The IRS’s Latest Misstep on the 501(c)(4) Front
The IRS, reeling from the implosion of its Exempt Organizations unit and its leadership failures, issued a remarkable report Monday that reveals the agency still is in damage control mode, and listing badly. Among other fixes IRS Principal Deputy Commissioner Daniel Werfel proposed is a so-called “Streamlined Approval Process for the Priority Backlog.” Clearly designed to mollify congressional criticism about the long queue of applicants awaiting approval of their 501(c)(4) status, the proposal promises approval within two weeks or less for those applicants certifying they will spend less than 40 percent of their yearly expenditures and total staff time on political activities.
What’s wrong with this approach? Just about everything. One source of the IRS’s problems is its failure to reconcile its regulations, which require only that 501(c)(4) organizations be “primarily” engaged in social welfare activities, with the Tax Code itself, which dictates that such groups be organized “exclusively” for the promotion of social welfare. The IRS regulation not only contravenes the law, but has paved the way for 501(c)(4) groups to spend hundreds of millions of “dark” or anonymous money attempting to influence the outcomes of our elections.
In practice, both the IRS and applicants have interpreted the IRS regulation to mean an organization meets the statutory and regulatory requirements for 501(c)(4) status as long as its political activities do not exceed 49 percent. During the recent round of congressional hearings, many members noted that the core issue at the center of the IRS scandal is that the agency has re-defined “exclusively” to mean “primarily.”
It doesn’t take a math genius to figure out that 39 percent — the new threshold the IRS seemingly plucked out of thin air — is no more true to the word “exclusively” than the formerly used 49 percent. While it might temporarily appease some irate applicants and members of Congress, the IRS’s latest proposal is as flawed as the regulation in use since 1959. The law says “exclusively,” which means “solely,” or “only,” but never 49 percent or 39 percent.
Not only does the IRS continue to flout the congressionally passed statute governing 501(c)(4) organizations, but this new, reflexive proposal is ill-considered and wrong. Over the past several years, CREW and others have called on the IRS to engage in meaningful deliberations on the limitations on political activity by social welfare organizations through the vehicle of a rulemaking procedure. Those calls have gone unheeded, leading CREW to file a lawsuit against the IRS for its failure to act.
Suddenly, as a result of congressional ire and public outrage, Mr. Werfel now admits “both the taxpayer and the IRS would benefit greatly from clear definitions” of what constitutes disqualifying political activity and how much such activity is permissible. The way to determine these definitions, however, is not through a hastily prepared report, intended to calm the roiling waters in which the IRS finds itself. Rather, the answer is a considered and transparent rulemaking process in which experts and the public have the opportunity to weigh in on any proposed fix to the problem the IRS itself created when it implemented the initial regulation.
Congress could, of course, step in and pass legislation amending the Tax Code to resolve the issue. Given the partisan gridlock as well as the refusal of some members to recognize that the regulations have contributed to the current debacle, the odds of congressional action appear low. The best hope for real reform is for a federal court to step in and order the IRS to change the regulations to adhere to the plain meaning of the statute. If, as the law requires, those seeking 501(c)(4) status are permitted to operate exclusively to promote social welfare, the IRS will have an easy standard for those that apply: any political activity will be too much.