IRS probe ignored most influential groups; ‘tax-exempt' line blurs

WASHINGTON -- There's an irony in the Internal Revenue Service's crackdown on conservative groups.

The nation's tax agency has admitted to inappropriately scrutinizing smaller tea party organizations that applied for tax-exempt status, and senior Treasury Department officials were notified in the midst of the 2012 presidential election season that an internal investigation was underway.

But the IRS largely maintained a hands-off policy with the much larger, big-budget organizations on the left and right that were most influential in the elections and are organized under a section of the tax code that allows them to hide their donors.

"The IRS goes AWOL when wealthy and powerful forces want to break the law in order to hide their wrongful efforts and secret political influence," said Rhode Island Sen. Sheldon Whitehouse, a Democrat who is among a small Senate group pushing campaign finance reform measures that would force these big outside groups to disclose their donors. "Picking on the little guy is a pretty lousy thing to do."

Karl Rove's Crossroads GPS and the Koch brothers' Americans for Prosperity were among those that spent tens of millions of dollars on TV ads and get-out-the-vote efforts to help Republicans. Democrats were aided in similar fashion by Priorities USA, made up of former Barack Obama campaign aides, and American Bridge 21st Century Foundation, an opposition research group led by a former adviser to Senate Majority Leader Harry Reid.

Yet those groups so far have escaped investigations into whether they have crossed the blurry line under the law between what constitutes a tax-exempt "social welfare" organization that is free from donor reporting requirements and a political committee subject to taxes and disclosures.

Watchdog groups and lawmakers who have sought more disclosure and restrictions on such groups claim an injustice. They say the IRS saga over the targeting of smaller groups shines a light onto the agency's failure to guard against the flood of secret money into the political system through the creation of the deep-pocketed groups.

Other advocates of reform worry that, in light of the IRS disclosure of targeting small groups, government regulators will be less likely to scrutinize the tax-exempt status of the bigger, more powerful groups out of fear they will appear to be targeting groups for political reasons.

"We expect that opponents of disclosure will try to use the recent developments to allow the groups that are misusing the tax laws to hide donors to continue misusing them. But that's a battle that we will engage in," said Fred Wertheimer, founder and president of watchdog group Democracy 21.

Since a series of court decisions including the Supreme Court's ruling in the 2010 Citizens United case, the IRS has seen an influx of applications -- from 1,735 in 2010 to 3,357 in 2012 -- by so-called social welfare groups wanting to form under section 501(c)(4) of the federal tax code. That section grants tax-exempt status as long as the primary mission of these organizations is not politics and influencing elections. The IRS makes that determination. Such nonprofits can keep secret the names of their donors, which are not subject to traditional campaign finance limits.

The rules are fuzzy. The law says that these groups can only be involved in social welfare activity and not politics. But IRS regulations give the groups leeway to conduct political activities -- as long as that is not its "primary activity." That conflict opens the door to potential abuses and different interpretations of what is allowed and what is prohibited.

An IRS inspector general's report released this week recommended developing for the first time specific guidelines to measure the primary activity of social welfare organizations, and some in Congress have shown a willingness to review big groups like the not-for-profit Crossroads GPS and its sister super PAC, American Crossroads. They spent a combined $176 million in the last election cycle, much of it on television advertisements to benefit Republican candidates.

A Senate investigative panel led by Democrat Carl Levin of Michigan and Republican John McCain of Arizona has been reviewing the use of social welfare groups for political causes for the past year and now is examining the agency's handling of the tax-exempt reviews.

And in a letter to congressional investigators Thursday, Rep. Chris Van Hollen, D-Md., urged the House Ways and Means Committee not to ignore the influx of groups that may be abusing the tax code as part of its upcoming IRS probe, saying: "I hope we can remove the incentive for any group, regardless of its political orientation, to seek 501(c)(4) tax-exempt status to engage in significant political campaign activities while hiding their donors."

Despite the bipartisan outcry over the IRS scandal, there's little incentive for lawmakers on either side of the aisle to push for reforms because Republicans and Democrats alike benefit from these big outside groups.

In fact, just the opposite may be happening.

Some congressional Democrats, fearful of being tied to the scandal, are backing the push for more aggressive enforcement of these groups. And some conservative leaders and Republican donors are using the IRS scandal to help protect the status quo while preparing to pump hundreds of millions of dollars -- raised anonymously in many cases with no contribution limits -- into the next election cycle, just as they did last fall.

"I would hope that this new information about the politicization of the IRS should put the brakes on any sort of disclosure of donors who wish to remain anonymous," said Charlie Spies, who helps raise money for several conservative organizations and previously led the super political action committee that raised more than $140 million to benefit Mitt Romney's presidential bid. "We're now seeing exactly what the risk is for donors to be disclosed."

At least some tea party groups are unwilling to trust the agency with more enforcement power in the wake of such damaging revelations.

"The IRS' integrity is shattered," said Jenny Beth Martin, chairman of the Tea Party Patriots, which was among the largest not-for-profit conservative groups the IRS targeted. She said that now, more than ever, donors need freedom to give money anonymously "without fear of retribution" from a politicized IRS. In the meantime, she says her organization's influence is growing, fueled by anonymous unlimited donations.

Wertheimer, of Democracy 21, said the "laundering of secret money into elections" will become a greater scandal than IRS misconduct unless something is done.

"There will be efforts to sweep this under the rug," he said. "They may succeed on a temporary basis for a relatively short period, but they are not going to succeed in the long term."

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Peoples reported from Boston.

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