IRS Denial Of Tax Exempt Status To Political Group May Be Cause For Other Groups’ Concern
June 8, 2012
IRS Denial Of Tax Exempt Status To Political Group May Be Cause For Other Groups’ Concern
June 28, 2012

GOP Lawmakers Send Letter To IRS Demanding Justification For Donor Name Requests

It seems as if the ongoing saga between the IRS and political action committees (PACs) took another turn today as eleven Republican senators who serve on the U.S. Senate Committee on Finance sent a letter to the IRS citing concerns over privacy protections and requesting additional information regarding the agency’s request for private donor information from organizations seeking tax exempt status.  Previously, we discussed calls by campaign finance reform advocates to investigate the role that 501(c)(4) tax-exempt organization were playing in influencing elections and the IRS’ denial of tax-exempt status to one organization which the IRS determined to be organized “primarily for the benefit of a political party and a private group of individuals, rather than the community as a whole.”

The letter states that “we remain concerned that the IRS is requesting the names of donors and contributors to organizations that apply for tax exempt status.  In doing so, the IRS appears to be circumventing the statutory privacy protections that Congress has long provided donors.”  It goes on to demand that the IRS provide justification for requesting actual donor names during reviews of applications for recognition of exemption under Section 501(c)(4), as well as information regarding whether it is customary for the IRS to request donor names and how many times it has done so in the past ten years.

The IRS is no doubt struggling to get a handle on the influx of 501(c)(4) applications since the Citizens United decision came down in January of 2010.  This decision removed restrictions on corporate and union political campaign expenditures, and spurred an increase in tax-exempt spending on political campaigns.   The 501(c)(4) designation is attractive to so-called “super PACs,” because they can use a 501(c)(4) to hide the names of donors for years.  The 501(c)(4) receives individual donor contributions and then the 501(c)(4) donates all of its money to the PAC, which lists the 501(c)(4) as the sole donor.

The problem for the IRS is that 501(c)(4)s are not supposed to be organized for political purposes.  According to the Treasury Regulations, a 501(c)(4) organization is one that is operated “exclusively” for the promotion of social welfare and is “primarily” engaged in promoting the common good and general welfare of the people of a community for the purpose of bringing about civic betterment and social improvements.  Generally speaking, social organizations are allowed to advocate a particular stance on a political issue as long as it is not their primary focus to participate directly or indirectly in political campaigns on behalf of or in opposition to any candidate for public office.

As the IRS grapples with 501(c)(4) filings in the post-Citizens United landscape, it is seeking ways to assist in the determination that a proposed 501(c)(4) is not being organized for the primary purpose of influencing politics.  It seems that someone at the agency has determined that a review of the applicant’s donor list would help to reach the appropriate conclusion.  Whether the IRS will be able to continue to request this information in the future, especially in the face of resistance from lawmakers, remains to be seen.