IRS to Propose Stronger Limits on Nonprofit Political Spending

June 20, 2014
IRS
This week, IRS Commissioner John Koskinen announced his agency’s upcoming solution to a growing problem: the spread of groups using 501(c) tax-exempt status to spend in elections while shielding the identities of their donors. That shielding denies voters information they need to evaluate the messages they receive before an election. The new proposal, expected in final form in early 2015, will better regulate nonprofits’ political spending by covering more organizations and including stronger limits on the amount 501(c) organizations can spend on politics. Both changes are crucial to stemming the ever-increasing flood of dark money in our elections.
 
Due to loopholes in federal election and tax laws, donors can now anonymously engage in significant political spending by using a nonprofit group recognized under sections 501(c)(4), 501(c)(5), or 501(c)(6) of the tax code. This secret spending has exploded in recent years – from less than $70 million in 2008 to well over $300 million in 2012. This leaves the public in the dark about who is trying to influence their votes before the election and who might be trying to influence legislators’ votes after the election is over.
 
In response to the rise of dark money, the IRS proposed new rules in November 2013. The proposal drew almost 170,000 public comments, leading the IRS to announce that it would revise its rules to address the commenters’ concerns. Koskinen’s announcement contains two major improvements to the original proposal.
 
First, the rules will cover more nonprofit entities. The original proposal applied only to “social welfare organizations” – entities registered under section 501(c)(4) of the tax code.  But as the Brennan Center explained in its comments on the original proposal, regulating only 501(c)(4)s would allow circumvention of the law through other types of nonprofits, most likely 501(c)(5) labor unions and 501(c)(6) business associations. Expanding the rules to cover these groups ensures that every 501(c) nonprofit plays by the same rules and that closing one loophole does not result in political money merely moving to another loophole.
 
Second, the rules will lower limits on the amount of political spending an organization can engage in before endangering its 501(c) nonprofit tax status.  Although the IRS has never officially confirmed its criteria, it is widely believed that under the current system a 501(c) nonprofit can retain its tax status so long as its political spending does not reach 50 percent of its budget.  Koskinen’s announcement that the limit will be lowered is encouraging, but absent specifics, it is difficult to predict the impact. 
 
The Brennan Center proposed a hybrid rule for setting political spending limits on 501(c) groups. Under the Brennan Center’s suggested rule, organizations that spend more than either a specific dollar amount (for example, $10,000) or a percentage of their budgets (such as 15 percent) would lose their 501(c) status, and be required to register as a political organization under section 527 of the tax code. Unlike 501(c) entities, 527 organizations must publicly disclose their donors.  The percentage threshold ensures that nonprofits are truly focused on the purposes for which they receive tax benefits (being social welfare, labor, and business organizations) rather than on spending immense sums of dark money in elections. The specific dollar threshold ensures that well-funded organizations aren’t able to significantly influence elections while avoiding disclosure simply because they have large budgets.
 
Commissioner Koskinen’s announcement deserves praise. If the final proposal lives up to the promise of his preview, it will help strengthen the integrity of both our elections and the tax code. The IRS should finalize and implement its reforms before the 2016 elections – when, if the current pattern holds, we can expect to see an even greater deluge of political dark money.
 
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