WASHINGTON -- For years, the IRS has done little or nothing to check the rise of overtly political groups that claim a special tax-exempt status in order to funnel secret money into election-related advertising.
But in a sign that the agency may be waking from its slumber, the IRS has sent detailed questionnaires to several Tea Party organizations -- and possibly other political groups -- to determine if they truly qualify for the 501(c)(4) designation intended for groups whose exclusive purpose is to promote social welfare.
Should any group currently calling itself a 501(c)(4) have its designation denied or revoked, tax experts said the consequences could be severe, including fines of 35 percent or more of the money they raised in secret.
And the groups might have to make donors' names public.
Even loose talk about donor secrecy no longer being guaranteed could put a screaming halt to the extraordinary flow of money into these groups from deep-pocketed people and corporations that want to buy political ads without leaving fingerprints.
"If I thought it was important to remain anonymous for my business reasons or for my personal reasons, I wouldn't take any comfort in any assurances the organization has given me until now," said Karl Sandstrom, a former Federal Election Commission member who now works at the Washington office of law firm of Perkins Coie.
It’s not clear whether any of the major groups that identify themselves as C4s -- and are well on their way toward collecting and spending tens of millions of dollars in this election cycle -- have been the subject of IRS inquiries. The IRS won't say, and it’s apparently a sensitive topic with the groups. Representatives from Karl Rove-associated Crossroads GPS, Obama-backing Priorities USA, and several others didn't respond to requests for comment.
But, said Sandstrom: "It's hard to imagine that the IRS would take the time to make inquiries of small organizations if there are very large organizations -- spending vast sums of money compared to these much smaller organizations -- that are not receiving similar attention."
The tax code requires 501(c)(4) groups to be operated "exclusively" for social welfare purposes -- which does not include intervention in political campaigns. The IRS has allowed the groups to engage in political activity as long as it was not their primary purpose. But for many of these groups, it's hard to see what other purpose they could possibly have.
It's also hard to see why a political group would file under section 501(c)(4) instead of under Section 527 -- the part of the tax code explicitly designed for political groups including PACs and super PACs -- other than to hide its donors. Like the C4s, the 527 groups are allowed to raise unlimited funds and pay no taxes. They just have to disclose who donates money.
Reform groups have been pressuring the IRS to enforce its rules for months. In February, a group of Democratic senators sent a letter to the IRS, which stated: "It is contrary to the letter and spirit of the statute for political organizations formed primarily to advocate for a political candidate or to run attack ads against other candidates to take advantage of section 501(c)(4)."
Sen. Tom Udall (D-N.M.), one the letter’s signers, praised the IRS inquiry. "The term 'social welfare organization' is clearly being used loosely these days,” Udall said in a statement. “Voters deserve to know who's behind the attack ads they see on TV and we need a multi-pronged approach to get there -- a tightening of regulations, disclosure legislation from Congress, and ultimately, a constitutional amendment to reduce the influence of money in our elections."
Meanwhile, a conservative legal organization representing several Tea Party groups assailed what it says "appears to be a coordinated attempt by the Internal Revenue Service to intimidate and silence these organizations in this election year."
The Tea Party groups released IRS questionnaires that requested detailed information, including lists of people invited to speak at events, their credentials, and hard copies of all handouts.
"The problem here is the IRS has gone beyond legitimate inquiries and is demanding that these organizations answer questions that actually violate the First Amendment rights of our clients," Jay Sekulow, chief counsel of the evangelical interest group American Center for Law and Justice, said in a statement.
But Donald Tobin, a law professor at the Moritz College of Law at Ohio State University, said the information requested by the IRS is perfectly normal and appropriate. "The idea is to get the proper information from the organization so you can make the proper decision," he said.
An IRS spokesman declined to comment on specific cases, but said in a statement on Thursday that "when determining whether an organization is eligible for tax-exempt status, including 501(c)(4) social welfare organizations, all the facts and circumstances of that specific organization must be considered."
The statement described the agency's procedure:
In cases where an application for exemption under 501 (c)(4) present issues that require further development before a determination can be made, the IRS engages in a back and forth dialogue with the applicant. For example, if an application appears to indicate that the organization has engaged in political activities or may engage in political activities, the IRS will request additional information about those activities to determine whether they, in fact, constitute political activity. If so, the IRS will look at the rest of the organization’s activities to determine whether the primary activities are social welfare activities or whether they are non-exempt activities. In order to make this determination, the IRS must build an administrative record of the case. That record could include answers to questions, copies of documents, copies of web pages and any other relevant information.
Career civil servants make all decisions on exemption applications in a fair, impartial manner and do so without regard to political party affiliation or ideology.
No organization is being compelled to do anything, said Paul S. Ryan, a lawyer with the Campaign Legal Center, a group trying to reduce the influence of money in politics.
"The tax-exemption of nonprofit groups amounts to a subsidy of their operations," Ryan said. "If a group's going to show up at the IRS with its hand out, I think the federal government is fully within the bounds of not only permissible, but desirable activities to make sure that what amounts to a subsidy is in compliance with the law.
"I have no sympathy for those who are bending over backward to evade disclosure laws and complaining about the IRS simply doing its job and enforcing the laws on the books," Ryan said.
The only known previous action by the IRS came in July, when it denied C4 status to three units of Emerge America, a group that identifies and trains Democratic women to run for office.
The IRS opened an examination into whether five large donors had violated the law by not declaring their contributions to political 501(c)(4) groups as gifts. But the agency stopped its inquiry after six Republican members of the Senate Budget Committee accused the IRS of pursuing a Democratic political vendetta.
"The IRS was bullied by Congress and backed off immediately. It will be interesting to see if the IRS has any backbone this time," Ryan said.
Ofer Lion, a Los Angeles tax lawyer who represents tax-exempt organizations, said that even if the IRS proceeds, the agency "usually acts very slowly."
"They are now being looked to enforce these restrictions on political and lobbying activities at the pace of the campaign, which is something they're not used to and not built for," Lion said.
The IRS move will inevitably be attacked as political, but Lion said he sees no indication of politics. "I'm not sure that it's much more than what seems pretty plain, which is that these organizations look like political organizations," he said.
"Some of these organizations look like political parties. And a political party is not a 501(c)(4). This is just enforcing the laws on the books."
According to Sandstrom, if the IRS rejects or revokes a C4 classification, it's likely that the group would be forcibly reclassified as a 527 -- and would immediately be in violation of that section's reporting requirements.
That could result in a slap on the wrist or some sort of negotiated settlement. But technically, the statute establishes the penalty for nondisclosure as the maximum corporate tax rate (35 percent) times all the money that should have been disclosed, but wasn't.
“Failure to report involves a substantial penalty related to the activity you're supposed to report, both on the contribution side and on the expenditure side, so the effective tax is about two-thirds of all revenue,” Sandstrom said.
Huffington Post Fundrace Editor Paul Blumenthal contributed to this report.