Internal Revenue Service is caught in an election-year struggle between Democratic lawmakers pressing for a crackdown on nonprofit political groups and conservative organizations accusing the tax agency of conducting a politically charged witch hunt.
Senator Michael Bennet, Democrat of Colorado, is part of a legislative push demanding greater disclosure from “super PACs.”
In recent weeks, the I.R.S. has sent dozens of detailed questionnaires to Tea Party organizations applying for nonprofit tax status, demanding to know their political leanings and activities. The agency plans this year to press existing nonprofits like American Crossroads, on the Republican side, and Priorities USA, on the Democratic side, to justify their tax-protected status as “social welfare” organizations, a status that many tax professionals believe is being badly abused.
Senate Democrats are readying a fresh legislative push to demand that such groups disclose their donors and attach disclaimers to their political advertising identifying the advertisement’s primary funders. Tax experts are also raising concerns that corporate donors to “super PACs” may be deducting their contributions as business expenses.
“The shadowy attack ads we see every day should be brought into the light,” said Senator Michael Bennet, Democrat of Colorado. “The largest contributors should stand by the ads they’ve paid for, the voters should know who’s behind these ads, and these super PACs should not be allowed to abuse our tax code by masquerading as nonprofit charities.”
The pushback is likely to be just as fierce. Jay Sekulow, a conservative lawyer known more for his stands on religious freedom than for his tax work, said he is representing 16 Tea Party groups that are claiming harassment by the I.R.S., and the number is growing. He said he intended to demand an explanation from the Treasury Department on Wednesday for what he called “McCarthyism” tactics and that he would contact Republican lawmakers this week.
“This is obviously a coordinated effort by the I.R.S. to stifle these Tea Party and Tea Party-affiliated groups, and to stifle free speech activities,” Mr. Sekulow said. “It’s as onerous as what they did to the N.A.A.C.P. in the 1950s, and I plan to make that point.”
With independent political groups already dominating the 2012 campaign cycle, their treatment under tax and campaign finance law is likely to be a recurring theme in the coming months. Senate Democrats have formed a task force behind Mr. Bennet to plan hearings and a legislative response. Republicans suspect political motivations.
Into that charged atmosphere, the I.R.S. is heightening its own push to ensure that nonprofits are sticking to their primary role as social welfare groups, an effort that began gingerly in 2011.
At issue are groups large and small formed as 501(c)(4)s under the tax code, a designation created for social welfare groups but which include such overtly political organizations as American Crossroads — co-founded by Karl Rove, the former political adviser to President George W. Bush, to help elect Republicans — and Priorities USA, founded by former Obama White House aides and overtly backed by President Obama.
“To be tax-exempt as a social welfare organization described in Internal Revenue Code (IRC) section 501(c)(4), an organization must be primarily engaged in the promotion of social welfare,” I.R.S. officials said in a statement e-mailed in response to inquiries about the I.R.S.’s activities. “The promotion of social welfare does not include any unrelated business activities or intervention in political campaigns on behalf of or in opposition to any candidate for public office.”
But, the service added, such organizations can engage in some political activity “so long as, in the aggregate, these nonexempt activities are not its primary activities.” Nobody is quite sure how that is measured.
“This is really the last loophole,” said James P. Joseph, a tax lawyer in Washington at Arnold & Porter, “and it has made way for a profusion of political activities and questionable tax issues.”
For instance, individual donations to groups like American Crossroads are not tax deductible as charitable contributions, and most tax lawyers would say company donations should not be deducted either. But in some circumstances, companies could try to justify donations to political nonprofits as a “necessary” business expense, said Frances R. Hill, a tax law professor at the University of Miami.
Tax professionals suspect — but cannot prove — that some donors are tucking their contributions to the groups into their marketing or advertising budgets and deducting them from their taxes, she said.
Recent Supreme Court rulings have heightened concern about the issue, since companies can now give unlimited amounts to so-called super PACs as long as those political action committees do not coordinate directly with candidates. Outfits like Crossroads and Priorities USA run both tax-exempt 501(c)(4)s and more overtly political arms, known as 527 organizations. Under current law, there is little or no way to tell whether contributions are being deducted, especially because many of the most political companies are privately held.
“I think the story here is that we have a system in which we think this is happening, and there’s absolutely no way we can find out legally,” Professor Hill said.
The Democratic group Priorities USA uses a blanket disclaimer on its Web site that says, “Contributions to Priorities USA are not deductible for federal income tax purposes.” American Crossroads leaves unaddressed the business tax deductibility issue, stating, “Contributions to American Crossroads are not deductible as charitable contributions for federal income tax purposes.”
Officials at the organization say they tell their donors, including companies and individuals, that they should contact their financial advisers and tax counsels to determine the ramifications of their contributions.
Democrats, whose 501(c)(4)s have been outraised significantly by their Republican counterparts, have been pressing the I.R.S. for a response on the tax questions, and the agency responded earlier this year. The I.R.S. noted that under existing tax law, new 501(c)(4)s simply declare themselves to be social welfare organizations, but they are supposed to justify that status each year with their tax returns’ Form 990s. The agency promised that it “will review organizations to ensure that they have classified themselves correctly and that they are complying with applicable rules.”
The questionnaire being sent to agencies was identified as one way to check compliance. I.R.S. officials would not say whether that effort had gotten off the ground with the big groups that Democrats want examined. But what the I.R.S. called “a companion process” with new applicants was begun in recent weeks.
Small Tea Party-aligned groups say they have become collateral damage.
Eric Wilson, director of the Kentucky 9/12 Project, which spun out of an effort by the television and radio personality Glenn Beck, said his group applied for tax-exempt status in December 2010, and a month later was informed by the I.R.S. that it would get a response in 90 days. In February it got a response, a seven-page questionnaire with 30 multi-part questions, 88 inquiries in all.