Treasury Unveils New Criteria for Gauging Nonprofit Political Activity

This story has been updated. 

After six months of political debate and agency shakeups, the Treasury Department and the Internal Revenue Service on Tuesday released proposed guidance for interpreting the tax code’s definition of a social welfare organization to help officials and nonprofits seeking tax-exempt status to evaluate political activity.

The proposed rule -- a response to recommendations made in last May’s highly critical report by the Treasury Inspector General for Tax Administration that immersed the IRS in political controversy -- defines the term “candidate-related political activity” and would amend current regulations by indicating that the promotion of social welfare does not include this type of activity, according to a release sent out hours before the draft rules.

The proposal also solicits public comment on related issues such as what proportion of a 501(c)(4) organization’s activities must promote social welfare to merit the tax exemption.

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

Treasury Assistant Secretary for Tax Policy Mark Mazur described the proposed guidance as “a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations. 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 agencies said they expected a high volume of comments on an issue that has worked its way into the 2014 mid-term election campaign and that resulted in the resignations or dismissals of numerous IRS officials connected with the Exempt Organizations division, particularly its Cincinnati office where auditors found that many of the applications for tax-exempt status were being processed using the nonprofits’ political vocabulary as a determinant. While groups of all stripes saw their applications delayed, a preponderance of the applications were found to be tea-party-related.

The proposed rules are designed to simplify IRS operations by reducing the need for “fact-intensive inquiries” that were deemed burdensome by many affected groups. The proposed criteria for evaluating the extent to which an applicant is more political than social-welfare-oriented center around the group’s communications to its members and the public, its grants and contributions, and its activities closely related to elections or candidates.

Asked to comment, House Ways and Means Committee Chairman Rep. Dave Camp, R-Mich., said, "There continues to be an ongoing investigation, with many documents yet to be uncovered, into how the IRS systematically targeted and abused conservative leaning groups. Before rushing forward with new rules, especially ones that appear to make it harder to engage in public debate, I would hope Treasury would let all the facts come out first -- something they could achieve by fully cooperating with Congress in the investigation. This smacks of the administration trying to shut down potential critics. Given how they have handled the Obamacare rollout, one can understand why they may take that approach, but it doesn't make it right."

House Oversight and Government Reform Committee Chairman Rep. Darrell Issa, R-Calif., was also critical of the proposed guidance. “This new effort by the Obama administration to limit traditional advocacy efforts by social welfare organizations will have a much more profound impact on grassroots and community organizations than on the well-heeled groups it supposedly targets," he said in a statement. "The fact that the administration's new effort only affects social welfare organizations -- and not powerful unions or business groups -- underscores that this is a crass political effort by the Administration to get what political advantage they can, when they can."