It's Time for the IRS to Crack Down on Phony Non-Profits

For many of us, the initials I, R and S strike fear into our heart. But now the Internal Revenue Service is apologizing. The IRS has admitted that during the 2012 elections some relatively low-level employees in Ohio required additional information from some conservative groups seeking tax-exempt status.

Groups with the words "tea party" or "patriot" in their applications were flagged and asked to submit additional materials. Other groups may have been targeted as well. There is little doubt that the IRS' approach to determining whether to grant tax-exempt status should be politically even-handed, without regard to partisan affiliation. But this kerfuffle is merely the tip of the proverbial iceberg.

The IRS' actions evoke a much larger question about which groups should be able to obtain the benefit of tax-exempt status and lack of transparency that inures to certain non-profit organizations. Thanks in large part to the United States Supreme Court's 2010 decision in Citizens United v. FEC, corporations are constitutionally free to raise and spend unlimited sums to advocate for the election or defeat of political candidates as long as that spending is not coordinated with candidate campaigns. This is true for non-profit corporations as well, unless, as discussed below, there are statutory or regulatory restrictions placed on those groups.

How important are nonprofit organizations and other committees to election campaigns? Estimates put independent spending by nonprofit corporations -- political action committees (PACs) and super PACs -- at more than $1 billion during the 2012 elections. Unlimited spending by all of these entities is harmful to the integrity of our electoral process, but the worst offenders may be those entities organized under section 501c4 of the IRS code.

The 501c4s, as they are commonly known, are social welfare organizations. However, the IRS has interpreted the regulations affecting these nonprofit organizations as allowing them to engage in some political activity, as long as that does not become the organization's primary activity. This is, at best, a line drawn in the sand on a windy day, to quote Justice Scalia in another campaign finance case.

And here is the kicker: while these 501c4 non-profit corporations can engage in some political activity, they need not disclose their donors. This leaves the public without the most important piece of information about those spending money to try to sway their votes; the identity of those organizations' supporters. While other organizations, such as PACs and super PACs, must disclose their donors, when those donors are 501c4 corporations then all that is disclosed is the name of the corporation, but again, not those supporting that corporation. This situation blasts an enormous hole through our nation's web of disclosure provisions.

Hence once an organization obtains non-profit status under section 501c4 of the IRS code, any political fundraising by that organization is essentially clothed in secrecy. This is a perilous state of affairs. When organizations "speak" to us by spending money to try to influence whom we chose to represent us in our government, then we the people have an important interest in knowing the identities, the true identities, behind those attempting to persuade us.

In addition, it remains to be seen whether many of these organizations, purportedly dedicated to social welfare, are little more than political committees. Karl Rove's Crossroads GPS comes to mind as but one example. If it looks like a political committee, and it raises and spends like a political committee, then it just might be a political committee. One of the differences between political committees and 501c4s is, of course, that political committees must disclose their donors.

While there has been a good deal of public outcry concerning the IRS' admitted targeting of certain organizations applying for nonprofit status, the problem isn't that the IRS asked for too much information from organizations seeking favorable tax treatment, it is that they only asked for that information from conservative organizations. The IRS should be more, not less, inquisitive, but it should do so in an even-handed fashion.

Aggressive inquiries by the IRS will only help the further the important interests served by disclosure provisions. Entities should no longer be able to wrap themselves in the protective layer of the IRS code only to operate in the shadows.