I have not yet heard anyone else say it and I think it needs to be said: singling out for closer scrutiny applications for Section 501(c)(4) status as a social welfare organization because they include “tea party,” “patriot” or similar buzz words associated with conservative political causes, makes complete sense. It is a procedure that the under-staffed and under-funded Internal Revenue Service should employ to more efficiently discharge its duties. Applications containing words like “liberal” or “progressive” or other buzz words associated with left-leaning causes should also attract the same scrutiny.
An organization that is qualified under Section 501(c)(4) of the Internal Revenue Code is exempt from taxation on its income and its donors do not have to be disclosed. But unlike other tax-exempts, such as religious, charitable and educational organizations, contributions are not deductible by donors. However, tax exemption and donor anonymity are significant benefits. 501(c)(4) applications more than doubled following the Supreme Court’s Citizens United decision. Money spent by these organizations in political campaigns has been referred to as “dark money.”
Section 501(c)(4) provides that the organization must be “operated exclusively for the promotion of social welfare” (emphasis added). IRS regulations state that this “does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.” However, the organization “may engage in some political activities, so long as that is not its primary activity” (Emphasis added). These provisions create a minefield of subjective interpretive challenges. So how does an IRS examiner charged with the responsibility of reviewing applications for 501(c)(4) status deal with this situation?
The examiner has to base the review entirely on the application and accompanying papers. These disclose such matters as a statement of the applicant’s purposes, proposed plan of operation and budget. There is no track record to review. The examiner must determine whether the proposed operation is consistent with the 501(c)(4) criteria. It is logical to focus attention on those applications that contain language that suggests or implies that the applicant intends to engage in impermissible activities.
I am unconcerned that this approach is “profiling.” It is intelligent profiling, and is not based on race, religion or any other illicit consideration. Such profiling, if properly motivated and executed, will better implement the intent of the tax law and also save time and money. In this time of fiscal constraint, this is a goal devoutly to be wished.
If there is a problem, and I think there is one, it is not at the application review level. The problem is enforcement. The IRS should be devoting more resources to monitoring the post-application activities of these organizations for compliance with the Internal Revenue Code and the IRS regulations. The last presidential campaign demonstrated that many of them have trespassed the line, and their political activity has become their “primary activity.” It is ludicrous to say that the political activity of Crossroads Grassroots Political Strategy, the 501(c)(4) formed by Karl Rove that anonymously raised and spent millions in the campaign, was “not its primary activity.” There are also 501(c)(4) organizations on the other side of the political divide that have spent significant sums on campaigning.
What is needed is not apologies. What is needed is more scrupulous monitoring by the IRS of the activities of 501(c)(4) organizations.