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IRS chief: Agency working on specific limits for nonprofits’ political activities

The Internal Revenue Service will propose new guidelines next year that would establish specific limits on the amount of political activity allowed for tax-exempt advocacy groups and lay out which types of organizations have to follow the rules, according to the agency’s commissioner.

The move would address questions left unanswered in controversial draft guidelines the IRS unveiled in November with the goal of clarifying the rules for so-called social welfare groups, which fall under section 501(c)(4) of the tax code. The initial proposal focused largely on defining political activity, leaving aside other matters for future discussion.

The new plan could be a game-changer for the tax-exempt advocacy groups — such as Americans for Prosperity on the right and the League of Conservation Voters on the left — that have grown increasingly influential in recent elections.

Campaign-finance watchdogs have complained that the existing 501(c)(4) rules allow “dark money” to influence elections, since  social welfare groups are able to collect unlimited financial contributions without disclosing who provided the money. The new rules could make such organizations less attractive for donors.

The Center for Public Integrity first reported the rule-making development on Wednesday, citing interview remarks by IRS Commissioner John Koskinen.

Koskinen took over the IRS  last year in the wake of the agency’s tea party controversy, which started after former IRS official Lois Lerner acknowledged at a May 2013 legal conference that the IRS had targeted organizations with terms such as “tea party” and “patriot” in their names.

A subsequent inspector general’s report that same month confirmed that the agency had applied extra scrutiny to groups based on their names and policy positions.

The IRS said that vague rules for 501(c)(4) groups contributed to the problem. Federal law says the organizations must be engaged exclusively in social welfare, but a 1959 IRS regulation states that they should be “primarily engaged” in such efforts. 

The recent rule-making is part of a plan to clarify the guidelines and avoid future problems. But the November proposal drew criticism from both sides of the political spectrum, with liberals complaining that it defined even voter-registration efforts as political activity, while conservatives said the effort was part of a scheme to silence President Obama’s critics.

The IRS is reworking the draft guidelines, which drew more than 150,000 comments during the public-input phase that ended in February. The agency plans to hold a hearing on its next proposal once it is complete. Koskinen told the Center for Public Integrity that he expects a new draft of the 501(c)(4) regulations by early 2015.

House Ways and Means Committee Chairman Rep. Dave Camp (R-Mich.) proposed a bill in January to stop the IRS from modifying its 501(c)(4) regulations for one year while Congress continued investigating the targeting matter. The House passed the measure in February with support from 14 Democrats, but the legislation has stalled in the Senate.

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