IRS Withdraws Proposed Regulations on 501(c)4 Groups

The Internal Revenue Service plans to substantially change the regulations it proposed last fall for tax-exempt “social welfare” organizations and their political activities before moving ahead with a public hearing.

The announcement Thursday came in response to the unprecedented number of comments—over 150,000—the IRS received on the proposed rules, which were supposed to govern the types of political activity that would be permissible for groups to maintain tax-exempt status as “social welfare” organizations under Section 501(c)4 of the Tax Code (see Treasury and IRS Issue Guidance for 501(c)4 Tax-Exempt Social Welfare Organizations). The issue has roiled the IRS since last year, when the former director of the IRS’s Exempt Organizations unit, Lois Lerner, admitted that the IRS had used terms such as “Tea Party” and “Patriot” to screen applications from conservative groups applying for tax-exempt status. Those revelations led to the departures of Lerner and a number of other high-ranking officials at the IRS, along with a series of contentious hearings, subpoenas and contempt of Congress charges against Lerner.

The new commissioner, John Koskinen, indicated back in February that the proposed regulations are not likely to be finalized anytime soon and would be subject to heavy revision in response to the thousands of comments the agency received (see IRS Commissioner Koskinen Says Proposed Tax-Exempt Rules Won’t Be Finalized Soon). Republican lawmakers in Congress introduced legislation in February to block the proposed regulations (see Congress Considers Legislation to Block IRS’s Proposed 501(c)4 Regulations).

On Thursday, the IRS released the following statement: “Last November, Treasury and the IRS proposed a new regulation governing political activity of section 501(c)(4) organizations. The proposal generated over 150,000 written comments—the most comments ever received by Treasury and IRS on a proposed tax regulation. Consistent with our standard rulemaking process, we intend to review those comments carefully, take into account public feedback, and consider any necessary changes. Consistent with what Commissioner Koskinen has previously stated, it is likely that we will make some changes to the proposed regulation in light of the comments we have received. Given the diversity of views expressed and the volume of substantive input, we have concluded that it would be more efficient and useful to hold a public hearing after we publish the revised proposed regulation. Treasury and the IRS remain committed to providing updated standards for tax-exemption that are fair, clear, and easier to administer.”

The IRS had planned to hold a public hearing on the proposed regulations before moving forward, but it now intends to issue a revised set of proposed regulations before moving ahead to the hearing stage. However, the timing on any new proposed regulations is indefinite, according to a spokesman.

House Ways and Means Committee chairman Dave Camp, R-Mich., whose committee held several hearings on the controversy, interpreted the announcement as saying the original proposed regulations have been scrapped for now.

“During this Committee’s investigation, we exposed the true intent of this rule—to silence the voice of conservative non-profit groups,” Camp said in a statement Thursday. “We also uncovered the fact that this rule was purposefully kept out of the public’s view and developed offline. This proposed rule was wrong from the start. The American people spoke out loud and clear against it, and hopefully the IRS and the Obama Administration will think twice before ever trying to go down this path again. If they do, we will continue to defend Americans’ First Amendment rights.”

In January, Camp introduced H.R. 3865, the "Stop Targeting of Political Beliefs by the IRS Act of 2014," to prohibit for one year the Treasury and the IRS from issuing or finalizing proposed 501(c)(4) regulations. In February, the Republican-led Ways and Means Committee submitted comments on the proposal rule, outlining their strong opposition to them.

A number of Democrats in Congress have stressed the need to regulate 501(c)4 organizations, which were used in the wake of the Supreme Court’s 2010 decision in the Citizens United v. Federal Election Commission case to make unlimited political campaign contributions without exposing the names of the donors. However, some of the IRS’s proposed regulations attracted opposition from groups on both the left and right.