In a letter sent today to the Internal Revenue Service, Democracy 21 and the Campaign Legal Center called on the agency to promptly initiate a rulemaking proceeding to revise and clarify its regulations that spell out how much campaign activity 501(c)(4) “social welfare” organizations can engage in under the Internal Revenue Code.

According to the letter:

On July 27, 2010, Democracy 21 and the Campaign Legal Center submitted to the Internal Revenue Service a “Petition for Rulemaking on Campaign Activities by Section 501(c)(4) Groups.”

The Petition challenged as contrary to law the existing regulations that define eligibility for an organization to qualify for section 501(c)(4) tax-exempt status.

The letter stated:

Since then, we have heard nothing from the IRS to indicate that such a rulemaking is under consideration.

Meanwhile, developments in the course of the 2012 national elections have  served to underscore the fact that inadequate and flawed IRS regulations are facilitating widespread misuse of the tax laws by organizations claiming tax-exempt status under section 501(c)(4) in order to keep secret the donors financing their candidate campaign-related expenditures.

This is seriously undermining the integrity of the tax laws and the credibility of the nonprofit sector.

The letter continued:

We are writing again to strongly urge the IRS to act on our Petition promptly and initiate a rulemaking proceeding. The IRS must take steps to properly interpret and enforce the tax law and stop these abuses from continuing to explode in our elections.

According to Democracy 21 President Fred Wertheimer:

Organizations are ripping off the tax laws to hide from the American people the wealthy individuals and corporations financing their campaign activities. Yet as far as anyone knows, the IRS has failed to stop this. We again call on the IRS to replace its ineffectual regulations and restore the integrity of the tax laws. The IRS should adopt a new bright line standard, in accord with court decisions, to establish that groups spending more than an “insubstantial amount” on campaign activities are not eligible for 501(c)(4) tax status.

According to J. Gerald Hebert, Executive Director of the Campaign Legal Center:

The inaction of the IRS is only serving to inspire further abuses of the tax code as 501(c)(4)s are misused by special interests and individuals seeking to buy influence in Congress and the White House without revealing their identities to the public.  The IRS needs to establish a bright-line standard on eligibility for this privileged tax status or the already flagrant abuses will become even more widespread and the damage to our democracy will be made infinitely worse.

The letter stated:

Recently, a group of Democratic Senators and a group of Republican Senators have each separately written to the IRS, both complaining about the agency’s administration of section 501(c)(4).  One group of Senators argues that the agency is too intrusive in its inquiries into the candidate election activities of applicants for 501(c)(4) “social welfare” status.  The other group of Senators argues that the agency is too lax in enforcing the limits on candidate campaign activities by such groups.

The IRS has a statutory responsibility to administer and enforce the tax laws as interpreted by the courts without regard to political pressure.  These letters from the Senators, however, serve to confirm that it is essential for the IRS to initiate a rulemaking to provide clarity and a legally correct bright line standard for determining when a group is eligible to receive tax-exempt status under section 501(c)(4).

Democracy 21 and the Campaign Legal Center also sent a series of letters to the IRS on October 5, 2010, September 28, 2011, December 14, 2011, and March 9, 2012calling on the IRS to investigate and take appropriate action against four groups claiming 501(c)(4) status whose overriding purpose is to elect and defeat candidates.  The four groups are Crossroads GPS, Priorities USA, American Action Network, and Americans Elect. The letters from the watchdog groups make the case that even in the face of the ineffectual IRS regulations the four groups appear to be clearly ineligible for 501(c)(4) tax-exempt status.

The letter concluded:

The widespread abuse of the tax laws by groups improperly claiming section 501(c)(4) tax-exempt status will continue and grow until the IRS revises its regulations to conform with the statutory provision in the Internal Revenue Code and with court interpretations holding that tax-exempt groups may not engage in more than an insubstantial amount of non-exempt activity.

The IRS must move promptly to set a new clear, bright-line and administrable standard for determining eligibility for 501(c)(4) tax status and ensure that the standard complies with the statute and court decisions.  Absent such action by the IRS, the agency will bear direct responsibility for the misuse and abuse of the tax laws by groups that are flooding our elections with secret money.

We strongly urge the IRS to promptly institute a rulemaking proceeding to address this matter.  We would appreciate receiving a response from the IRS to our letter regarding what action the agency is prepared to take.