After initially filing a lawsuit against the Internal Revenue Service, the advocacy group Citizens for Responsibility and Ethics in Washington filed a rulemaking petition with the agency asking the IRS to revise its existing regulations to eliminate a loophole that allows certain tax-exempt groups to engage in substantial political activity while keeping the identities of their donors secret.

Current IRS regulations grant tax-exempt status under Section 501(c)(4) of the Tax Code to groups with a “primary purpose” of promoting social welfare. The tax laws, however, require such groups to be operated “exclusively” for social welfare purposes.

Groups seeking or claiming 501(c)(4) status have interpreted the IRS regulation to mean they can spend up to 49 percent of their budgets on electoral activities, while still maintaining tax-exempt status that allows them to keep their donors secret. As a result, Republican-leaning organizations like the American Action Network and Crossroads GPS and Democratic-leaning groups like Priorities USA have been able to pour large sums of anonymous or dark money into elections, changing the political landscape.

During the 2012 election cycle, Section 501(c)(4) groups spent upwards of $250 million, including $131.3 million on congressional races.

“For decades, this regulation has been a point of contention for the IRS,” CREW executive director Melanie Sloan said in a statement Tuesday. “Being ‘aware’ of the problem is not the same as doing something about it. Political spending by tax-exempt groups is out of hand and it is way past time for the IRS to enforce the law as Congress intended.”

CREW contended that 501(c)(4) organizations had a significant and direct influence on the outcome of at least some 2012 elections.  For example, AAN spent nearly $1.5 million opposing Democratic candidate Dr. David Gill in the race for Illinois’ 13th congressional district, likely resulting in his defeat. Throughout the race, nearly every poll showed Dr. Gill leading his opponent, Republican Rodney Davis, by margins ranging from one to nine percent. AAN also spent more than $1 million against Dr. Gill in the final weeks, and he lost by 1,002 votes (0.3 percent of votes cast). In February, CREW and Dr. Gill sued the IRS for flouting the federal law barring 501(c)(4) groups from engaging in political activity.

“As was evident in Dr. Gill’s race—and in a number of races around the country—outside money can be a game changer,” said Sloan. “We saw tax-exempt groups enter the political fray in 2010 and then lead the charge in 2012. As the fundraising begins for the 2014 elections and voters grow tired of watching vituperative, deliberately inaccurate ads, the IRS cannot continue sitting on its hands.”

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access