Originally published on Forbes.com May 14th, 2013
The current flap about the IRS exempt organization group in Cincinnati, the gang that couldn’t sort straight, has some people asking whether the IRS is tough enough on the political activities of exempt organizations, specifically 501(c)(4) organizations. Citizens For Responsibility and Ethics in Washington (CREW). CREW has a lawsuit going against the IRS maintaining that 501(c)(4) organizations should not be permitted to engage in any political activities:
According to federal law, groups seeking tax exempt status under section 501(c)(4) must be “operated exclusively for the promotion of social welfare.” The IRS, however, issued a regulation undermining this clear language by requiring such groups only to be “primarily engaged” in promoting social welfare. This has allowed some groups to conclude up to 49 percent of their overall activities may be political. The lawsuit simply asks the court to require the IRS to interpret and apply the law the way Congress wrote it.
CREW’s executive director, Melanie Sloan, issued a statement in light of the forthcoming congressional investigation:
What happened at the IRS was wrong, but let’s not be sidetracked. The real problem is that phony 501(c)(4) groups are exploiting the tax laws to protect donors who don’t want to be held accountable for vicious, deceitful political ads. Hopefully this scandal will put these obscure but politically significant groups on the public’s radar.
“During the congressional hearings this week, members should question all aspects of 501(c)(4) enforcement, including why an IRS regulation allows these groups to work ‘primarily’ for the social welfare when the statute requires them to engage in such activities ‘exclusively,’ as well as why the IRS has allowed some groups to violate even the lax primary purpose standard without consequences.
I spoke with Ms. Sloan and she indicated that she would like to get the IRS out of this. The simple way to do that would be to prohibit political donations by 501(c)(4) organizations. That would not put any limit on political spending, just anonymous political spending.
I’m inclined to agree with Ms. Sloan. Collecting taxes is an enormous, complicated job.
If we are going to have deductible charitable contributions then we need the IRS to be looking at some charities, but organizations end up applying for exempt status for a large variety of reasons that have nothing to do with taxation. 501(c) status creates an unjustified patina of respectability in some circles and, in some states, will allow privileges such as running gambling operations. Some people seem to think that 501(c)(4) status can hide the fact that you grass-roots populist movement is backed by billionaires. What these extraneous matters have in common is little or no connection to the IRS mission:
Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.
I’m not sure how important transparency in political expenditures is. It seems like the fact that somebody is obfuscating where the advertising money is coming from should be enough of a credibility hit. On the other hand the lengths that people go to do the covering up makes me think they are accomplishing something with it. We’ve got a Federal Election Commission that is supposed to be taking care of that. That is where the enforcement effort belongs. Let the IRS focus on collecting taxes.
You can follow me on twitter @peterreillycpa.