Watchdog group sues IRS for stricter tax-exemption rules

The watchdog group Citizens for Responsibility and Ethics in Washington filed a lawsuit Tuesday in the U.S. District Court for D.C. to compel the Internal Revenue Service to impose stricter standards for what types of groups qualify for tax-exempt status.

Current law says tax-exempt 501(c)(4) organizations must engage “exclusively” in so-called “social welfare” activities, but IRS regulations only require that the “primary” purpose of the groups must fall into that category.

Charles Dharapak/AP - Ousted IRS chief Steve Miller, left, and former IRS Commissioner Douglas Shulman are sworn in Tuesday, prior to testifying before the Senate Finance Committee. Charles Dharapak/AP – Ousted IRS chief Steve Miller, left, and former IRS Commissioner Douglas Shulman are sworn in Tuesday, prior to testifying before the Senate Finance Committee.

Critics of the IRS rules say the lack of consistency between federal statute and IRS standards helped lead to the singling out of conservative groups that applied for tax-exempt status before the 2010 midterms and during the 2012 election cycle.

The IRS has suggested that its managers developed the targeting campaign in response to a flood of applications for nonprofit status.

“As the ongoing IRS scandal shows, the 501(c)(4) regulation is unmanageable,” said CREW executive director Melanie Sloan. “It clearly conflicts with the tax code and IRS employees are simply at a loss as to how to apply it.”

CREW said social welfare groups spent $255 million on elections during the 2012 election cycle, noting that many of those organizations have interpreted the IRS regulation to mean they can spend up to 49 percent of their annual expenditures on election-related activities.

At least two groups, CREW and Democracy 21, have petitioned the IRS to revise its tax-exemption rules to match federal law.

“Until now, it has been impossible to persuade the IRS or Congress to confront this issue,” Sloan said. “But now that the entire country has been educated about this previously obscure tax matter, this lawsuit may finally spur reform.”

(The Post’s Juliet Eilperin also reports that True the Vote, a Houston-based voter watchdog group, filed suit in federal court Tuesday against the IRS over the agency’s processing of its request for tax-exempt status. Read the full story here.)

For more federal news, visit The Federal Eye, The Fed Page and Post Politics. To connect with Josh Hicks, follow his Twitter feed, friend his Facebook page or e-mail josh.hicks@washpost.comE-mail federalworker@washpost.com with news tips and other suggestions.

Josh Hicks covers the federal government and anchors the Federal Eye blog. He reported for newspapers in the Detroit and Seattle suburbs before joining the Post as a contributor to Glenn Kessler’s Fact Checker blog in 2011.
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