Conservatives call it a scheme to silence President Obama’s critics. Liberals complain the administration risks trampling on the First Amendment.
Protests are coming from all directions over the Obama administration’s proposal to curb secretive groups that play an increasingly dominant role in American politics. In 2012, such tax-exempt organizations poured hundreds of millions of dollars into campaign-related ads, and they are taking the lead in shaping the landscape of this year’s midterm elections.
That kind of spending would be much harder under draft rules the Treasury Department rolled out in November that would define what constitutes political activities for “social welfare” groups organized under the 501(c)(4) section of the tax code. But now, the opposition is so intense that many believe the proposed regulations are in serious jeopardy.
The battle over the rules will test the administration’s ability to shape policy through executive action, a tactic Obama is increasingly embracing in the face of a recalcitrant Congress.
More than 23,000 comments — the majority of them sharply critical — have been filed in response to the proposed regulations, shattering the Internal Revenue Service’s previous records.
Republican lawmakers, who say the rules are aimed at constraining Obama’s conservative opponents, are pushing legislation to delay them. But protests have also come from groups on the left such as the American Civil Liberties Union, which has argued that the regulations could cause serious free-speech problems, as well as logistical nightmares.
Amid the debate, tax-exempt groups that do not disclose their financial supporters are already emerging as major players in the 2014 midterms. Americans for Prosperity, a conservative advocacy group backed by the billionaires Charles and David Koch, has pumped $27 million into ads attacking congressional Democrats. On the left, organizations such as Patriot Majority and the League of Conservation Voters have sought to counter the attacks.
The effort to rein in such players is caught up in the charged political atmosphere of the IRS targeting scandal last year, when an audit revealed that agency staffers had singled out nonprofit groups with words such as “tea party” and “patriot” in their names for extra scrutiny.
Critics and supporters of the proposal agree that the vehement objections could delay or even derail the rules. Tax experts now expect the Treasury Department to pull back the regulations and rewrite them — or withdraw them completely.
“There is a valid concern that the IRS is going to back away from any enforcement at all,” said Stephen Spaulding, staff counsel for Common Cause, which backs more limits on tax-exempt groups. “They’re being pummeled,” he added.
Tax attorney Marcus Owens, a former top IRS official, had a more dire prognosis. “I think the regulations are dead in the water,” he said.
Administration officials indicated that the rulemaking was proceeding.
“Treasury and the IRS issued the proposed guidance as a first step in a careful, thoughtful process to clarify the rules governing social welfare and other tax-exempt organizations, consistent with the recommendations of the Treasury Inspector General for Tax Administration,” Treasury Department spokeswoman Victoria Esser said in a statement. “Clarification of these rules is an important goal and one that we are committed to, although there are still many steps remaining before final rules are released.”
But congressional Republicans are seeking to head off any new restrictions. On Tuesday, the House Ways and Means Committee advanced legislation to prevent any rules from taking effect for a year. A similar measure was introduced in the Senate by Jeff Flake (Ariz.) and Pat Roberts (Kan.) and sponsored by 37 additional senators, including Minority Leader Mitch McConnell (Ky.).
The proposal “would essentially allow the IRS to bully and intimidate Americans who exercise their right of free speech,” McConnell said on the Senate floor this month.
“The administration knew it could never get anything like that through Congress the democratic way, so it is trying to quietly impose these new regulations through the back door — through the back door — by executive fiat,” he added.
Advocates for tightening the political activities of 501(c)(4) groups say there are flaws in the proposed regulations but contend that conservative critics just want to ensure that nonprofits engaging in campaigns do not have to reveal their donors, as political committees must.
“What we’ve seen from the likes of Leader McConnell and many folks on the right is really egregiously dishonest,” Spaulding said. “It’s been incredibly over the top, and it’s raised the temperature to the point that folks need a reminder as to what this whole controversy is about in the first place — multimillionaires using these (c)(4)s as tax shelters to spend unlimited amounts of money on politics.”
The use of tax-exempt groups as political vehicles took off in the wake of the Supreme Court’s Citizens United decision, leading to a flood of applications to the IRS from new organizations seeking recognition as 501(c)(4)s. Such groups have wide latitude under tax laws, governed only by a regulation from 1959 that states that a social-welfare organization must be “primarily engaged in promoting in some way the common good and general welfare of the people of the community.”
A lack of specific guidance about how much such nonprofits can engage in campaigns may have led IRS employees to inappropriately target some groups for extra scrutiny, the Treasury Department’s inspector general concluded in a May audit.
The department sought to begin clarifying the rules in November, releasing draft regulations that for the first time would define what constitutes “campaign-related political activity” for 501(c)(4)s. Those activities would not count toward a group’s social-welfare purpose.
But the proposal sweeps into that category many routine functions of advocacy groups, including nonpartisan voter registration, candidate forums and get-out-the-vote activities. That triggered alarm across the political spectrum.
“The proposed rule threatens to discourage or sterilize an enormous amount of political discourse in America,” the ACLU wrote in a 26-page comment that urges the IRS to revamp the proposal.
Among the most troubling aspects, ACLU counsel Gabe Rottman said, is that the regulations would classify as political activity the mere mention of candidates or political parties on a group’s Web site in the run-up to primaries or elections — requiring organizations to scrub their Web sites or try to calculate how much they were spending to maintain those Web pages.
Environmental groups such as the League of Conservation Voters and the Sierra Club — while supportive of clearer rules for 501(c)(4)s — are also worried. Cathy Duvall, the Sierra Club’s director of strategic partnerships, said that the proposal “harms efforts that have nothing to do with politics, from our ability to communicate with our members about clean air and water to our efforts to educate the public about toxic pollution.”
Objections have also been registered by labor unions, which are formed under a different part of the tax code and fear the new rules would eventually apply to their activities.
But the loudest protests are coming from groups on the right. Organizations such as FreedomWorks and Tea Party Patriots have urged members to submit comments objecting to the rules.
Conservative election law attorney Cleta Mitchell said she has spent the past month doing briefings and national conference calls for nonprofit groups, warning them of the potential impact.
In the end, she said, she hopes “the IRS will realize that these proposed regulations are an abomination and will discard any thought of trying to push them to final implementation.”