The IRS has begun enforcing an oft-ignored tax on contributions to nonprofit advocacy groups, potentially creating large gift tax liabilities for donors who wrote big checks last year and throwing a wrench into the fundraising push leading up to the 2012 elections.
The IRS for decades has done little to enforce a statute that requires individuals to pay a tax on money given to organizations that are tax-exempt but not charitable in mission. But attorneys say donors who gave generously to the type of influential nonprofit group known as a 501(c)(4) organization, which proliferated during the last election cycle thanks to their ability to shield donors from public disclosure, are now receiving notices from the IRS that their tax returns are being examined.
“It’s exciting news that this is something they’re paying attention to, it could really change the dynamic of where or if big donors are giving their money,” said Lisa Gilbert of the consumer advocacy group Public Citizen, which itself has a registered 501(c)(4) division.
Nonprofit 501(c)(4) organizations emerged as powerful players during the last election cycle, often working in tandem with “super PACs” to inject millions of dollars into political campaigns. Unlike their charitable 501(c)(3) counterparts, which are barred from political activity, and 527 political organizations, which have heightened disclosure requirements, 501(c)(4) groups can shield donor identities yet still participate in campaign activity, so long as it’s not the organization’s primary purpose.
These groups have proliferated since a January 2010 Supreme Court decision rolled back limits on corporate and union spending in election campaigns, and both parties expect to raise hundreds of millions of dollars for 501(c)(4) groups in this election cycle.
“The IRS has a ruling that’s been out for almost 30 years saying it can enforce the gift tax in this sort of situation but it hasn’t done anything to do that,” said attorney Gregory L. Colvin of Adler & Colvin in San Francisco. “If they have virtually abandoned this for almost 30 years, but now intend to enforce it, they should make some announcement ... rather than reaching back to former years where people were not aware of it and hitting them with audits.”
When Colvin came to Washington last week to attend a meeting of the American Bar Association’s tax section, he brought up an audit letter one of his clients had received during a breakfast meeting with other attorneys who specialize in tax-exempt organizations. By the end of the day, he had encountered at least six other attorneys representing clients who had received similar audit letters, prompting a flurry of Twitter updates.
“Looks like IRS is suddenly enforcing gift tax on donors to 501(c)(4) advocacy groups,” Colvin posted on his Twitter page on May 6. “I asked IRS officials point blank re: these (c)(4) gift tax audits: Why now? Why no announcement? Reach back to 2008 election? No answer,” he posted after a panel featuring two representatives from the IRS’s tax-exempt entities section.
At press time, the IRS had not responded to request for comment on the change in enforcement tactics.
Attorney Ofer Lion of Mitchell Silberberg & Knupp in Los Angeles has for months been working to notify his clients of the potential tax implications created by 501(c)(4) contributions, which can mean a gift tax as high as 35 percent on any donation of more than $13,000 made to a single group in a given year. “I thought it’s time to send up the warning flags so people don’t end up getting these massive gift taxes unbeknownst to them,” Lion said. “We don’t know if there’s an enforcement program underway, if this is an initial trickle that may turn into a flood of gift-tax assessments.”
In one February letter reviewed by Roll Call, an IRS examiner told a donor “your contribution [to a 501(c)(4) organization] in 2008 should have been reported on your 2008 Federal Gift Tax Return.”
Some attorneys say a compelling argument can be made that the gift tax, which was meant as a backstop to prevent taxpayers from circumventing estate taxes by giving away money early, was never meant to be applied to any sort of tax-exempt organization. But if Congress does not draft another gift-tax exclusion, as it did with 527 organizations, the only recourse for a donor facing an audit would be taking the matter to court.
“One of the things that is most interesting is that if the donors choose to contest it then they’ll no longer be anonymous, which is interesting considering that the whole benefit to giving these organizations is that you’ll remain anonymous,” Gilbert said.
Rep. Eric Swalwell, D-Calif., walks on Broadway after a Future Forum with young entrepreneurs in the Flatiron District of New York City, April 16, 2015. Reps. Steve Israel, D-N.Y., Seth Moulton, D-Mass., and Grace Meng, D-N.Y., also attended.