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Who's the Right Watchdog for Nonprofits' Political Activity? | Rules of the Game

An obvious danger of the IRS political targeting scandal is that congressional and federal investigations will produce much heat but little light.

As House Ways and Means ranking Democrat Sander M. Levin of Michigan cautioned at that panel’s opening IRS hearing last week, members of Congress “must seek the truth, not political gain.” Even nonprofit sector leaders warn that recent IRS scrutiny, while long overdue, will exacerbate the agency’s many problems instead of fix them.

“The thing that we don’t want to happen is for the appropriate anger of lawmakers to result in the wrong outcome,” said Diana Aviv, president of Independent Sector, a coalition of nonprofits and philanthropic community leaders. While “there should be consequences for people who misused their position,” she added, the IRS should not “pull back” from curbing abuses by politically active tax-exempt groups.

It’s a legitimate fear. Between calls for an independent counsel, attacks on the Obama administration’s allegedly “Nixonian” tactics, congressional subpoenas and legal action by tea party groups, the furor triggered by IRS missteps could not be more politicized. Vulnerable Democrats fretting about midterm fallout in 2014 have assailed the IRS almost as shrilly as Republicans.

Politicized or not, the controversy has already shed crucial light on the disastrous tax and campaign finance mess that landed the IRS in trouble to begin with. A recent federal inspector general’s report did not just expose the agency’s inappropriate targeting of tea party groups. It also pulled back the curtain on the agency’s failure to consistently apply, or even understand, its own regulations.

One of the most intriguing aspects of the May 14 report by the Treasury inspector general for tax administration is a tucked-away footnote promising that “a future audit is being considered” of how the IRS handles “political campaign intervention” by tax-exempt organizations, such as 501(c)(4) social welfare organizations and 501(c)(6) trade groups.

Until recently, only tax lawyers, campaign finance watchdogs and policy wonks could have told you that the IRS regulations governing such groups are hopelessly vague. Now, thanks to congressional probes, an FBI inquiry and wall-to-wall media coverage, terms such as “primary purpose” and “facts and circumstances” are practically in vogue.

It has become common knowledge that IRS rules require 501(c)(4) groups to focus on social welfare as their “primary purpose” but fail to define precisely what that means. Moreover, the agency has no “bright line” rule to distinguish between political activity and advocacy, relying instead on a multipart “facts and circumstances” test that’s innately subjective.

At least now, the nation is wading into a long-overdue public debate over where such lines should be drawn. It’s a question that urgently needs settling now that the Supreme Court has unleashed a flood of new election-minded tax-exempt groups with its 2010 ruling to deregulate political spending. These organizations operate outside the normal Federal Election Commission disclosure rules.

Some of the ideas now being tossed about may not get very far. It would be a heavy lift to strip all campaign finance enforcement away from the IRS, for example, and hand it over to the FEC — as Center for Competitive Politics President David Keating recently recommended to the Ways and Means Committee.

Likewise, social welfare advocates probably won’t like tax expert Joseph J. Thorndike’s solution, recently outlined in the Washington Post: eliminate section 501(c)(4) of the tax code altogether. “Encourage nonprofits to forswear political activity,” urged Thorndike, a contributing editor for Tax Notes magazine.

“Social welfare groups have historically played such a critically important role in bringing more content, diversity and substance to our national debate,” noted Nan Aron, president of the Alliance for Justice. “Many do great work.”

Other proposals, such as the campaign finance transparency law known as the DISCLOSE Act, which Democrats have set out to revive, stand little chance of passage. Senate Minority Leader Mitch McConnell, R-Ky., now calls the legislation a bid to silence and intimidate its authors’ political opponents, akin to the recent IRS abuses.

Still, the more IRS fixes that get thrown on the table, the better. Sooner or later, one of them will stick — whether it’s creating a 10 percent political spending threshold for tax-exempt groups, as San Francisco tax lawyer Gregory Colvin has suggested, or giving the FEC and the IRS joint oversight, an idea floated by University of Miami law professor Frances R. Hill.

As Campaign Legal Center senior counsel Paul S. Ryan put it: “If there’s a silver lining in this recent IRS controversy, it’s that there can be no doubt that the IRS and the issue of 501(c)(4) groups getting involved in elections is on Congress’s radar.”

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

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