When news broke last spring that the Internal Revenue Service had singled out conservative groups for special scrutiny, the most frustrated group in Washington wasn’t the Obama Administration, which would spend months putting out the fire. It wasn’t conservative Republicans, who were only too happy to hold hearings and caterwaul on cable. It was the campaign-finance reformers, who knew the scandal would overshadow the bigger problem at the IRS.
Since the Citizens United decision in 2010, groups masquerading as social-welfare organizations have capitalized on a 1959 IRS rule that allows tax-exempt groups to participate in political activity. The proliferation of such groups, and the so-called dark money that they poured into ensuing elections, has dramatically reshaped the U.S. political landscape. To campaign-finance watchdogs, the improper targeting of Tea Party organizations was a symptom of a larger problem: the IRS was mistakenly forced to sift through the growing pile of 501(c)(4) applications to determine whether the applicants’ “primary” purpose was electioneering or issue advocacy, using hazy legal definitions enshrined two generations earlier.
Now campaign-finance reformers are fighting back. On Wednesday, Democratic Congressman Chris Van Hollen, the ranking member of the House Budget Committee, filed a federal lawsuit against the IRS, claiming that the agency’s rules fail to comply with tax law, unfairly permitting Van Hollen’s political opponents “to obtain an improper benefit — the advantage of tax exemption without the requirement of donor disclosure.”
(MORE: The Real IRS Scandal)
“The root of the problem,” Van Hollen explained, “is that the IRS is currently in the business of trying to determine whether the primary purpose of an organization seeking 501(c)(4) status is social welfare or whether their primary purpose is political.” But the challenge boils down to a dispute over whether the IRS twisted an ancient federal law limiting tax-exempt groups from engaging in political activity.
In 1913, Congress passed the so-called Revenue Act, which first granted special tax benefits to a new class of nonprofit organizations. Congress defined such groups narrowly, noting they should be “operated exclusively for the promotion of social welfare.” But more than 50 years ago, “that plain meaning somehow got tortured,” Van Hollen says, by an IRS decision to allow those groups to engage in political activity as long as it wasn’t their “primary purpose.” Primary has never been officially defined; in practice, it’s often interpreted to mean 501(c)(4) groups are allowed to spend up to 49% of their time influencing elections.
It falls to the IRS to scrutinize these groups to determine where to draw the line. After the Citizens United ruling, the scope of that task ballooned as groups rushed to take advantage of the Justices’ ruling that extended new free-speech protections to corporations. Drowning in paperwork, the organization erred, adopting a system that filtered for specific keywords — terms like tea party and patriot — as a kind of shortcut. “The IRS was never intended to be in that business,” Van Hollen says.
The campaign-finance watchdogs joining Van Hollen as plaintiffs — Democracy 21, Public Citizen and the Campaign Legal Center — saw the train wreck coming. Fred Wertheimer, president of Democracy 21, petitioned the IRS in 2011, urging it to crack down on big-money groups masquerading as 501(c)(4)’s in order to shield their donors. In 2012 those groups, including powerhouses like Karl Rove’s Crossroads GPS and the Obama-supporting Priorities USA, were permitted to pour $256 million into political races without disclosing the source of the cash. The figure was more than triple the tally from 2008, thanks to the Supreme Court’s Citizens United ruling.
The explosion of dark-money groups, says Paul Ryan, senior counsel for the Campaign Legal Center, is an “enormously troubling growth sector in U.S. politics.” The plaintiffs in the suit say they don’t want to suppress political activity or deny tax-exempt status. Rather, they want to force political groups to register as 527 organizations, which are required to disclose their donors.
If you ask the plaintiffs, the ability of big-money groups to flout tax law is a bigger scandal than the improper targeting of a handful of Tea Party groups. And the real losers, Wertheimer says, “are the voters, who are being denied basic campaign-finance information they have a right to know.”