The Independent View: I.R.S. Plans to Restrict Nonprofits’ Political Activity

With time running short, both progressive and conservative advocacy groups are raising serious objections to new rules proposed by the Obama administration to rein in political activity by nonprofit organizations that are not required to disclose sources of their funding. They fear that enforcement of the regulations would chill more neutral civic initiatives such as voter registration efforts and candidate forums.

The I.R.S. proposed new regulations would better define the level of legitimate political activity that nonprofit groups could undertake and remain tax-exempt.

More than 23,000 public comments, a record, according to the agency, have been submitted regarding the proposal to put new restrictions on so-called social welfare groups, ahead of the Feb. 27 deadline.

The new rules could make it impossible for social welfare groups referred to as 501(c)(4) groups to participate in politics because of the attempt to crack down on organizations now skirting the law. Critics of the rules say the expanded definition of what the groups would have to count as “candidate-related political activity” would cover much of what they now do to promote civic engagement.

The I.R.S. intends to impose the regulations in time for this year’s midterm elections or, at a minimum, make organizations more cautious about their activities. The new rules do not apply to labor unions.

Some watchdog groups say the I.R.S. proposal, while flawed, is a necessary step toward clarifying what nonprofits can do in politics and to place better controls on organizations on both the right and the left that are taking advantage of the system to improperly influence elections.

“These are certainly imperfect rules, but the I.R.S. has to figure out how you differentiate bona fide social welfare organizations from these phantom (c)(4)'s that are doing nothing but abusing the tax laws,” said Stephen Spaulding, counsel to Common Cause, a public advocacy group.

A coalition of campaign watchdog groups this week came out in opposition to a House Republican plan to force a one-year delay in the rules, saying in a letter to the Ways and Means Committee that a delay “will only serve to prolong the opportunity for the abuses of the tax laws that have resulted in hundreds of millions of dollars of undisclosed ‘dark’ money flowing into federal elections.”

Top Democrats say the I.R.S. effort is warranted because groups created under the social welfare heading have become the conduit for tens of millions of dollars flowing into campaigns from undisclosed sources.

Currently, nonprofits can engage in politics and remain tax exempt if more than half of their money and time is spent on social welfare activities. But the line has always been blurry, with the I.R.S. basing its determination of tax status on the individual facts and circumstances of a case. Thousands of nonprofit groups have formed across the nation to work on the full range of national issues and campaigns to local ballot initiatives.

In issuing its proposal, the agency noted that “one of the significant challenges with the 501(c)(4) application review process has been the lack of a clear and concise definition of ‘political campaign.’”

To the alarm of the nonprofits, the draft proposal would significantly tighten the definition by considering voter registration drives, turnout initiatives, candidate debates, forums and voter guides among candidate-related political activity. The definition of a candidate would also now extend to judicial and executive appointments.

One area where conservative and progressive critics of the proposals differ is that more left-leaning groups believe the I.R.S. needs to come up with a clear definition of political activity that could apply to all nonprofit sectors, not the just the 501(c)(4)'s, and weed out abusers. But most do not support the initial proposal.

Changes to federal campaign finance laws have led to a surge in political spending by nonprofit 501(c)(4) “social welfare” groups, which under fuzzy Internal Revenue Service regulations, may not operate “primarily” in candidate election activity or risk losing their tax-exempt status. While groups can form separate political committees to raise and spend unlimited funds for these activities, they would then have to disclose their donors — something they are not required to do as a 501(c)(4).

At a House hearing last week, John Koskinen, the new I.R.S. commissioner, said the rules were “not going to be finalized in the near-term future.”

CLICK HERE to view a chart of I.R.S. rule changes since 2002.