Heightened Scrutiny on Non-profits by IRS


Certain non-profit organizations may be in jeopardy of losing their tax-exempt status under Section 501(c)4 of the tax code as the IRS takes a closer look at their activities. Well-known groups like Crossroads GPS, a pro-Republican group set up by former Bush advisor Karl Rove, have been spending a great deal of their time and money on political activities. As a result, the IRS has swung into action.

The IRS has prepared a questionnaire for all non-profits that poses questions reviewing their activities and compliance to tax laws. According to IRS spokesman Dean Patterson, the matter of the questionnaire has been stated on in the IRS website and in the IRS Exempt Organization work plan since February. He pointed out a passage on “501(c)(4), (5) and (6) self-declarers” in the IRS’ 2012 Exempt Organization work plan that reads, in part:

“In FY 2012, EO will send a comprehensive questionnaire to organizations based on Form 990 filings to assess compliance in this area.”

But the questionnaire is not ready yet. In an emailed statement, Patterson said, “We have not announced when the questionnaire will be sent, and we have not announced any specific details about this beyond what’s in the work plan. Other details have not been finalized, such as who will receive the questionnaire or the size of the groups receiving the questionnaire. We anticipate asking groups a range of questions on topics including executive compensation, member services, political activity and a number of other issues.”

Many of these politically linked non-profits have better-known sister organizations known as "Super PACs," or political action committees. Together with the super PACs, these non-profits are exempt from paying taxes and their contributors can claim tax deductions on their donations. In addition, these groups can raise and spend unlimited funds – in contrast to political campaigns, which may receive only $2,500 per donor each election cycle. But the non-profits have one clear advantage over super PACs – they qualify as social welfare groups and so do not have to disclose their donors whereas super PACs do.

However, one thing super PACs can do which non-profits are not allowed to is issue ads that endorse or attack political candidates. Non-profits can keep their tax-exempt status under 501(c)4 so long as they release so-called "issue ads," that do not use a candidate's name or likeness and are used to educate the public on broad issues or positions. But some of these “issue ads” seemed to have crossed the line in supporting or vilifying political candidates and resulted in calls for them to disclose their donors like super PACs do. In one video ad by Crossroads, President Obama is featured alongside a caption that says, “Obama says spend more. We need jobs, not more Washington insider deals.” As a result, the President’s re-election campaign asked the Federal Election Commission (FEC) to force Crossroads GPS to formally register as a super PAC and declare its donors.

Crossroads together with its Super PAC sister plans to spend up to $300 million on the November elections.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Darrin Mish, Tampa Tax Attorney, The Law Offices of Darrin Mish, P.A. | Attorney Advertising

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