The IRS faces growing pressure from critics on both sides of the aisle to come to grips with the role that tax-exempt “dark money” groups play in elections.  

The challenge for the beleaguered IRS, which is bracing for a fresh round of controversies early in 2015, is that Republicans and Democrats regard both the problem and the solution in starkly opposing terms.  

To Republicans, the problem is that the IRS has policed tax-exempt groups, particularly those run by conservative activists, too aggressively. Republicans on Capitol Hill are poised to redouble their investigation into the agency’s self-admitted targeting of tea party groups and others seeking tax-exempt status. The GOP probe has been newly energized by a Treasury inspector general’s recent unearthing of thousands of emails previously declared “lost” from former senior IRS official Lois Lerner’s account. Also fueling the investigation is the GOP’s Senate takeover, and a conservative group’s recent lawsuit alleging the agency improperly shared taxpayer information with the White House.  

To Democrats, the problem is that undisclosed political spending, popularly dubbed “dark money,” continues to soar. According to the latest estimate  from the Center for Responsive Politics, political spending by outside groups that fail to publicly disclose some or all of their donors jumped to at least $219 million in this election cycle, up from $160.8 million in the 2010 midterms.  

Sen. Jon Tester of Montana is the latest Democrat to propose legislation aimed at shedding more light on politically active tax-exempt groups. Undisclosed political spending “leaves constituents without any real say in who represents them,” Tester said upon introducing his bill, which would require more donor disclosure from such multimillion-dollar operations as Crossroads Grassroots Policy Strategies, launched by GOP strategist Karl Rove, and Patriot Majority USA, run by a longtime ally of Senate Majority Leader Harry Reid of Nevada.  

The real problem, say tax experts on both sides of the debate, is that the IRS relies on a hazy “facts and circumstances” test to determine when tax-exempt organizations have strayed too far into politics. Tax law states that 501(c)(4) social welfare groups must operate “exclusively” for the public benefit, but IRS regulations interpret that to mean such groups must focus “primarily” on social welfare.  

Agency officials have never defined what they mean by “primarily,” however, which helps explain why the IRS got in such trouble regulating groups to begin with. The Treasury inspector general who first flagged the improper targeting ordered the agency to clear up its muddled rules, and the IRS made a first stab at this last year. But the IRS withdrew its first draft rules amid a firestorm of criticism from advocacy groups on both the left and right, which assailed them as sloppy and over-broad.  

Now the agency is back to the drawing board, and IRS Commissioner John Koskinen has said new draft regulations will be released early next year. The Bright Lines Project, a program housed at Public Citizen, recently delivered its own recommendations for proposed regulations to the agency. The Bright Lines plan defines the types of political activities that should be restricted, while carving out safe harbors for advocacy groups engaged in lobbying, not electioneering.  

“When you have a test as vague and confusing as the ‘facts and circumstances’ test, it’s bound to go wrong, and people are bound to do stupid things in trying to interpret something so vague,” said Emily Peterson-Cassin, Bright Lines Project coordinator. “So it really benefits both sides if you can get some objective standards in place.”  

A recent IRS complaint  filed by Citizens for Responsibility and Ethics in Washington captures the challenge facing the IRS. CREW accuses a self-described social welfare organization, the Kentucky Opportunity Coalition, of operating for the private benefit of Sen. Mitch McConnell of Kentucky. The group spent least $13.4 million on extolling McConnell’s virtues and urging his re-election or his opponent’s defeat, the complaint states. The KOC cast much of that spending as educational, not political, and therefore exempt from disclosure rules.  

“What’s unusual about KOC is that they were focused almost entirely on one politician,” said CREW Senior Counsel Adam Rappaport. “They were focused on doing things that benefited Sen. McConnell. Every single one of the issue ads they ran talked about Sen. McConnell in glowing terms.”  

KOC spokesman Scott Jennings, who CREW says worked on McConnell’s past two election campaigns, dismissed the complaint as “frivolous,” and suggested the IRS investigate CREW, instead, for what he called its partisan mission. It will be up to the IRS to sort out the dispute — an unenviable task that will be complicated by the many political and legal fires the agency must first put out.  

Eliza Newlin Carney is a senior staff writer covering political money and election law for CQ Roll Call.

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