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IRS to Propose Stronger Limits on Nonprofit Political Spending

With the increased number of political groups using 501(c) tax-exempt status, a new proposal seeks to better regulate nonprofits’ political spending.

  • David Earley
June 20, 2014
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.
(Photo: Think­stock)