked whether he may contribute large amounts of personal money this election cycle — potentially in excess of $25,000 — to get-out-the-vote drives billed as nonpartisan.

The FEC issued a formal opinion approving Corzine’s plans, as long as the chairman of the Democratic Senatorial Campaign Committee isn’t the primary source of the funding for such groups.

House Administration Chairman Bob Ney (R-Ohio), whose panel has primary jurisdiction over the FEC, blasted the agency’s decision.

“As I pointed out repeatedly during the debate over McCain-Feingold, this legislation does not ban soft money — rather, it simply diverts this money to less accountable groups,” Ney said. “As a result, our political parties have been significantly weakened, grassroots organizations have been muzzled, and the voices of ordinary Americans have been silenced — all to the benefit of unaccountable, ideologically-driven outside groups and the ultra-rich such as George Soros and Sen. Jon Corzine who have the means to self-fund their own political campaigns.”

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