'Dark Money' Nonprofit Political Spending Restricted In Proposed IRS Rules

IRS Cracks Down On 'Dark Money'

WASHINGTON -- The Treasury Department and Internal Revenue Service announced on Tuesday new guidelines clarifying the definition of political activity for nonprofit organizations.

The new rules, which still face many procedural hurdles, would limit the political activities of nonprofit organizations and help prevent political actors from using these groups to provide anonymity to donors.

Since the Supreme Court's 2010 Citizens United ruling, nonprofit organizations, particularly social welfare nonprofits organized under section 501(c)(4) of the tax code and trade associations organized under section 501(c)(6), have radically increased their reported political spending. In 2012, these groups reported to the Federal Election Commission spending in excess of $300 million. That was up from $69 million in 2008 and nearly $6 million in 2004, according to the Center for Responsive Politics.

Much of this spending was allowed because of the lack of clear guidelines for political spending by nonprofits. The statute governing political activity by these nonprofits says that they must work "exclusively" on their social welfare purpose, but the regulatory interpretation of that statute says that "exclusively" means "primarily." The term "primarily," has been criticized since it does not specify the acceptable percentage of political spending for tax exempt groups.

To determine whether a nonprofit is engaged "primarily" in its social purpose instead of politics, the IRS uses a "fact and circumstances" test; an IRS employee determines whether a given communication or action is political or not. For years, there has been no clear guidance for what constitutes political activity.

The proposed guidelines seek to clarify the rules and reduce the IRS' need to impose the "facts and circumstances" test. They would provide clear lines to judge whether a given action is political and break down into three categories:

  • Communications that would be considered political include calling for the election or defeat of a political candidate; any communication mentioning a political candidate or political party within 60 days of an election; and any expenditure that must be reported to the FEC.

  • Grants and contributions made by the group to any political group that reports to the FEC, as well as grants and contributions made by the group to any 527 or tax exempt group that spends money on candidate-related political activity, would count as political under the new rules.
  • Activities closely related to an election would be considered political. These include voter registration drives or get out the vote efforts, the distribution of certain materials promoting candidates, the preparation and distribution of voter guides mentioning candidates, and holding events within 60 days of an election featuring candidates.
  • “This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations,” Treasury Assistant Secretary for Tax Policy Mark J. Mazur said in a 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 proposed guidelines do not directly address the issue of how much a nonprofit can spend on political activity, but the IRS stated that it plans on issuing further guidance on that issue in the future.

    Tuesday's announcement follows a controversy that erupted over the summer when reports revealed that the IRS improperly targeted certain nonprofit groups -- both conservative and liberal -- for intensive reviews of their applications. The controversy led to many congressional hearings and the ousters of the IRS' acting director Stephen Miller and IRS tax exempt organizations' head Lois Lerner.

    During the scandal, Democrats pushed the IRS to review its rules governing political activity by tax exempt organizations and to impose clearer guidelines to reduce the potential for controversy when any group's political activities are examined. Bills were also proposed by Senate Democrats to change the IRS' rules for political activity.

    Rep. Chris Van Hollen (D-Md.) brought a court case challenging the IRS' previously ambiguous rules regarding political activity by tax exempt groups.

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

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