Mission Matters Insights
The Fuss Over the IRSMay 23, 2013
Abuse of the 501(c)(4) tax-exempt status?
Few people are probably upset that the IRS is in the middle of a problem. Even though most of us have never had an up-close and personal interaction with the IRS, it is the one government agency that everyone fears. So I suppose it is somewhat natural to smile a bit as we hear about their problems.
I thought that in this blog I would try to shed some light on the issue. Although most of the readers of this blog are charitable organizations, exempt under Section 501(c)(3) of the Internal Revenue Code, there are actually 29 different sections of 501(c) under which an entity can find tax-exempt status. Some of the media hype is about certain organizations that have sought tax-exempt status. Some of the general public is outraged because many people only think of charities when they think of a tax-exempt organization.
The specific section of 501(c) that is under scrutiny is 501(c)(4). 501(c)(4) organizations are generally civic leagues and other corporations operated exclusively for the promotion of “social welfare”, such as civics and civics issues, or local associations of employees with membership limited to a designated company or people in a particular municipality or neighborhood, and with net earnings devoted exclusively to charitable, educational, or recreational purposes. An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting the common good and general welfare of the people of the community.
501(c)(4) organizations may also inform the public on controversial subjects and attempt to influence legislation relevant to its program and they may participate in political campaigns. Contributions to such organizations are generally not tax deductible. The ability to participate in political campaigns is controversial because while there are laws requiring disclosure of donors to political campaigns, there are no such requirements relative to the financial supports of 501(c)(4) organizations.
Each of the political parties has its share of 501(c)(4) organizations and after the success of the Tea Party in 2010 there were many new applications for recognition of tax-exempt status by new 501(c)(4) organizations related to the Tea Party movement. These are the applications that the IRS is accused of slowing down or otherwise targeting for enhanced scrutiny.
There are many who question whether the 501(c)(4) organization is appropriate for a purely political organization. Allowing the 501(c)(4) organization to become involved in political campaigns is not the same as creating a 501(c)(4) organization that is entirely devoted to a political candidate or party. Actually both sides of the isle are concerned with the current situation and the recent headlines are really intended to get readers upset with the tax-exempt organizations. Many want to stop what they consider an abuse of the 501(c)(4) tax-exempt status.
The IRS is probably right to try to keep politics out of the tax-exempt arena – not just the 501(c)(3) organizations, but all 29 of the exempt 501(c) categories. The tax code is not the place for politics. Free speech doesn’t need the tax code as it is a basic guarantee and transparency in identifying who is saying what in our political campaigns is a worthy goal. The IRS probably had good intentions in giving these organizations a second look. The problem now is that those good intentions are going to be lost in a sea of rhetoric, the intentions of which may be totally unrelated to preserving the purity of the tax-exempt entity. Those in the tax-exempt field should be on guard to protect this portion of the Internal Revenue Code from the fallout of this issue.