The IRS’s C4 Regulation Problem

April 18, 2019; ProPublica

ProPublica reported last week that the IRS has all but stopped monitoring 501c4 organizations (C4s). This is, of course, the wing of the nonprofit sector that is allowed to spend money on political activities (so long as that activity is not “primary”) while keeping donor names undercover. IRS regulations for these entities can be found here, but they, as many such IRS guidelines do, lack an exacting clarity and any attempt at enforcement.

NPQ’s Rick Cohen, of course, once suggested that some see C4s as “explosive devices threatening to blow up the nonprofit brand.”

The lack of monitoring continues through today and it doesn’t arise from a lack of citizen complaints about violations of even that very murky standard. There have been thousands of them, and none lodged between September 2017 and March 2019 have reached the committee established to review them, according to ProPublica’s source.

On top of this, the bar to establish a 501c4 may never have been lower, with the IRS rejecting a mere three out of the 1,487 applications it received in 2017. (Placing this in some perspective is the fact, reported on by NPQ’s Michael Wyland in 2018, that the IRS has been rejecting very few applications for tax exemption overall.)

The fact the oversight of C4s activity has essentially ground to a nonfunctional halt can be traced to a number of factors, including its now-legendary lack of resources and staff (the exempt organization section shrank from 942 staffers in 2010 to 585 in 2018), an increase of the number of applications for the class, and the IRS’s self-imposed caution about wandering back into a political fray that started with the Tea Party scandal.

Some IRS auditors say they were paralyzed. “I was scared of being pilloried, dragged to the Hill to testify, getting caught up in lawsuits, having to sink thousands of dollars in attorneys bills that I couldn’t afford, and having threats made against me or my family,” said one employee who worked in Lerner’s division at the time. “I locked down my Facebook page. I deleted all personal Twitter posts. I stopped telling people where I worked. I tried to become invisible.”

Additionally, the very nature of C4s makes them tough to monitor at the speed at which the IRS moves. As Cohen wrote in 2012:

Adam Staggs of the Brennan Center for Justice, who says that a particular problem of enforcement is that these groups are often like “shell companies” set up for the purpose of “money laundering” for elections, and after the elections they can quickly dismantle themselves and circumvent potential FEC and IRS penalties. That seems solvable. For the (c)(4)s, prevent them from disbanding until after they have submitted to a full IRS or FEC review, and if they try to do quickie shutdowns, hold the managers personally liable. 501(c)(3) public charities cannot be expected to tolerate the power brokers behind 501(c)(4)s use and abuse of nonprofit confidentiality and nonprofit protections against individual liability. It only hurts the credibility of nonprofits that don’t exist for electoral purposes.

Some believe that the vacuum leaves a space for state regulators to get involved, but those units are often themselves understaffed and resourced—not to mention infected by their own political environments.

Though the exempt organization unit is adding new staff, even the planned increase will leave the unit 200 employees below the count at the beginning of the decade. Beyond that, there is a serious attrition problem.

“We’ve experienced so much attrition over the last few years that it’s a matter of having enough people to do the work,” said Margaret Von Lienen, the unit’s acting director, at a panel discussion in late 2018. Onboarding new staff will even further slow any review of complaints—if that’s even possible.

“We can probably expect in 2019 we’re going to do fewer exams,” Von Lienen said. The division’s priority is to “stay on top of [the] application inventory, and probably the exam side of the house is going to suffer for that.”

Meanwhile, Anna Massoglia of the Center for Responsive Politics comments, “There are new loopholes being exploited every day.”

Many might think see this as none of our business, but remember, the press often refers to these unregulated political players as “nonprofits”—not as C4s—and that means that any violations of trust land up in our collective reputational laps, not to mention their deleterious effect on democracy.

The whole ProPublica article is worth reading for its short review of the history of these problems, but in the end we think that it may be, as Cohen put it seven years ago, “time for the nonprofit sector writ large, including all those 501(c)(3) public charities, to speak up as a sector and tell the secretive big money (c)(4)s to stop screwing around with the reputation of the nonprofit brand.”—Ruth McCambridge