The Intersection: May 2014

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The IRS’ Long Tentacles are Increasingly Reaching into Non-Profit Organizations

An Interview with Jason Torchinsky, Partner, Holtzman Vogel Josefiak, Attorneys at Law

With the end of April, many of us are breathing a sigh of relief that we finished and filed our taxes by the deadline. The IRS is one government entity that we want to have as little interaction with as possible. Just receiving a letter in the mail with their logo is enough to intimidate and bring heart palpitations.

I spoke with Jason Torchinsky, one of the nation’s top election lawyers and partner of Holtzman Vogel Josefiak, Attorneys at Law, to gain insight on the IRS targeting of 501 (c)(4) organizations and the new regulations they are proposing to reign in the political activities of these tax-exempt groups.Yet, the IRS has been using its authority to agitate many new political organizations in recent years, and there are growing implications for those involved in public policy campaigns.

Sadlier: Last year, the IRS was accused of targeting specific groups who applied for 501(c)(4) tax-exempt status, setting aside their applications for additional scrutiny. What is the status of the investigation into this?

Torchinsky: To be clear, it was the Treasury Department’s Inspector General for Tax Administration that conducted an investigation and concluded that inappropriate criteria were used to target conservative groups. This report was released in May of 2013, and came a few days after the public apology by Lois Lerner, the former head of tax exempt groups at the IRS, that set off the firestorm. At the time, President Obama said, “we’re going to hold the responsible parties accountable.” Since then, at least two committees in the House of Representatives –

Ways and Means and Oversight & Government Reform – have engaged in active investigations.

The full House of Representatives just voted to hold Lois Lerner in contempt of Congress and passed a resolution instructing the Justice Department to investigate her for criminal conduct. Congressman Darrell Issa, chairman of the Oversight Committee, recently announced an expanded inquiry into whether the Justice Department was also involved in improperly targeting conservative groups.

Sadlier: Has this affected how 501(c)(4)s are conducting their activities?

Torchinsky: For existing c4 organizations, most have continued to operate as they have been.  For c4s that were in the targeted group and had their applications held up with the IRS, the turmoil has caused some of them to cease operations completely. For organizations that are newly formed c4s, it appears that approval of new c4 applications has slowed to a trickle at best.

Sadlier: What is a 501(c)4 group and what are they allowed to do politically under the current law?

Torchinsky: A 501(c)(4) is a “social welfare” organization that must be engaged primarily in social welfare activities. This is a very broad category of groups, but includes some of the best known policy advocacy organizations in the country – left, right and center. Examples of well-known c4s include the ACLU, the NAACP and the NRA. Social welfare groups can spend 100% of their funds on lobbying. However, IRS regulations provide that political activity is not social welfare, so these organizations can spend no more than 49% of their funds on political activity. What constitutes political activity under IRS rules is a matter of intense debate – and the IRS has offered very little useful guidance.

Sadlier: In late 2013, the IRS proposed new rules to regulate the kind of political activity 501(c)(4) organizations could undertake. What would the proposed rules do and what kind of impact will they have on groups?

Torchinsky: The IRS’s proposed rules would greatly expand the definition of political activity and perhaps set a limit significantly lower than 49% for political activity by 501(c)(4) organizations. Many activities that are currently traditional lobbying activities or traditional social welfare activities would be swept into the definition of political activity. For example, voter registration drives conducted at any time of any year even when conducted on a non-partisan basis would be considered political activity when done by a 501(c)(4).

Additionally, any public communication in any format that mentioned a candidate distributed anywhere in the country within 30 days of a primary or 60 days of a general election would be considered political activity. So, for example, if the ACLU were to send out a “legislative update” in September of 2014 talking about how Senator Harry Reid, Senator Mitch McConnell and Speaker John Boehner were negotiating on a piece of legislation, this would be a per se political activity because both Senator McConnell and Speaker Boehner are on the November 2014 ballot in their respective states, and the communication is taking place within 60 days of the general election.

Sadlier: I understand the IRS has said that they will adjust the proposed rules. How do you expect the new rules will differ from the current proposal?

Torchinsky: The IRS recently announced that they would likely re-propose new rules based on the overwhelming number of comments they received on the proposal they issued in November of 2013. Exactly what changes the IRS might make in the proposal when round two comes out are unknown, but presumably they would be more narrowly drawn that the original proposal.

Sadlier: What is the likelihood of new, more restrictive rules taking effect?

Torchinsky: It is clear now that no new rules will take effect in 2014. If comments are filed in early 2015 on the new proposal, presumably the IRS would be in a position to issue actual rules sometime in mid to late 2015. Assuming that these new rules are not tied up in legal challenges before the ink is dry, these new rules could be in effect by the middle or end of 2015.

Sadlier: Have these two actions by the IRS affected how coalitions/newly formed groups organize or the activities they plan to conduct?

Torchinsky: Some groups are beginning to adjust their practices based on the definitions in the proposed rules, and others are refraining from starting new 501(c)(4) organizations altogether. Since those draft rules applied only to 501(c)(4) organizations, some others are looking to 501(c)(6) organizations to conduct activities or are exploring other forms of organization to accomplish their goals that are not covered by these IRS exempt organization rules.

Thanks to Jason for his insight on the IRS efforts. It will be important in the coming months to keep an eye on the new proposed rules, as they will no doubt impact the political and policy activities of non-profit organizations in the years to come.


Lizanne Sadlier


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