IRS Proposes Questionable Limit on Activities of Tax-Exempt Groups

The Obama administration has announced plans to limit the political activities that groups may participate in and still claim tax-exempt status.

The announced plan and the political activities in question would apply to any group that is a 501(c)(4) tax-exempt organization as defined in the Internal Revenue Code.  These organizations would have limitations related to paid political advertisements, distributing literature in support of a political campaign, and efforts to drive voter registration.

These changes would apply to the conservative organizations that were the subject of targeting by the IRS between 2010 and 2012.  In the targeting, the IRS used keywords associated with conservative organization to identify and delay approval of applications for tax-exempt status.  Those delays lasted for months and in some cases for years.

The proposed changes would likely take several years to approve and put into place, which means the tax-exempt organizations could likely continue to support political campaigns during the 2014 mid-term elections.  However, the changes could be in place before the next presidential election in 2016.

Timing and Nature of Limitations on Tax-Exempt Groups Questioned

Some have expressed concern about the timing of the proposed changes, since the investigation into the IRS targeting of conservative tax-exempt organizations is still ongoing.  One of those who questioned the changes includes Dave Camp, Michigan Republican and Chairman of the House Ways and Means Committee.

“There continues to be an ongoing investigation, with many documents yet to be uncovered, into how the IRS systematically targeted and abused conservative-leaning groups,” noted Camp.  “This smacks of the administration trying to shut down potential critics.”

Jay Sekulow, an attorney for the American Center for Law and Justice (ACLJ), questioned the impact of the proposal on freedom of speech.

“This is a feeble attempt by the Obama Administration to justify its own wrong-doing with the IRS targeting of conservative and Tea Party groups,” wrote Sekulow.  “Instead of holding those responsible for the unlawful targeting scheme accountable for their actions, the Obama Administration is determined to further limit the free speech of Americans by attempting to change constitutional practices that are decades old.”

The ACLJ is leading a lawsuit involving over 40 organizations against the IRS for the unfair targeting.

Supporters of the Obama administration proposal note that while the original wording in 501(c)(4) were intended to limit the primary activities of tax-exempt organizations to those of a benevolent nature, interpretations of that wording by the IRS and the Supreme Court have allowed tax-exempt organization activities to extended into the political arena.

“Enormous abuses have taken place under the current rules, which have allowed groups largely devoted to campaign activities to operate as nonprofit groups in order to keep secret the donors funding their campaign activities,” noted Fred Wertheimer, president of Democracy 21.  Democracy 21 stands for placing limitations on the amount of money allowed in political campaigns.

Kenneth Gross, an attorney who specializes in campaign finance reform, sees the proposed changes as a possible good thing if they can add clarity and simplification to the existing rules.

“Brightening what are now blurred lines—what is political activity—is not only useful but necessary to have some kind of clarity to a vehicle that has been used to the tune of millions and millions of dollars,” said Gross.

by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.