House Ways and Means Committee Chairman Dave Camp, R-Mich., has released a public letter he sent to the Internal Revenue Service demanding information about its recent investigation into donations to politically active tax-exempt organizations and the agency’s apparent drive to impose gift taxes on these monies. 

Dave Camp

The IRS reportedly began sending letters to at least five donors to so-called 501(c)(4) organizations, named after the relevant section of the Tax Code, saying their contributions should have been reported on a Form 709 federal gift tax return (see IRS May Tax Political Donations as Gifts). Several 501(c)(4) organizations, such as Crossroads GPS, Americans for Prosperity and the American Action Network, played a major fund-raising role in the 2010 elections, especially in steering donations to Republican causes. Unlike Section 527 tax-exempt organization, they do not have to disclose the names of their donors. Democrats also have begun to organize their own 501(c)(4) organizations, such as Priorities USA.

Camp, who chairs the tax-writing committee in the House, questioned the process leading up to this action and level of involvement by the Obama administration.

“Every aspect of this tax investigation, from the timing to the sudden reversal of nearly 30 years of IRS practice, strongly suggests that the IRS is targeting constitutionally-protected political speech,” Releasing the letter,”  Camp said in a statement accompanying the release of the letter Wednsday. “The IRS must explain its actions or risk creating a chilling effect that threatens not only political advocacy groups, but all tax-exempt organizations that depend on contributions from individual donors.”

His letter follows on the heels of a similar letter sent last month by the ranking Republican member of the tax-writing Senate Finance Committee, Orrin Hatch, R-Utah, along with five other Republicans: John Kyl, R-Ariz., Pat Roberts, R-Kan., John Cornyn, R-Texas, John Thune, R-S.D., and Richard Burr R-N.C. (see Senators Question IRS on Gift Tax Enforcement and Political Influence).

The gift tax, currently a 35 percent rate that applies to sums given by people in excess of $13,000 per year, has not generally been assessed on donations to 501(c)(4) entities.  While case law is unsettled on the matter, the IRS has yet to issue guidance on the matter, leading both donors and nonprofits to believe gift taxes may not apply. 

“With more than 120,000 501(c)(4) organizations in operation across the United States, this sudden, unexplained enforcement by the IRS raises great uncertainty for both donors and these organizations,” Camp added. “As chairman of the Ways and Means Committee and a defender of taxpayers, it is my obligation to conduct the necessary and proper oversight of the IRS to get to the bottom of this issue.”

In his letter, Camp called on the agency to submit information to the Committee regarding how the IRS decided to begin the enforcement of gift tax rules on 501(c)(4) donations. Camp demanded the agency take immediate steps to provide a detailed explanation of its investigation to reassure taxpayers that the country’s tax laws are being enforced in a fair and consistent manner. Specifically, the letter requires IRS to provide information related to:

• The names, titles and divisions and/or offices of any and all individuals who were involved in or contributed to the decisions to investigate whether donations to 501(c)(4) organizations should be subject to the gift tax rules;

• The number of employees in the IRS working on estate and gift tax issues, including the name(s) of the individual(s) who made the determination to treat contributions to 501(c)(4) organizations as subject to the gift tax; and

• The criteria used by the agency to select taxpayers for gift tax examination, including all information that analyzed the legal or political consequences of auditing gift tax returns for contributions to 501(c)(4) organizations.

Camp also elevated his inquiry into this matter by exercising his authority as chairman to request a review of non-public documents within the possession of the IRS.  Under Section 6103 of the Tax Code, the chairman of the Ways and Means Committee can review, but not disclose, the exact contents of such documents as tax returns and IRS audit files. Camp has utilized this tool to review all relevant activities by the IRS in this matter and to determine whether the audits were initiated and conducted properly. 

The IRS is expected to begin providing the requested items later this month.