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IRS May Crack Down on Tax-Exempt Political Groups

September 4, 2012

A new report from the Congressional Research Service could mean bad news for political groups that have been using the Tax Code to raise money on behalf of candidates and spending millions on political ads while benefiting from tax-exempt status.

While groups that qualify for tax exemptions under Sections 501(c)3 and 501(c)4 of the Tax Code are allowed to take policy positions and do issue advocacy, they are not supposed to advocate on behalf of a political candidate. However, that’s exactly what they do in many cases. Groups like the Republican-leaning Crossroads GPS and the Democratic-leaning Priorities USA are often aligned with the so-called Super PACs that are driving up the cost of the current election cycle to an unprecedented level. Meanwhile the groups claim tax exemptions that allow them to avoid taxes and shield the identities of donors. In their commercials, they urge viewers to contact a politician and urge them not to do this or that. Even though the commercial may not explicitly say,

“Don’t vote for President Obama” or “Cast your vote for Mitt Romney,” the intent is still clear.

The CRS report notes, “The IRS has released two rulings that provide a non-exhaustive list of factors the agency considers when determining whether an issue advocacy communication is electioneering. The most important point to keep in mind is that the determination of whether an ad is actually campaign activity is entirely dependent on the facts and circumstances of each case. This requires looking at the ad in question, as well as being familiar with some of the organization’s other activities (e.g., has the group run a series of similar ads?) and the election (e.g., has the issue been raised to distinguish among the candidates?).”

The IRS has come under pressure from both political parties, with Republican lawmakers in Congress generally pressing the service to ease up on questioning the tax-exempt status of Tea Party-affiliated groups or and grant them tax exemptions, while Democratic lawmakers have generally urged the agency to tighten up its scrutiny of tax-exempt political groups (see GOP Lawmakers Prod IRS to Grant Tax Exemptions to Tea Party Groups and Senators Ask IRS to Cap Political Spending by Nonprofits). The CRS report is likely to provide further ammunition for the side pushing for a tougher approach to the tax-exempt groups, but is not likely to have much effect before the November elections.

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