IRS Scandal Brings Senate Democrats' Focus To 501(c)(4) Abuse

WASHINGTON -- Senate Democrats on Tuesday used a hearing investigating the unfolding Internal Revenue Service scandal to call for tightening the rules that govern tax-exempt nonprofit groups.

"Once the smoke of the current controversy clears, we need to examine the root of this issue and reform the nation’s vague 501(c)(4) tax laws," Max Baucus (D-Mont.) said in his opening statement to a Senate Finance Committee hearing on IRS targeting of conservative groups. "Neither the tax code nor the complex regulations that govern nonprofits provide clear standards for how much political activity a 501(c)(4) group can undertake. The code does not even provide a clear definition of what qualifies as political activity."

The issues Baucus raised are at the center of the controversy surrounding IRS scrutiny of tea party groups. An inspector general's report made public on May 14 revealed that IRS agents singled out nonprofit conservative groups applying for 501(c)(4) status and made extensive and inappropriate information requests when trying to determine if those groups were primarily political in nature.

Committee Democrats joined Baucus in blasting the "confusion" and "ambiguity" of the laws and regulations governing the political activity of nonprofit groups and called for changes that would prevent political organizations from using section 501(c)(4) of the nonprofit tax code to prevent the disclosure of their donors.

"Clearly a mack truck is being driven through the 501(c)(4) loophole," Baucus said.

After the Supreme Court's 2010 Citizens United ruling freed corporations -- including nonprofits organized under sections 501(c)(4), (c)(5) and (c)(6) -- to spend money directly on political campaigns, 501(c)(4) spending on politics soared from an infinitesimal amount in 2006 to $294 million in the 2012 election. Nonprofits, unlike political committees and campaigns, are not required to disclose their donors, and the surge in their spending has raised concerns among lawmakers and campaign-finance watchdogs that groups are improperly claiming tax-exempt status when their primary purpose is electioneering.

This spending is allowed thanks to a difference between the tax law and IRS regulations for these nonprofit groups. The law says that 501(c)(4) organizations must be operated "exclusively" for the purpose of social welfare, while the IRS regulation defines "exclusively" as "primarily." This difference has created a substantial amount of confusion within and outside the agency around what constitutes political activity, and officials say it played a part in the abuses uncovered in the inspector general's report.

Nearly every Democrat on the panel called for clearer rules governing how the IRS determines political activity and for a better definition of how much political campaign activity is allowable for 501(c)(4) groups.

Sen. Ron Wyden (D-Ore.) said Citizens United had created a situation where "groups that ought to be [political organizations] are applying for 501(c)(4) status to hide their donors."

"The lines blurred between [political organizations] and 501(c)(4), and you all don't seem to have done anything about it," Wyden said, addressing the panel of former and current IRS and Treasury officials who appeared before the committee.

IRS officials explained that it was extremely difficult for agents to define political activity that doing so required them to ask sometimes uncomfortable questions.

Douglas Shulman, a former IRS commissioner who ran the agency from 2008 through 2012, said defining political activity and policing it "is a very hard task to give to the IRS."

Acting IRS Commissioner Steve Miller, who is expected to resign next month, said the agency had tried to issue guidance on allowable political activity, "but not enough."

Sens. Bill Nelson (D-Fla.), Bob Menendez (D-N.J.), Ben Cardin (D-Md.) and Sherrod Brown (D-Ohio) all asked about why the IRS had redefined "exclusively" as "primarily" in the agency's regulations for 501(c)(4) organizations.

Miller said that divergence was one reason the IRS decided to centralize its applications for tax-exempt status, a move that ultimately led to an effort to triage such cases through the use of what he deemed "inappropriate" politically-tinged search terms, such as "tea party" and "patriots."

Sen. Michael Bennet (D-Colo.) asked whether any of the panel members would defend the language of the law and the regulation governing 501(c)(4) nonprofits.

"I'm not going to defend it or attack it," Miller said. "It is what the regulation is."

Miller went on to explain that even if the IRS regulations were altered, "We would have a hard time parsing what's politics and what's not -- what's an issue ad versus education. These are very difficult tasks."

J. Russell George, the Department of the Treasury Inspector General for Tax Administration, said his office would "shortly" conduct a review of IRS oversight of 501(c)(4) nonprofits and their political activity.

But Sen. Brown asked Miller and Shulman "how long" Congress and the public would have to "wait for the IRS" to act on fixing the rules that apply to 501(c)(4) nonprofits.

Shulman responded that the onus should be on lawmakers, rather than the agency, to better define appropriate political activity for nonprofit groups. "If Congress decides this is something to be changed, Congress should do it, or it should be done through regulations," he said.

Members of Congress, however, do not seem to agree on whether 501(c)(4) groups should be allowed to spend tens of millions of dollars on political activity without disclosing their donors. Senate Republicans have three times filibustered legislation that would require groups spending a substantial amount of money on political campaigns to disclose their donors to the public.

Rep. Chris Van Hollen (D-Md.), the chief sponsor of the disclosure legislation, previously said that the passage of his bill would reduce the pressure on the IRS to police nonprofit groups. "No groups, regardless of their political leaning, would have an incentive to torture the tax laws in order to hide their donors from voters," he said.

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