Reform Groups Call on IRS to End Misuse of Nonprofits to Launder Secret Contributions into Federal Elections

In a letter sent today to IRS Commissioner John Koskinen, reform groups called on the IRS to end the misuse use of nonprofit groups to launder secret contributions into federal elections.

The reform groups included the Campaign Legal Center, Common Cause, Demand Progress, Democracy 21, League of Women Voters, People For the American Way, Public Citizen, and Sunlight Foundation.

According to the letter, IRS regulations governing the eligibility of groups for tax status as section 501(c)(4) “social welfare” fail to comply with the tax laws.

The letter stated that the IRS, for years, has informally acceded to an interpretation of the regulation, without any written explanation or justification, that allows section 501(c)(4) groups to spend up to 49 percent of their expenditures on political intervention, or campaign activities. IRS Commissioner Koskinen also reportedly took this position in recent testimony before the Senate Judiciary Committee.

According to the letter, however, this position “is not legally sustainable because the existing IRS regulations contradict the nation’s tax laws and court decisions interpreting these laws”:

The fact is the IRS for many years has misinterpreted and failed to properly enforce the eligibility standards for obtaining section 501(c)(4) tax-exempt status under the Internal Revenue Code.

The letter stated that in order for IRS regulations to comply with the tax laws and applicable court decisions, the agency must “limit the campaign-related expenditures by a “social welfare” group to an “insubstantial” amount:

The requirement to limit a section 501(c)(4) organization to an “insubstantial” amount of campaign activities means, in our view, that an organization can engage in only a limited amount of campaign-related expenditures, such as no more than 5 or 10 percent of total annual expenditures.

According to the letter:

Under the language of the statute and the applicable court decisions, there is simply no way, consistent with the law, to interpret the “insubstantial” test to allow a social welfare organization to spend up to 49 percent of its expenditures on non-social welfare activities, like campaign activities.

The letter stated:

This is contrary to the framework set up by Congress to govern non-profit organizations and contrary to court decisions interpreting that framework.

The tax laws require the IRS to change the regulation.

The letter stated:

The need for you and the IRS to move expeditiously to interpret the tax laws properly is all the more important in light of the great damage that the IRS’s misinterpretation of the tax laws has done to the integrity of our political system and the interests of the American people.

The failure of the IRS to properly interpret the eligibility requirements for section 501(c)(4) tax-exempt status has resulted in hundreds of millions of dollars in secret contributions being laundered into federal elections.

Secret money in American politics is the most dangerous kind of influence-buying money. It provides widespread opportunities for government corruption that remains unknown to the American people and for which neither public officials nor those seeking to influence them can be held accountable.

It is simply wrong and unfair to the American people for the IRS to fail to address this problem when the problem is being caused by the IRS’s legally erroneous interpretation of the tax laws.

The letter concluded:

The IRS has an obligation not only to ensure that the tax laws are properly interpreted and enforced, but also to avoid improperly condoning activities that misuse the tax laws and, in doing so, undermine the integrity and transparency of the nation’s elections.

If the IRS does not end the current practices, the agency will continue to provide license for hundreds of millions of additional dollars in secret contributions to be laundered into federal elections, in contravention of the tax laws.

Our organizations strongly urge you and the IRS to use the ongoing rulemaking process to conform the IRS regulations to the statute and to applicable court decisions that require social welfare organizations to spend no more than an “insubstantial” amount on campaign activities.

We also strongly urge you to make clear that the requirement for section 501(c)(4) organizations to engage in no more than an “insubstantial” amount of non-social welfare expenditures means that a social welfare organization can only spend a small percentage of its total annual expenditures on campaign activities, such as no more than 5 or 10 percent, in order to be eligible for section 501(c)(4) tax status.

To read the letter, click here.