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.