IRS to police tax-exempt groups as part of campaign finance reform

The Federal Election Commission isn't the only agency put on the spot by the new campaign finance law. Also wading into uncharted territory is the Internal Revenue Service, which will be called on to police a new generation of politically active tax-exempt groups.

Such groups are expected to proliferate after November 5, when the national political parties may no longer raise and spend soft money. Experts predict that lawmakers and donors will be tempted to steer huge amounts of soft money into charitable organizations that have a 501(c)(3) tax-exempt status, or social welfare organizations with a 501(c)(4) status. Also expected to mushroom are political committees that are tax-exempt under Section 527 of the Internal Revenue Code.

"I expect to see more activity by nonprofit organizations," says Michael J. Malbin, executive director of the Campaign Finance Institute, a nonpartisan research group affiliated with George Washington University.

The soft-money ban's impact on such groups, in fact, will generate more controversy and debate than any other aspect of the new campaign finance regime, predicts Frances R. Hill, a University of Miami law professor. "That will be the burning issue: the disclosure of the sources and uses of the money" by tax-exempt organizations, says Hill, who warns that elected officials in particular will try to turn nonprofits into conduits for political money.

By law, 501(c)(3) charities can't engage in political campaign activities, but 501(c)(4) groups may do so as long as political campaigning is not their primary activity. But the rules that define political activity are ambiguous, and political players have a history of exploiting nonprofits.

Tax-exempt charities and social welfare organizations, for example, engage in voter mobilization, and "issue advertising." Many might be tempted to skirt ever closer to the line of helping or hurting a candidate, especially because these tax-exempt organizations, unlike the so-called 527 groups, are subject to few disclosure rules.

Some campaign finance watchdogs say the IRS already is doing a dismal job of regulating politically active nonprofits. A year after Congress passed tough new disclosure rules for 527 groups, the IRS has failed to furnish even basic information about these organizations, charged a recent study by the nonprofit group Public Citizen.

Political committees that are tax free under Section 527 are, by definition, set up to influence elections. Many 527 groups, such as party committees, simply report to the FEC. But a new breed of 527s claim to be exempt from FEC rules, saying they are engaged in "issues," not elections. These groups must at least report to the IRS.

"There is a clear and present danger that 527 groups will become surrogates for outlawed soft money," Public Citizen President Joan Claybrook said at the April press conference to release the study. The report charged that organizations often can't be found on the IRS Web site because its database is not searchable and the agency has mangled more than a few names. Dozens of groups file late, incomplete reports, according to Public Citizen, and many do not file at all. But the IRS has yet to take a single enforcement action against a 527 group.

Some of the report's findings were comical. In one case, an unidentified group repeatedly wrote "does not apply" on its disclosure form, prompting the IRS to create in its database a phantom organization dubbed "Does Not Apply."

IRS officials declined to comment on the Public Citizen report. On May 2, however, the agency announced steps to bolster disclosure and enhance enforcement. The agency will waive taxes, penalties, and interest for late-filing 527 groups if they submit required forms by July 15. A senior IRS official, citing "some confusion" among political committees about filing requirements for 527s, said the new voluntary compliance program will help make records available before the election.

Tax law experts predicted as early as a year ago that the IRS would have trouble enforcing the new disclosure rules. Unlike the FEC, the IRS does not have the experience or the infrastructure to function as a public-disclosure agency. If anything, the culture of the IRS has been one of guarding taxpayers' privacy.

"It's disclosure in name only," Malbin said of the IRS's Web site for 527s. "If you do not know the name of the organization you want, you cannot find it." Malbin's institute is preparing recommendations for improving disclosure by 527 groups. Options include making the FEC and IRS political-money databases compatible and making information available through a single government portal.

Congress, too, is considering revisions to its 527 disclosure law--revisions that might actually do more harm than good. Sens. Kay Bailey Hutchison, R-Texas, and Joe Lieberman, D-Conn., have authored a bill that would encourage electronic filing by 527s, among other improvements. But because the bill would also relieve some local groups from reporting to the IRS if they already disclose at the state level, some watchdog organizations warn that this could create a new loophole for groups that want to operate in secret.

Experts say that the IRS will have its hands full tracking all the politically active nonprofits: 527s, 501(c)(3)s, and 501(c)(4)s. The tax agency's challenge will be to prevent abuses of the new election law while also protecting the constitutional right of citizens to organize in private. "It is extraordinarily difficult to be a federal agency with the task of oversight in this area," Hill said.