The Taxman Cometh?

May 18, 2011

“The taxman goes after campaign donors.” That’s what an editorial in today’s Wall Street Journal claims. Referring to recent press reports that the IRS is enforcing the gift tax on donors to 501(c)(4)s, the editorial declares, “Unleashing the IRS is an especially nasty turn.”

501(c)(4)s, social welfare organizations, are allowed to get involved in politics provided it is not their primary purpose. In the 2010 election, some donors used these special nonprofits to spend anonymously on politics. Since 501(c)(4)s must report all of their donors to the IRS, why is anyone surprised that the IRS then cross-checks whether the donors who gave more than the annual exclusion ($13,000) included the donation on their gift tax return and paid the tax (35 percent)? 

That big donations to 501(c)(4)s trigger the gift tax is not new news. This law has been on the books for decades. The Alliance for Justice published a guide in 2009 called “Contributions to Nonprofits and the Gift Tax,” long before Citizens United was handed down, noting that the tax applied. In addition, there have been numerous articles in the press, including an excellent discussion in Forbes last October by William P. Barrett called, tellingly, “Hey, Secret Big Political Donor, Don’t Forget The 35% Gift Tax.”  

From press reports and IRS statements, it appears that just five people received these letters inquiring about potential back gift taxes. Yesterday in New York, Marcus Owens, the former head of the Exempt Organizations division of the IRS, discussed the letters at a presentation. Why only five letters? According to Mr. Owens, it’s because most donors subject to the gift tax pay it voluntarily. They know it applies, and so they file their returns and pay their taxes promptly in accordance with the law. 

Is it fair to let some people off the hook when everyone else is doing the right thing? This hysterical editorial makes us wonder — is the esteemed Wall Street Journal, one of the world's great newspapers, saying that people should be allowed to neglect paying their taxes and government employees should not do their jobs? We certainly hope not.