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'Dark Money' Nonprofit Rules Will Get Review, IRS Letter Says

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Karl Rove founded Crossroads GPS, a
Karl Rove founded Crossroads GPS, a "social welfare" nonprofit spending tens of millions on political ads.

WASHINGTON -- The Internal Revenue Service is considering changes to the rules on nonprofits that now let certain political groups run attack ads while not publicly disclosing the identities of their donors, according to a July 17 letter.

The IRS' announced review of rules governing 501(c)(4) "social welfare" nonprofits that are funded by undisclosed "dark money" comes in response to a series of letters sent by the campaign finance reform groups Democracy 21 and Campaign Legal Center. The groups had jointly petitioned the IRS not only to review the regulations governing this class of nonprofit, but also to individually investigate specific groups, including Karl Rove-linked Crossroads GPS, pro-Barack Obama Priorities USA and the American Action Network, which is headed by former Sen. Norm Coleman (R-Minn.).

"It appears to us to be significant," said Democracy 21 President Fred Wertheimer about the July 17 letter. "As far as we know, this is the first time the IRS has publicly stated that it will consider rules changes to the regulations that deal with the eligibility of 501(c)(4) groups."

The letter from Lois Lerner, director of the tax agency's exempt organizations division, states, "The IRS is aware of the current public interest in this issue. These regulations have been in place since 1959. We will consider proposed changes in this area as we work with the IRS Office of Chief Counsel and the Treasury Department's Office of Tax Policy to identify tax issues that should be addressed through regulations and other published guidance."

Paul S. Ryan, senior counsel to the Campaign Legal Center, explained the importance of the letter: "It's the first time that we've heard back from the IRS on any of the many occasions that we've submitted letters to the IRS. ... I definitely don't view it as a form letter. We've been sending letters to the IRS for years, and we typically don't hear back from them."

To Wertheimer, the revelation that the regulations governing 501(c)(4) organizations have been in place since 1959 highlights the importance of reviewing them now.

There have been "revolutionary changes from 1959 to now," Wertheimer said. The letter "acknowledges that the regulations here are more than half a century old. They do not reflect current circumstances or the court's interpretation of the law."

Spending on political campaigns by groups registered under section 501(c)(4) has exploded over the past five years. The expansion began in 2008 after the Supreme Court lifted some campaign finance restrictions placed on certain nonprofit groups by the 2003 McCain-Feingold law. Those restrictions were entirely removed by the court's 2010 ruling in Citizens United v. Federal Election Commission.

Any new IRS rules, regulations or guidance would likely take months, if not longer, to write. That means there is little chance of any direct action being taken before this November's election.

In a July 23 letter responding to the July 17 IRS missive, Democracy 21 and the Campaign Legal Center pressed the agency to work quickly and to investigate groups currently spending large sums on politics while shielding their donors from the public.

"We strongly urge the IRS to promptly institute a rulemaking proceeding to address this matter," they wrote. "We also strongly urge the IRS to act expeditiously in the interim to stop the blatant abuses of the tax laws that are resulting in massive amounts of secret money being laundered into our national elections by groups claiming to be 'social welfare' organizations."

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