IRS enforcement and the misuse of nonprofits to hide political spending

Yesterday, Common Cause joined the growing call for House and Senate hearings to answer those questions, but stressed the need for those hearings to delve deeper into the bigger problem facing our democracy after the Supreme Court’s decision in Citizen United — the dramatic surge in the misuse of nonprofits to hide political spending by billionaires and corporations from American voters, and the lack of any meaningful enforcement response.
Common Cause has a long history of standing up for apolitical enforcement of the nation’s tax laws, dating back to the days when key Common Cause leaders were on Nixon’s enemies list. In a March 2012 press release accompanying a complaint to the IRS challenging the tax status of Liberty Central, then-president Bob Edgar stated that:

Common Cause supports the efforts of the IRS to investigate all groups, regardless of their partisan leanings, that appear to use nonprofit status to hide their political activities from American voters. Special interests should not be permitted to use front groups to evade disclosure laws designed to inform voters and prevent corruption.

Although the IRS must enforce the law impartially, the agency should not abrogate its responsibility to enforce it in the first place. While Common Cause strongly supports an investigation, we are concerned that partisans on both sides will use this tempest to cow the IRS and forestall enforcement of the tax code.

Reported political spending by 501(c)(4)s — the kind of group at the focus of this controversy — surged to $254 million in 2012, almost matching spending by political parties ($255 million), according to the Center for Responsive Politics, thanks in large part to the Supreme Court’s decision in Citizens United. The vast majority of that spending — 85 percent — came from conservative organizations, led by Karl Rove’s Crossroads GPS and Americans for Prosperity, backed by the Koch brothers. Given this disproportionate spending on behalf of conservative candidates at this point in history, most of the groups flagged will logically be conservative organizations, even using impartial criteria.

It is patently obvious to American voters that many of these groups, on the left and right, have been formed in order to hide political spending by mega-donors who want to influence the outcome of elections while keeping their identities secret.

There is also no getting around the fact that the IRS search criteria at the heart of the current controversy were developed at a time when billionaire political players, led by the Koch brothers and Rupert Murdoch, were bankrolling Tea Party groups. In 2010, there were 129 candidates for Congress and nine Senate candidates running for office under the Tea Party label. The primary focus for many of those groups was taking out Members of Congress who voted for the Affordable Care Act, and they played a major role in flipping the U.S. House to Republican control in 2010. Some of the groups evaporated soon after the elections were over.

Targeting groups that have applied for tax-exempt status for additional scrutiny because they appear to have an electoral motive is proper — as long as the same criteria are applied to all regardless of political viewpoints. At a time of unprecedented use of nonprofit organizations to funnel money for use in political campaigns, we need more enforcement to prevent evasion of campaign, disclosure and tax laws, not less.

Common Cause filed a complaint in March 2012 to the IRS about one of those organizations in 2012 — Liberty Central — founded by Justice Thomas’ wife Ginni Thomas while he was still deliberating on Citizens United. Based on our research, the primary purpose of that group was to elect Tea Party candidates for Congress in 2010 and defeat Members who had voted for the Affordable Care Act. Ms. Thomas spent much of her time flying to Tea Party events and rallies, expressly called for the election of certain candidates, and featured a candidate scorecard on her website. Thomas left the group shortly after the elections, and its activity evaporated. Common Cause's challenge to Liberty Central’s tax status produced no visible action by the IRS, nor did similar complaints from the Campaign Legal Center and Democracy 21 against other groups on both sides of the political spectrum.

The current IRS controversy does not excuse sham political organizations masquerading as social welfare organizations, and shines a light on the critical need for campaign spending disclosure legislation. The increased pressure on the IRS is a direct result of the abysmal failure of Congress and the FEC to enact or adopt common sense disclosure rules, despite the Supreme Court majority’s assurance that disclosure would allow voters (and shareholders) to make informed decisions.

The crisis is also a product of the fuzzy “primary purpose” test, based on facts and circumstances, that the IRS has long used to determine if a c4 is violating its nonprofit social welfare status. Vague standards don’t work in the world of campaign finance and, given the increased politicization of nonprofits, they are ill suited to the world of tax law as well. It is time for Congress to adopt a bright-line test for deciding when political activity by nonprofits requires a group to form a “527” political organization and disclose its donors.

Common Cause is concerned that instead of moving the ball forward, partisans will use the current controversy to intimidate the IRS from ever enforcing nonprofit tax laws when, in fact, the larger problem here is already inadequate enforcement. The IRS backed off enforcement of the gift tax on large contributions to c4s in 2011 after a political backlash. Will the same thing happen here with enforcement of c4 limits on political activity? It will take a concerted effort by reform advocates and the media for the “Tea Party” controversy to move the country forward instead of backward.