Tea party outrage over a spate of IRS letters to conservative groups has revived a long-standing dispute over the agency’s controversial role in policing politically active nonprofits.

In January, the IRS began sending extensive questionnaires to organizations applying for nonprofit status as part of a broader project to understand whether social welfare organizations — which are not required to disclose their donors — are actually acting as political committees.

Campaign finance reform groups and lawmakers in both parties have repeatedly demanded that the IRS examine the activities of tax-exempt advocacy groups, which proliferated during the 2010 cycle and are on pace to play an even larger role in 2012.

Democrats, whose affiliated outside groups have lost the fundraising race to Republican organizations this year, have been particularly vocal, sending repeated letters to the agency requesting an investigation. On Wednesday, Rep. Peter Welch (D-Vt.) asked his colleagues in Congress to sign yet another.

In 1995, the IRS ruled that 501(c)(4) organizations are allowed to make political expenditures as long as electioneering is not their primary activity. But the agency has never said how “primary activity” should be measured, opening the door for explicitly political groups such as Crossroads GPS and Priorities USA to spend millions of dollars in undisclosed contributions on federal elections.

But the IRS appears to be quietly making moves. In the past two months, dozens of tea party groups that have applied for nonprofit status in the past year say they have received lengthy and intrusive questionnaires, some of which request the names of donors and volunteers.

Lawyers who work with nonprofits seeking exempt status said the questions are unprecedented but agreed that they are within legal bounds.

“I think it’s an overreach,” said Marcus Owens, a lawyer at Caplin & Drysdale, who ran the IRS’ exempt organizations division for a decade. “There are some contexts where that’s relevant.”

These types of data collection efforts often precede audits. For example, an IRS investigation of compensation at colleges and universities began in October 2008 when the service sent long questionnaires to 400 institutions. As a result of that survey, 30 institutions were audited in May 2010, about 19 months later.

“I would expect to see an audit project next fiscal year,” Owens said. “The real question is, why did it take the IRS so long? It’s clearly been an issue.”

With an unprecedented amount of money flowing into politics through social welfare groups — which are set up under IRS tax code 501(c)(4) — the dust-up underscores the agency’s awkward position. If it is aggressive, it is accused of pursuing a partisan agenda; if it is passive, watchdog groups label it toothless.

The IRS historically has shied away from politically charged issues surrounding campaign contributions.

This summer, the organization suspended an examination of untaxed gifts to 501(c)(4)s after Republican Senators, convinced that it was an attempt to scare off their donors, demanded that it halt the investigation.

“I see the IRS saying, ‘We don’t want to be on this battlefield. You guys solve this,’” Trevor Potter said at a Brookings Institution forum on campaign finance earlier this month. Potter is the head of the political activities practice at Caplin & Drysdale and the founding president and general counsel at the Campaign Legal Center, which has sent three letters to the IRS demanding an investigation.

Charles Watkins, an attorney at Webster, Chamberlain & Bean who advises groups during the application process, said the IRS set up a Cincinnati-based task force specifically focused on nonprofit applications.

“This is a whole other level of investigation,” Watkins told Roll Call. “Typically a [501(c)(4) application] went through with nothing.”

The IRS announced that this year it would begin sending “comprehensive questionnaires” to groups that have already filed tax returns “to ensure that they have classified themselves correctly and that they are complying with applicable rules.”

Dean Patterson, a spokesman for the IRS, denied the existence of a special committee but said the IRS has a “companion process that administers the same provisions of the tax law in the context of new applications for tax-exempt status. The legal issues and the information that will inform our discussions will be similar in both contexts.”

Conservative organizations have been most willing to go public with these letters, so it is unclear how many left-leaning organizations might have received similar communications. But several liberal groups contacted by Roll Call did not report similar experiences.

For example, a spokesman for Protect-
YourCare, a 501(c)(4) set up to defend the new health care law, said the group has not received any kind of questionnaire from the IRS. Another liberal 501(c)(4) granted tax exempt status in May received only a modest six-part questionnaire.

The conservative groups that have received the letters all appear to be small local organizations, such as the Kentucky 9/12 Project and the Richmond Tea Party.

“When you’re a small organization, what do you have to lose? Nothing. They have to respond in order to protect their own First Amendment interests,” said Jay Sekulow, a conservative lawyer at the American Center for Law and Justice, representing almost 20 tea party groups in a harassment claim against the IRS. “In some cases, these applications have been sitting for two years. Why now in the middle of an election year?”

Welch said that he is most concerned that taxpayers are subsidizing political activity through a tax deduction intended for charities.

“It’s no different than an individual getting notification from the IRS that they are doing an audit,” he told Roll Call. “If you’ve paid your taxes, you have nothing to be worried about.”

The groups that have been asked to turn over donor lists are particularly alarmed because the names would become public once their status is approved.

“There is a difference between transparency of your organization and privacy of your donors,” said Toby Marie Walker, of the Waco Tea Party in Texas, which has received one of these letters.

She said she has collected the letters of almost 40 tea party organizations that say they have received similar communications.