Charities Upset Over Lobbying Audits

Several organizations that represent charities are concerned over news that the Internal Revenue Service plans to audit numerous groups that attempt to influence federal legislation, saying they are afraid that the charities are being singled out because of the way they report lobbying expenses on their Form 990 federal information returns.

At least six Minnesota charities that lobby have been notified that they are being audited, according to Jon Pratt, executive director of the Minnesota Council of Nonprofits. The groups have not been publicly identified.

Several national coalitions of charities, including the Alliance for Justice, Charity Lobbying in the Public Interest, and OMB Watch, have asked the IRS to stop the audits, saying it is wrong for the revenue service to single out charities that report their lobbying expenses in a particular way By focusing on certain groups to audit, “the IRS will effectively discourage groups from engaging in legitimate lobbying activity and from accurately reporting their activities to the IRS,” wrote Nan Aron, president of the Alliance for Justice, in a letter to Rosie Johnson, IRS director of exempt organizations examinations.

The IRS has previously announced that it will conduct studies of specific types of organizations, such as religious groups and social-service organizations, and certain subjects, such as lobbying, which charities seem to find especially confusing, so it can determine where it might need to step up its enforcement efforts.

The IRS, which had sent the audit notices as part of its study of lobbying expenses, said it will review the project due to the letters. “We’re taking a look at the situation in light of the concerns that have been raised,” said IRS spokesman Ken Hubenak.

The coalitions said they are concerned the IRS may be singling out particular charities because of the way those charities report lobbying expenses on their Form 990 federal informational returns. Charities have two options in reporting lobbying expenses: They can elect to spend a set percentage of their total budgets on lobbying; or they can use a formula to prove that influencing legislation forms “no substantial part” of their overall activities. Because of the imprecise nature of that test, tax experts prefer the first method. However, Ms. Aron said she is concerned that the charities that elect to spend a set percentage of their budgets are being singled out. “Conversations with IRS staff suggest that any 501(c)(3) that has elected to use the expenditure-based test for lobbying and that reports more than $10,000 in lobbying expenditures may face an audit as part of a national project,” she wrote.

Not so, said the IRS’ Mr. Hubenak. Some charities that chose the “no substantial part” test have also been picked for the project, he said.

Marc Owens, a Washington lawyer who was previously director of the IRS division that oversees charities, said that nonprofit groups are nonetheless worried that if they elect to calculate lobbying expenses as a percentage of their budgets, “they will somehow identify themselves as doing something wrong, and that will draw an IRS audit.” He added: “Whether the IRS audit project is only of electing organizations, or of electing and non-electing, it still sends the same concern. It’s important for the IRS to encourage charities to report lobbying expenses as a percentage of their budgets because it is a far more accurate way to track the expenses, he said.