IRS Changes the Game?

On Wednesday November 26, 2013, the US Department of Treasury and Internal Revenue Service issued proposed guidance, subject to a comment period, that would limit the scope of permissible political activities of 501(c)(4) social welfare groups. Under the new guidance, the IRS will move away from the “facts and circumstances” test long-employed in evaluating 501(c)(4) political activity and instead use bright-line rules.

The Treasury and the IRS plan to issue additional guidance that will address other issues relating to the standards for tax exemption under section 501(c)(4).

As there is a comment period, any new rules will not likely be in place until after the 2014 elections.

IRS Issues Initial Report on 501(c)(4) Controversy

This week the Internal Revenue Service issued a report to assess the scandal that has been plaguing the agency ever since a Treasury Inspector General Report came out that, as the report cites, found that:

The IRS used inappropriate criteria that identified for review Tea Party and other organizations applying for tax-exempt status based upon their names or policy positions instead of indications of potential political campaign intervention. Ineffective management: 1) allowed inappropriate criteria to be developed and stay in place for more than 18 months, 2) resulted in substantial delays in processing certain applications, and 3) allowed unnecessary information requests to be issued.

The report is meant to provide “an initial set of conclusions and action steps, along with an explanation of the additional review and investigatory activities underway.”

Interestingly, the report establishes a new voluntary process for organizations that have been subject to a backlog for more than 120 days to gain expedited approval to operate as a 501(c)(4) through self-certifying to certain thresholds and limits to political and social welfare activities.  Specifically, organizations can self-certify if:

  1. The organization has spent and anticipates that it will spend less than 40% of both the organization’s total expenditures and its total time (measured by employee and volunteer hours) on direct or indirect participation or intervention in any political campaign on behalf of (or in opposition to) any candidate for public office (within the meaning of the regulations under Section 501(c)(4)); and
  2. The organization has spent and anticipates that it will spend 60% or more of both the organization’s total expenditures and its total time (measured by employee and volunteer hours) on activities that promote the social welfare (within the meaning of Section 501(c)(4) and the regulations thereunder).

The IRS notes that the “thresholds reflected in the representations are criteria for eligibility for expedited processing rather than new legal requirements.”

The report also spells out additional criteria as to what constitutes “direct or indirect participation or intervention in any political campaign”:

  1. Any public communication within 60 days prior to a general election or 30 days prior to a primary election that identifies a candidate in the election.
  2. Conducting an event at which only one candidate is, or candidates of only one party are, invited to speak; and
  3. Any grant to an organization described in Section 501(c) if the recipient of the grant engages in political campaign intervention.