Fixing the IRS: Clarify the Rules on Political Involvement

The controversy over the Internal Revenue Service’s handling of applications for tax exemption from conservative groups has put the tax agency in the hot seat.

The Chronicle invited nonprofit and legal experts to suggest remedies:

• Today: Clarify the rules on political involvement
• Tuesday: Improve the application process
• Wednesday: Provide more money for enforcement
• Thursday: Avoid political bias

We encourage you to join the discussion in the comments section.

Clarify the Rules on Political Intervention

Ellen P. Aprill
Loyola University

Rules would better regulate this area than the current amorphous standards.

The controversy that has rocked the Internal Revenue Service highlights how difficult it is for the agency to determine whether organizations seeking to become tax-exempt charities are violating the ban on partisan politics.

The IRS should start the hard work of writing a set of rules to clarify this prohibition. Groups that are exempt under section 501(c)(3) of the federal tax code play an important role in American life, but they cannot “participate in or intervene in (including the publishing or distributing of statements) any political campaign on behalf of (or in opposition to) any candidate for public office.” Thus, they cannot endorse or oppose a political candidate or contribute to his or her campaign.

The IRS has long interpreted this prohibition to apply to “indirect” as well as “direct” intervention. But how it interprets, communicates, and enforces this ban, particularly when it comes to indirect intervention, remains a matter of controversy.

Critiques of the IRS’s approach in this area, like most other critiques of the tax agency, generally take the point of view of the regulated entities to point out the difficulties the affected parties can face in complying with the standards. But they also cite the need to uphold the organizations’ First Amendment rights, a more unusual approach for those taking the IRS to task.

We also need, however, to approach this problem from the agency’s point of view. The IRS must balance its responsibilities in encouraging compliance and accurately identifying offenders. In this case, the low level of enforcement, the large number of organizations involved, and the small number of groups that are likely to seek legal advice strongly suggest that rules would better regulate this area than the current amorphous standards.

The intense spotlight that is now on the IRS should offer an incentive to the agency to draw up rules on campaign intervention, or at least begin by establishing a set of safe harbors, or political activities that are permissible. Such action would make life easier both for 501(c)(3) organizations and for the IRS’s overworked agents.

Ellen P. Aprill is a professor of law specializing in tax matters at Loyola University in Los Angeles.

Lisa Gilbert
Public Citizen

In our proposal, communications that express a view on a clearly identified candidate would be considered “political intervention.”

The Internal Revenue Service’s inappropriate process for scrutinizing conservative groups’ applications for tax-exempt status absolutely warrants investigation. The agency is, and should be, an impartial arbiter of whether organizations merit tax-exempt status. The IRS has a newfound credibility problem that will not quickly go away.

One thing that could help rebuild trust in the agency, however, is to improve the way tax law defines and limits political activity by tax-exempt entities, including charities, which must refrain from all partisan politics.

The IRS should shift from the complex, multifactor, open-ended “facts and circumstances” test currently used to interpret political activity to a well-defined, objective standard. The current test is hard for the agency to apply and was highly vulnerable to challenge long before the recent debacle.

The first step is to create a definition of what is considered political. To create a standard less susceptible to political bias, Public Citizen has taken on the Bright Lines Project, which began four years ago with a retreat hosted by Rockefeller Brothers Fund and organized by OMB Watch (now called Center for Effective Government). A drafting committee led by a group of prominent tax lawyers has developed a set of guidelines to redefine “political intervention,” setting out clearly which activities are permissible and which cross the line.

This would enable more charities to participate in nonpartisan political activities safely while relieving IRS staff from having to flag organizations based on no clearer a criterion than “knowing political activity when they view it.”

Our project created working definitions for political intervention for all tax-exempt entities, using standards similar to those that have been in place for more than two decades to define acceptable lobbying for charities. Communications that refer to a clearly identified candidate and express a view on that candidate would meet the threshold definition of “political intervention.”

Like the IRS lobbying rules, we have examples of when exceptions are acceptable. For example, if a candidate attacks an organization or comments on an organization’s policy position, it is permissible for the group to respond without it being considered political intervention.

Our proposal could be enacted by the IRS as a regulation, but if the agency cannot or will not act, Congress should direct it to adopt such well-defined rules—a move that would reduce uncertainty and help rebuild national trust in the IRS.

Lisa Gilbert is director of Congress Watch at Public Citizen, a consumer-advocacy organization.