January 9, 2020; Bloomberg
The Treasury Inspector General for Tax Administration (TIGTA), a body created to provide oversight of the Internal Revenue Service (IRS), recently released a report about the ability of the IRS to fulfill its oversight of the nonprofit sector, focusing specifically on 501c4 “social welfare” organizations. The report found at least 9,774 of these organizations have failed to meet their legally obligated reporting requirements. The report is concerning in a number of different ways, and the findings have significant implications for the future of the sector and our democratic processes.
Bloomberg reports that the TIGTA report found that these organizations are politically active tax-exempt organizations, “that may have failed to notify the Internal Revenue Service of their existence or submit the paperwork to operate tax-free.” Bloomberg notes the report found the IRS isn’t doing enough to identify organizations operating outside the legal requirements. Additionally, the IRS appears to be failing to collect the penalties and fees associated with noncompliance.
According to the IRS, social welfare organizations “must not be organized for profit and must be operated exclusively to promote social welfare.” Social welfare organizations can accept donations, but the donations are not tax deductible for the donor. These organizations are provided more flexibility in their ability to engage in political and lobbying activities compared to traditional 501c3 organizations, often referred to as “charitable organizations.”
These recent developments are particularly concerning in light of the proliferation of political spending by social welfare organizations in the wake of the Citizens United Supreme Court decision. The 2010 Supreme Court ruling essentially found that corporations should not be limited in their ability to spend money on political campaigns.
The Citizens United case made it easier for social welfare organizations to raise and spend money, and since then political spending by these groups has skyrocketed. According to the Center for Responsive Politics, spending by 501c4s in the 2008 election was around $86 million, compared to $257 million in 2012. Additionally, applications for c4 status nearly doubled from 1,735 in 2010 to 3,357 in 2012.
Many independent watchdogs and individuals have been sounding the alarm about the inability of the IRS to fulfill its oversight duties in light of the gutting of the IRS budget over the years. In a report from early 2019, ProPublica explains how over $1 billion in obscured funding has been filtered through nonprofits in the past decade. The report explains how “the tax code allows organizations to make independent expenditures on politics while concealing their donors’ names—as long as politics isn’t the organization’s ‘primary activity.’” The parameters and definition of what this exactly means for enforcement remains somewhat vague.
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The report explains how the IRS has failed to ensure 501c4s are abiding by these rules. There have been thousands of complaints, yet not one organization has been stripped of its nonprofit status. ProPublica attributes the lack of enforcement to a confluence of factors, including the large increase in politically active social welfare organizations, the unwieldly process of investigating those who have been accused of breaking the rules, and the fact that the “exempt organization” section of the IRS had 585 staff members in 2018 compared to 942 in 2010.
All of these developments taken together have significant implications for our democratic processes and for the upcoming election season. In an article for the Center for Responsive Politics, Robert Maguire details how the lack of regulation is playing out in the real world. Carolina Rising is a 501c4 that spent roughly $4.7 million on advertisements in 2014. The group spent all of the money in a three-month period leading up to the 2014 elections. Their filings show that 98.7 percent of their money came from a single donor. (Social welfare organizations were previously required to report their donors to the IRS, but these lists are not public. A recent rule change proposed by the IRS would remove even this IRS reporting requirement.)
The advertisements paid for by Carolina Rising all “touted the legislative accomplishments“ of Republican Thom Tillis. Tillis was then Speaker of the House in North Carolina and was running for a Senate seat. The ads never told viewers to vote for Tillis, which allows the organization to claim that it is working on the issues rather than supporting a candidate, which would trigger certain limits on political activity.
There is only one question on the 990 form that directly addresses an organization’s political activity, and it reads, “Did the organization engage in direct or indirect political campaign activities on behalf of or in opposition to candidates for public office?”. Carolina Rising responded in the negative to this question. If nearly every penny was used on advertisements touting the accomplishments of a specific legislator, where is the ostensible social welfare purpose that’s supposed to be the “primary purpose” of the organization, according to the law?
In response to the report, the IRS claims it has done little to enforce this rule because it would require too many resources and the need to process applications for tax-exempt status is more pressing. Additionally, the IRS claims that they have not focused on enforcement because new rules that require organizations to inform the IRS of their existence within 60 days are relatively new, first mandated in 2016. Further, the IRS claims, “Many of the organizations are managed by volunteers with limited knowledge of tax laws.”
Taken altogether, the defanging of the IRS, which has essentially admitted it lacks the capacity to keep up, appears to be a concerted effort to strip our government of its ability to govern, leading to an environment that encourages even more lawlessness. In a country that values the rule of law, it is interesting that the IRS is accepting the argument that ignorance of the law abdicates legal responsibilities. Try and use that excuse the next time you’re pulled over by a cop and see how that goes.
The inability of the IRS to regulate social welfare organizations has already created a ripple of effects over the years. It is imperative that the nonprofit sector recognize the threat nonenforcement of IRS rules poses to its legitimacy, as well as to our democratic processes. These issues must be on the agenda for advocacy efforts in the coming year as we approach the 2020 national elections. This appears to be another deliberate attempt to foster undemocratic tendencies in an electoral system already poisoned by special interests at the expense of the people.—Benjamin Martinez