The IRS’s Thanksgiving turkey: More non-profit restrictions
Last Tuesday evening before Thanksgiving, the IRS released a regulatory turkey that will give the non-profit community heartburn long after the last holiday leftovers are gone. Apparently not having been chastened by the recent scandal surrounding the agency’s harassment of ideological non-profit groups, the IRS proposed a set of new rules that would further restrict non-profits’ political rights and add complexity to the tax code.
At the heart of the IRS scandal and the agency’s latest proposal are the rules governing the political activities permissible for non-profits. The Internal Revenue Code basically puts non-profits into two categories. Charities such as churches, soup kitchens, and the Red Cross operate under Section 501(c)(3) of the Code. Donors may deduct contributions from their taxable income, and charities have been prohibited from what is known as “political intervention” – activities that support or oppose the election of political candidates or parties.
Social welfare and education organizations, often known as advocacy groups, operate under Section 501(c)(4) of the Code. Donations to them are not tax deductible, but such organizations have long been permitted to engage in political activity, so long as it is not their primary purpose. The proposed IRS rules would restrict such political participation.
For decades, the IRS has determined what constitutes political intervention through a vague and open-ended, “facts and circumstances” standard that the agency acknowledged last week “lack[s]… a clear and concise definition.” In the purported interest of providing more precision to non-profits, however, the IRS has proposed to stigmatize a broad swath of valuable civic activities as being incompatible with advocacy groups’ purpose of promoting social welfare.
As a preliminary matter, the IRS is proposing to create a different and more restrictive set of standards for advocacy groups. While tax-deductible charities would operate under more permissive rules for much activity, advocacy groups would be subject to new rules for “candidate-related political activities,” which one prominent tax attorney has already waggishly (and anagrammatically) abbreviated as “CRAP.”
What are some of these activities that advocacy groups will now have to be wary of? One would be grassroots lobbying efforts on pending legislation. Another would be holding a non-partisan candidate debate 30 days before a primary or 60 days before a general election. Apparently the IRS believes informing the citizenry about legislation or candidates fails to fall within social welfare groups’ mission of benefiting or educating society. Yet, under the IRS’s existing rules, which would still apply to charities under the proposal, those organizations could continue to hold debates without time restrictions, even though charities are supposed to have fewer political rights than advocacy groups due to the tax deductibility of their donations.
While you chew on that regulatory fruitcake, note that the proposed rules would also place voter guides and voter registration and get-out-the-vote (GOTV) drives into the danger zone for advocacy groups, regardless of whether they benefit any candidates or political parties. Once again, the IRS permits these activities for charities. To the extent anyone actually objects to advocacy groups engaging in these activities, the IRS would merely be shifting these programs to charities. Of course, the IRS also could choose simply to shut down these activities for all non-profits alike, and given the agency’s recent ham-handedness, that is not inconceivable. In which case, look forward to more voter guides brought to you by Exxon-Mobil or Halliburton.
The proposed IRS rules also would restrict advocacy groups from any advertising or public activity that so much as refers to a candidate within 30 days of a primary or 60 days of a general election. These rules would severely harm small and single-issue lobbying groups, who may find that Congress has scheduled legislation for a vote during a regulated time. The rules go far beyond what is defined as “electioneering communications” under federal campaign finance law, and would cover membership newsletters, organization websites, mailings, canvassing, and much more. Thus, the only thing inhibiting Congress, the president, state legislatures, and governors from cramming more controversial bills into those windows would be their campaign schedules.
The IRS’s woefully vague rules governing non-profits’ political activities have unquestionably been a mess up to now, and the agency’s application of those standards has been even more shameful recently. But the IRS’s response to its scandals seems to be to turn on the non-profit community. Having been caught abusing its authority, the IRS now seeks more authority to regulate political advocacy through the tax code. After delivering this Thanksgiving turkey, the IRS deserves a lump of coal this Christmas.
Eric Wang is a political law attorney and a Senior Fellow with the Center for Competitive Politics.