IRS Scrutinizing Political Activity

Posted April 11, 2008 at 6:13pm

Tax regulators are hinting at an imminent crackdown of outside political outfits masquerading as nonprofit organizations, groups that already are making a splash in the 2008 Congressional primaries.

Lois Lerner, an Internal Revenue Service director who oversees 527s, charities and other tax-exempt groups, recently told Roll Call that the agency is taking a “close look” at allegations involving excessive political activity, particularly by “social welfare” organizations that register under section 501(c)(4) of the federal tax code.

“It’s not that you can’t [act politically], it’s that you can’t do too much of it,” Lerner said. “There’s not a clear-cut line. We really are looking at all the facts and circumstances involved.”

Since the Federal Election Commission two years ago began handing 527 groups six-figure fines for violating campaign finance laws in the 2004 presidential campaign, election law experts have predicted a vast migration of one-time 527 organizers and backers to more generous areas of the tax code.

Traditionally the regulatory home of mainstream lobbying groups such as the National Rifle Association and AARP, organizations such as liberal, anti-tax Club for Growth and dozens of other new groups have organized as social welfare organizations in recent years. But unlike and Club for Growth, which have both established political action committees to pay for television ads and other expenditures, a handful of new groups appear to be testing the now-dormant FEC — and perhaps the IRS — by paying for the ads directly out of organization coffers.

For example, a group supporting Sen. Norm Coleman (R-Minn.), the American Future Fund, spent more than $32,000 this month on television ads that asked viewers to “call Norm Coleman and thank him for his agenda.”

The state’s Democratic-Farmer-Labor Party, which has complained to the FEC, claims the ads violate campaign finance laws.

A source from a prominent nonprofit group said there are competing approaches to the “uncharted waters” that 501(c)(4)s and other organizations find themselves in this cycle. The explosion of these groups will continue, the source predicted, but many will play it safe — an approach driven largely by the widespread fear of tax regulators, who appear to have far more power than the FEC.

“We can’t go into this by saying if we get socked by the IRS, it’s simply the cost of doing business … there are some organizations that approach it that way,” the source said. “Historically, it’s been very easy to take an FEC fine and view it merely as a cost of doing business … you’re dealing with a different animal with the IRS.”

Ken Gross, an election law lawyer at Skadden Arps, said the IRS has not been particularly aggressive in investigating political groups and social welfare organizations for potential tax violations. Their primary emphasis, he said, has been in policing churches and charities, whose donors are allowed to make tax-deductible contributions and are prohibited outright from engaging in the political process.

“The larger efforts by the tax-exempt division over at the IRS have been focused — and correctly focused — on [charities and churches] that are crossing the line,” Gross said. “My sense is that there is additional scrutiny at the IRS regarding [social welfare groups], but it hasn’t manifested itself yet.”

Lerner, who also was once an FEC lawyer, said that although her IRS division is reviewing complaints involving banned political activity by nonprofit organizations, don’t expect any significant agency rulings until after the 2008 elections.

“It really isn’t until next year when they file their tax forms that we can tell whether they’ve paid the appropriate taxes,” Lerner said.

The IRS director also agreed that — perhaps unlike the FEC — a broad IRS sweep of wayward nonprofits may yield better results than the recent high-profile fining of 527s by election regulators. And although the IRS is likely to just revoke a group’s tax status and slap it with a fine, another source within the IRS said that serious violators could “go through our criminal investigations area … and it could end up at the Justice Department.”

“When the IRS knocks on people’s doors, they pay attention,” Lerner said. “For the most part … they’re willing to change their way of doing business.”

Ten days ago, the IRS lost a long-standing court case involving a prominent social welfare organization, the Democratic Leadership Council, which the agency said violated its status in the late 1990s. The agency made the centrist Democratic group pay three years’ worth of back taxes, money that the DLC won back in the case decided April 4.

Bob Bauer, a Democratic election campaign finance lawyer who represented the DLC, said that IRS allegations levied against his client differ drastically from the scrutiny that many groups may soon face. For example, Bauer said the IRS did not allege in the DLC case that the group violated its tax status by directly involving itself in elections; rather, he said, tax regulators charged that the group that former President Bill Clinton helped start was set up just to support the policy agenda of a particular political party.

“There was never any suggestion that it was engaged in electioneering activity or that its purposes were a partisan political purpose … this is a case separate and apart from some of the current controversies,” Bauer said. “They tried to take a backdoor route by arguing that what the DLC was doing was serving a private benefit … to Democrats.”

Gross called the recent decision an enforcement setback for the agency, which spent half a decade and countless hours pursuing the DLC over a $20,000 tax bill. Citing IRS guidelines, the agency declined to discuss the case.

“It was an important and significant case … in the area of (c)(4)s,” Gross said. “Whether they continue to pursue these types of cases remains to be seen … [but] presumably there are some in the pipeline.”