IRS Looks to Clamp Down on Political Spending of Nonprofits

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The IRS is looking to limit the political activity of certain nonprofits.
The IRS has proposed rules that would limit the political activity of certain nonprofit organizations.

In late November, the U.S. Treasury Department and IRS announced a proposed set of guidelines designed to specifically define what “political activity” actually means for nonprofit organizations.

These new guidelines would put a limit on the political activities of nonprofits in order to prevent those involved in politics from using such organizations to provide financial contributions to political groups in somewhat of an anonymous fashion. While these rules could take effect at some point, there are still a number of hurdles they would have to overcome to be legally implemented.

Government data has shown that since the Citizens United ruling by the Supreme Court in 2010, nonprofits that mostly include social welfare groups under 501(c)(4) and trade associations under 501(c)(6) have reported significant increases in political spending. In 2012, these nonprofits reported to the Federal Election Commission (FEC) spending of over $300 million. This figure was $69 million in 2008 and only about $6 million in 2004, according to statistics from the nonpartisan Center for Responsive Politics.

Experts say this spending by nonprofits has gone on due to a lack of clearly defined guidelines on political spending. The statute that outlines rules on political activity by nonprofit groups states that they are required to work “exclusively” on their social welfare mission, but the regulatory interpretation of this statute is that “exclusively” actually implies “primarily.” The word “primarily” fails to specify the percentage of political spending for these tax-exempt nonprofits.

The IRS utilizes what is known as a “fact and circumstances” test to determine whether nonprofits are primarily involved in what their missions truly are or if they are more involved in the political landscape. It conducts the test by having an IRS employee examine the actions and communications of a group to make this determination. For many years, the IRS has failed to present clear rules for what is considered political activity and what is not.

The proposed rules look to make clear what aspects of political spending are acceptable among nonprofits and are also designed to reduce the need for the “facts and circumstances” test. The guidelines are categorized into three different areas:

1) Forms of communication considered political include calling for the election or defeat of a specific political candidate, communications that mention a specific candidate or party within 60 days of an election, and any expenditures that have to be reported to the FEC

2) Contributions and grants made by an organization to a political group that must report to the FEC, in addition to contributions made by an organization to a tax-exempt or 527 group related to political activity for a candidate running for office would be classified as political in nature

3) Any activity that is closely tied to an upcoming election would be classified as political, which includes voter registration drives and get-out-the-vote initiatives, the distribution of materials that promote candidates, the creation/distribution of voter guides on specific candidates, and the hosting of events attended by candidates within 60 days of an election

Even though these proposed rules lay out clearer guidelines for nonprofits, they don’t address the issue of how much money an organization can spend on political activity. The IRS said it will issue additional information on this in the near future.

“This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations,” said Mark Mazur, the Treasury Assistant Secretary for Tax Policy, in a public statement. “We are committed to getting this right before issuing final guidance that may affect a broad group of organizations. It will take time to work through the regulatory process and carefully consider all public feedback as we strive to ensure that the standards for tax-exemption are clear and can be applied consistently.”

The announcement of these new proposed guidelines comes on the heels of controversy in which the IRS was found to be improperly targeting the applications and activities of certain nonprofits more than others earlier this year.

IRS Acting Commissioner Danny Werfel said the new rules are simply one piece of the puzzle to improve the efforts of the federal tax collection agency with regard to how it handles nonprofit organizations.

“This is part of ongoing efforts within the IRS that are improving our work in the tax-exempt area,” Werfel said in a public statement. “Once final, this proposed guidance will continue moving us forward and provide clarity for this important segment of exempt organizations.”

Photo credit: The photograph of the IRS headquarters building is used with permission via the Creative Commons license through Flickr.

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