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.