Watchdog Groups Send Treasury IG Previous Requests Urging IRS Action Against Groups Improperly Claiming 501(c)(4) Tax Status

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In a letter sent today to the Treasury Inspector General for Tax Administration (TIGTA), Democracy 21, joined by the Campaign Legal Center, forwarded fifteen letters that the watchdog groups had sent to the IRS beginning in October 2010 urging IRS action against groups improperly claiming 501(c)(4) tax status and calling for a rulemaking proceeding.

The letters to the IRS that had been sent by the watchdog groups called on the IRS to investigate and take appropriate action regarding groups that were improperly claiming tax status as section 501(c)(4) “social welfare” organizations in order to keep secret from the American people the donors financing their expenditures in federal elections.

The letters also petitioned the IRS for a rulemaking to replace flawed IRS regulations adopted more than a half century ago that conflict with the statute and that have been wrongly interpreted to allow section 501(c)(4) groups to conduct far more campaign activities than are permitted by the law.

According to the letter to the TIGTA:

The IRS rules, their lax interpretation and the absence of IRS enforcement, all combined to play a central role in the blatant abuses of the tax laws by groups improperly claiming section 501(c)(4) tax status to hide the sources of the funds being spent by the groups to influence federal elections.

The letter from the watchdog groups to the TIGTA followed his testimony on May 21, 2013 in which the Inspector General said that his office is undertaking an audit to determine how the Internal Revenue Service “monitors I.R.C. §§ 501(c)(4)–(6) organizations to ensure that political campaign intervention does not constitute their primary activity.”

According to the letter from the watchdog groups to the TIGTA, which called the audit essential, improper claims to tax status under section 501(c)(4) “have deprived citizens of basic information on the source of funds that were spent to influence their votes.” The letter stated:

More than $250 million of this “dark money” was spent in the 2012 presidential and congressional elections by groups claiming tax status as section 501(c)(4) “social welfare” organizations, making this evasion of disclosure requirements a major scandal in its own right.

The letter to the TIGTA stated:

Our letters have presented documented cases to the IRS regarding the abuse of section 501(c)(4) by pro-Republican, pro-Democratic and independent candidate groups – including Crossroads GPS, Priorities USA, Americans Elect and American Action Network. These groups claimed section 501(c)(4) tax status to shield their donors from disclosure, even though the groups appear to be engaged primarily in campaign activities, in contravention of the eligibility requirements for section 501(c)(4) tax status.

Our IRS letters presented specific evidence regarding the extent of the campaign activities by these groups and called for an IRS investigation into their campaign activities. To date, however, no public action has been taken by the IRS against these groups and they have been improperly allowed to continue to function as section 501(c)(4) “social welfare” groups.

According to the letter to the TIGTA:

During this same period, Democracy 21,  joined by the Campaign Legal Center, also filed a petition with the IRS in July 2011, calling on the IRS to institute a rulemaking to replace its deeply flawed regulations implementing section 501(c)(4) of the tax laws. Attached are copies of the petition and the subsequent letters we sent in regard to it.

As the petition sets forth, the existing IRS rules, which are more than a half century old,  provide that in order to be eligible for section 501(c)(4) tax status an organization must be “primarily engaged” in social welfare activities. The petition explains that the rules are contrary to the statutory language of section 501(c)(4), which provides that such groups must be “exclusively” engaged in social welfare. The petition further explains that the rules are also contrary to court cases construing the statute, which conclude that such groups may engage in no more than an “insubstantial” amount of non-social welfare activity.

The letter concluded:

We strongly urge you to fully investigate the failure of the IRS to properly enforce the requirements of section 501(c)(4), which we believe resulted in the improper spending of hundreds of millions of dollars of secret money in the 2010 and 2012 federal elections.