Politically active nonprofit groups such as Crossroads GPS and the League of Conservation Voters could see their influence on campaigns dramatically curbed under a proposed rule announced Tuesday by the Treasury Department and Internal Revenue Service.
The new guidance would amend current regulations governing groups set up as “social welfare” organizations under Section 501(c)4 of the tax code. Such groups are supposed to make social welfare their "primary" purpose under current IRS regulations, a rule that is generally interpreted to mean that 501(c)4s must spend at least 51 percent of their funds on things such as community beautification and education.
The new rule would explicitly define which kind of activities are political and fall outside of the social welfare category, forcing such groups to be more careful about how they spend their funds. Under the proposed regulation, "candidate-related political activities" would include running ads that mention candidates close to Election Day, preparing voter guides or holding voter registration drives.
The proposed guidance must still go through a public comment process, among other steps, before it can be adopted. But it represents the most aggressive effort to date to rein in the activities of nonprofit groups that have had a growing influence on elections in recent years while sidestepping the disclosure requirements facing political committees.
The ability of such organizations to play in politics without revealing their donors has been decried by President Obama and other critics as a major loophole in the campaign finance system.
The proposed change is one of the first new recommendations by the Treasury Department and IRS in response the revelations earlier this year that IRS employees were using political terms to screen for 501(c)4 groups that were potentially engaging in too much election-related activity.
The scandal led to congressional hearings and the departure of senior IRS officials, as well as charges by Republicans that the Obama administration was targeting groups based on their political leanings. In the aftermath, Treasury and IRS officials pledged to review the current “facts and circumstances” test used to ensure that 501(c)4 groups are staying within the bounds of their “social welfare” mandate, saying there was a need for clearer guidance.
"This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations," Treasury Assistant Secretary for Tax Policy Mark J. Mazur said in a statement. "We are committed to getting this right before issuing final guidance that may affect a broad group of organizations. It will take time to work through the regulatory process and carefully consider all public feedback as we strive to ensure that the standards for tax-exemption are clear and can be applied consistently."
Republicans were quick to denounce the change.
House Oversight and Government Reform Committee Chairman Darrell Issa (R-Calif.) likened the change to the IRS's improper targeting of conservative groups, on which his committee has led the investigation.
"The Committee’s interim report into the IRS’s targeting scandal explained how the Citizens United decision caused the IRS to handle conservative tax-exempt applicants in a distinct and unfair manner," Issa said in a statement. "The regulation released today continues this administration’s unfortunate pattern of stifling constitutional free speech."
But the initiative was largely cheered by campaign finance reform advocates as an important effort to limit the use of secret money in campaigns. They urged Treasury to also issue a regulation defining how much — if any — political activity social welfare and other nonprofit groups should be able to engage in.
“We are at a a point now where we have had wholesale evasion of campaign finance law,” said Fred Wertheimer, president of Democracy 21, a reform advocacy group, who said he would like to see several categories of nonprofits more sharply regulated.
Still, Wertheimer said cracking down on 501(c)4s is an appropriate first step. “These c4 organizations have been allowed to launder hundreds of millions of secret money in to our elections,” he said.
An earlier version of this post incorrectly said that 501(c)4 groups would be prohibited from engaging in campaign-related activities. It has been corrected.
Originally posted at 2:21 p.m.
Aaron Blake and Tom Hamburger contributed to this post.