Obama seeks limits on tax-exempt groups

The Obama administration on Tuesday moved to rein in the “dark money” groups that have spent millions of dollars in political campaigns without disclosing their donors.

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In draft guidance to be issued by Treasury and the IRS, the administration proposes new standards for tax-exempt groups like the Karl Rove-linked Crossroads GPS and Organizing for Action, the offshoot of President Obama’s own campaign apparatus.

“This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations,” said Mark Mazur, Treasury’s assistant secretary for tax policy.

The move springs directly from the controversy over IRS targeting of Tea Party groups, which began after compliance officers singled out political groups seeking tax-exempt status for extra scrutiny.

Democrats and watchdog groups say the targeting practices were fueled by the hazy rules surrounding the political nonprofits, which are known as 501(c)(4)s.

Current law says that 501(c)(4) groups must exclusively engage in social welfare, but Treasury regulations say social welfare must be the organizations’ primary purpose. The IRS put many of the groups through extended vetting to determine whether they met Treasury’s standard.

The guidance, if adopted, would make clear that the promotion of social welfare — the stated purpose of so-called 501(c)(4) groups — does not include “candidate-related political activity.” At the same time, the administration is asking for input on how much social welfare work a group must engage in to qualify for 501(c)(4) status.

That could have major ramifications for the political nonprofits, which critics argue are being set up solely to hide from public scrutiny.

Under the proposed rules, groups with the exemption couldn’t count political advertisements, participating in “get-out-the-vote” or voter registration drives or holding events involving candidates as “social welfare” work.

Acting IRS Commissioner Danny Werfel said the new draft guidance, to be published later Tuesday in the Federal Register, is intended to clear up ambiguity in the law.

“This is part of ongoing efforts within the IRS that are improving our work in the tax-exempt area,” Werfel said in a statement. “Once final, this proposed guidance will continue moving us forward and provide clarity for this important segment of exempt organizations.”

But groups with Tea Party links — like the American Center for Law and Justice — panned the rules as a diversion, and accused the Obama administration of starting “a new front in its war against political dissent.”

“This is a feeble attempt by the Obama administration to justify its own wrong-doing with the IRS targeting of conservative and Tea Party groups,” said Jay Sekulow, ACLJ’s chief counsel.

“Instead of holding those responsible for the unlawful targeting scheme accountable for their actions, the Obama administration is determined to further limit the free speech of Americans by attempting to change constitutional practices that are decades old.”

Top Republicans on Capitol Hill accused the Obama administration of a rush to judgment, and of preempting congressional investigations into IRS targeting.

“Before rushing forward with new rules, especially ones that appear to make it harder to engage in public debate, I would hope Treasury would let all the facts come out first — something they could achieve by fully cooperating with Congress in the investigation,” House Ways and Means Committee Chairman Dave Camp (R-Mich.) said. 

Sen. Orrin Hatch (Utah), the top Republican on the Finance Committee, chided the administration for releasing the new guidance before a bipartisan Senate investigation into the targeting of Tea Party groups came to a close.

Aides say that investigation, which Hatch and Finance Committee Chairman Max Baucus (D-Mont.) had hoped to release this year, could instead come out in early 2014.

Baucus, meanwhile, praised the administration proposals, saying they strike the right balance on a tricky issue.

“We need to ensure clear standards and equal footing for the treatment of tax exempt social welfare organizations. Today’s action by the IRS is an important step towards that goal,” Baucus said.



In a nod to the likely opposition to the rules, administration officials said they would be listening to concerns about the proposals, raising the possibility of a drawn-out process.

“We are committed to getting this right before issuing final guidance that may affect a broad group of organizations,” Mazur said. “It will take time to work through the regulatory process and carefully consider all public feedback as we strive to ensure that the standards for tax-exemption are clear and can be applied consistently.”

Democracy 21, a campaign finance watchdog, praised Treasury’s move, but said it remains to be seen whether the regulations will end the “misuse” of tax laws to hide donors.

“We urge the Treasury Department and IRS to seize this opportunity to end the scandalous practice of groups abusing the tax laws to hide from the American people campaign finance information to which they are entitled,” said Democracy 21 President Fred Wertheimer.

Treasury’s inspector general for tax administration pressed the department and the IRS to issue more guidance on 501(c)(4) groups in May as it outlined the targeting of Tea Party groups.

Werfel, who took over the IRS after the controversy broke, has suggested the current rules played a role in the controversy, while stressing the agency’s behavior was inexcusable.

The current rules “created considerable confusion for both the public and the IRS in making appropriate 501(c)(4) determinations,” the IRS said in an internal review released in June.

—This story was posted at 1:59 p.m. and was last updated at 6:26 p.m.