The real benefit to an organization in gaining tax exempt status as a 501(c)(4) isn’t actually gaining a break on taxes; it's that social welfare organizations don’t have to disclose their donors.
As the headlines have been blaring lately, the Treasury Inspector General for Tax Administration (TIGTA), which provides independent oversight of IRS activities, found that “The IRS used inappropriate criteria that identified for review Tea Party and other organizations applying for tax-exempt status based upon theirnames or policy positions instead of indications of potential political campaign intervention.” That’s according to the May 17, 2013, testimony of J. Russell George with TIGTA before the House Ways and Means Committee.
George provided some background: In 2010, some IRS employees began singling out applications for 501(c) (4) tax-exempt status from groups with “Tea Party,” “Patriots,” or other political sounding names, rather than focusing on the activities undertaken by the groups. According to Russell’s testimony, that changed in mid-2011, when the criteria shifted to applicants’ political, lobbying, or advocacy activities – which would be more appropriate. However, early in 2012, a unit within the IRS again focused on organizations’ policy positions, believing the 2011 criteria too broad. Several months later, the focus reverted once more, to the groups’ activities, Russell said in his testimony. Because of actions by some within the IRS, some groups applying for tax-exempt status had their applications delayed or were asked for unnecessary information.
For the IRS to single out any types of groups for special attention or harassment because of their names or convictions is wrong.
However, it’s worth taking another look at the whole idea of 501(c)(4) groups. According to the IRS, section 501(c)(4) provides tax exemption for two different types of groups:
1) Social welfare organizations:Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare. Examples include organizations that encourage industrial development by making loans to businesses and those that hold annual festivals of regional customs and traditions. Social welfare groups can’t intervene or participate, either directly or indirectly, in political campaigns. However, social welfare organizations may engage in some political activities, as long as they’re not the group’s primary activity, according to the IRS.
2) Local associations of employees:the membership of which is limited to the employees of designated person(s) in a particular municipality, and the net earnings of which are devoted exclusively for the promotion of social welfare.
The fact that social welfare organizations can engage in some political activities, as long as they’re not the groups’ primary focus, leaves plenty of room for interpretation. “Groups seeking or claiming 501(c)(4) status have interpreted the ‘primary activity’ requirement to mean they can spend up to 49 percent of their total expenditures in a tax year on political campaign activities” while still maintaining tax-exempt status that allows them to keep their donors secret, according to a rulemaking petition filed in April by Citizens for Responsibility and Ethics in Washington (CREW), a nonprofit focused on campaign finance, lobbying, ethics and transparency.
While IRS regulations provide tax exempt status to organizations that primarily are engaged in promoting the common good, the Internal Revenue code itself provides for a much narrower application of tax exemption, CREW states in its petition. Specifically, the exemption would come into play for “civil leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.”
The real benefit to an organization in gaining tax exempt status as a 501(c)(4) isn’t actually gaining a break on taxes. As Roger Colinvaux, an associate professor of law at Catholic University, points out in this piece for CNN.com, most of these groups don’t have much income. The real benefit is that social welfare organizations don’t have to disclose their donors. Political organizations do. “After Citizens United, the abuse the IRS is tasked with policing is whether an organization that claims to be a ‘social welfare’ organization is in reality a political organization in disguise,” Colinvaux writes.
In 2012, about 150 groups organized as 501(c)(4) organizations spent more than $254 million on various elections, according to OpenSecrets.org. The parties themselves spent about $255 million.
In its rulemaking petition, CREW states, “increasingly many 501(c)(4) organizations are spending a significant proportion of their funds on partisan, political activities to affect the outcomes of targeted races.” The result is an influx of anonymous money into the political process. CREW urged the IRS to ‘harmonize its regulations with the clear and unambiguous language requiring 501(c)(4) organizations to be operated exclusively for a charitable purpose.”
The IRS issued a brief, bureaucratic response to the petition, stating that it would work with its chief counsel and the Treasury’s Office of Tax Policy to consider proposed changes.
Given the amount of money being anonymously funneled into the political process, it seems that it’s time for the IRS to do more than consider proposed changes. It needs to act.