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IRS May Strengthen Oversight of Politically Active Nonprofits

In a potentially significant move hailed by reform advocates, the IRS has signaled that it will consider changing its regulations for politically active tax-exempt groups.

The IRS move comes at the urging of watchdog groups Democracy 21 and the Campaign Legal Center, which have twice called on the agency to tighten rules governing nonprofit social welfare groups. Such groups are spending millions on campaign activity in violation of tax law, the watchdog groups argue.

“The IRS is aware of the current public interest in this issue,” IRS Exempt Organizations Director Lois Lerner wrote in a July 17 letter to Democracy 21 and the Campaign Legal Center that the groups released today. “These regulations have been in place since 1959. We will consider proposed changes in this area as we work with the IRS Office of Chief Counsel and the Treasury Department’s Office of Tax Policy to identify tax issues that should be addressed through regulations and other published guidance.”

In a reply letter to Lerner, organizers for the two groups said they “welcome” the IRS statement but “want to stress once again the need for urgent action” to stop what they called “the blatant abuses of the tax laws that are resulting in massive amounts of secret money being laundered into our national elections by groups claiming to be ‘social welfare’ organizations.”

In their original letters to the IRS, sent last July and in March of this year, the reform advocates argued that IRS regulations are “contrary to law” when it comes to how much political activity social welfare groups may engage in and still qualify for tax exemption under section 501(c)4 of the tax code.

The code states that such groups must be operated “exclusively for the promotion of the social welfare,” a position supported by court rulings, organizers for the two groups argued in their letters petitioning the IRS for rulemaking. But IRS regulations state only that social welfare must be a 501(c)4 group’s “primary activity,” something the IRS has defined only by “facts and circumstances,” not bright-line rules.

That’s left many politically active nonprofits operating under the assumption that they may spend up to half their money on political activities, as long as the remainder goes to social welfare purposes. In their letters contesting that interpretation, the watchdogs pointed to the tens of millions that the pro-GOP nonprofit Crossroads GPS and similar groups spent on campaigns in 2010, and are expected to spend in 2012.

Republicans on Capitol Hill have also written the IRS this year to voice concerns about the agency meddling too aggressively in nonprofit groups, which they argue have a right to engage in advocacy activities without government intervention.

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