The IRS' Role in Campaign Finance Is an Awkward, Unhappy Accident

Everything about the brouhaha surrounding the IRS' enhanced investigation of Tea Party groups could have been handled better. For one, the IRS should probably never have been in the business of trying to determine which non-profit groups were exceeding the spirit of the law to shield donors to political activity. But the IRS' new role in campaign finance might now mean its best option for a real answer is the easiest one: kick that role somewhere else in Washington.

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There are a full 29 different subsections of IRS code 501(c), all of which, to some extent or another, are exempt from paying federal taxes. Cemetery companies are exempt (subsection 13), as are black lung benefit trusts (21). So are social clubs (7), labor unions (5), and the Loyal Order of Moose (8). Each section is a specific carve-out for a specific type of organization that didn't think it should have to pay taxes. Including 501(c)(4), social welfare organizations — the section that now also covers the Obama-sympathetic Organizing For Action, the conservative Americans For Prosperity, and scores of Tea Party organizations.

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The IRS isn't clear on the origin of section 4, but it apparently resulted from a 1913 request from the Chamber of Commerce asking that "civic and commercial" organizations be exempt from paying federal taxes. In 1958, the NAACP won a case at the Supreme Court allowing it to keep its donor list private, in order to protect its work for the social welfare.

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Which is what (c)(4)s are supposed to do: advocate for the improvement of the social welfare. Here's how the IRS describes that mandate:

The IRS gives examples: groups pushing for affordable housing, those doing job training for the unemployed, those working to build a stadium at a school.

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What isn't mentioned is: using non-profit status to shield contributions from donors that are used to advocate during political campaigns. It's this use that's become a problem, because the IRS definition of what constitutes social welfare is broad and vague. And unlike some other non-profits, these groups can do political advocacy. The IRS indicates that such groups cannot directly or indirectly advocate for candidates, but can "engage in some political activities, so long as that is not its primary activity."

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After Congress revised rules governing contributions to political parties a decade ago, donors went looking for other ways to anonymously promote political causes they supported. As far back as 2006, the media was calling out 501(c)(4)s that appeared to serve little "social welfare" outcome beyond the political goals of its funders. Forming a (c)(4) offered the best of all possible worlds: anonymous political money that could largely be used to influence politics. Once, that money flowed into political parties. Now it goes to IRS-designated non-profits.

In 2011, with the prospect of a presidential election looming, the Center for Public Integrity described the breadth of the loophole — little reporting, lots of money, unknown sponsors. In March 2012, after initial reports about Tea Party groups being heavily targeted by the IRS emerged, The New York Times editorialized for a fix, saying that, if the IRS was cracking down on (c)(4)s, it was doing its job. That prompted a request from several Democratic senators for the agency to revise how it allocated (c)(4) status, including:

• Making clear what "primary activity" means for social welfare work. This is generally understood to mean that 49.9 percent of the group's work can be specifically political without facing sanction.

• Require increased explanation of what the group spends on "social welfare" work.

• Require organizations to explain to donors how much of their donations can be a business expense. This was largely included to address a concern in The Times' editorial.

The first two points are meant to resolve the question of political groups taking advantage of the social welfare stipulation. If they seem a bit soft, it's out of necessity. As of 2011, there were an estimated 30,255 501(c)(4) organizations in the United States, the vast majority of which were not specifically designed as political organizations. Any revision to reporting procedures for those groups would result in a big increase in costs to those tens of thousands of organizations as they try to figure out how to meet the new reporting guideline. After all, a group advocating for a ballot measure that would fund a stadium at a school may toe close to the tacit political line in the (c)(4) definition. Nor did the Democratic Senators address the privacy of donations. That's very likely unfixable, given that it was implemented by the Supreme Court. And it serves a legitimate social service: The NAACP's donors in the late 1950s could have faced harassment or repercussions for their support.

In a letter to non-profit groups that raised questions about the status of (c)(4)s in 2011, the IRS wrote that it was going to "considered proposed changes" to the rules, but didn't indicate what those changes would look like. The previous year, it had begun doing the one thing in its power: paying close attention to the political activity of groups filing as (c)(4)s. In order to determine how an organization qualifies for (c)(4) status, the IRS already sends out a lengthy questionnaire; in the case of the Tea Party, those questions were far more complex. By singling out particular phrases — like "Tea Party" or "Patriots" — the IRS both crossed an ethical line and cast suspicion on an already suspicion-laden process. (Of course, it didn't do itself any favors when it at first suggested that it hadn't done anything wrong.)

People looking to give money to advance political causes without drawing attention to themselves seized upon a loophole. There was a demand; due to several accidents of history that go back precisely a century, the IRS offered a supply. But for the situation to be changed, there are two options.

• After last week's revelations, liberal groups and elected officials and members of the media have called for broader review of (c)(4) activity. That intensive effort could help — but that sort of review is precisely what the IRS was doing, however clumsily, in the Tea Party case.

• The IRS could alternatively develop rigorous standards for political behavior, rigid, complex, definitions of social welfare work, and limits on where and when a group can claim anonymity for donors — perhaps grandfathering in existing organizations.

It's likely that either or both revisions would have the same effect: A short, successful hunt by donors for another legally iffy method of pouring money into political work. At the very least, it might not be the IRS' problem any more.