The IRS is currently facing two scandals that must be investigated and addressed by Congress to
prevent the same abuses in the future.
The first scandal involves the wrongful targeting by the IRS of conservative groups seeking
section 501(c)(4) tax-status. The second scandal involves the failure of the IRS to act to prevent
groups from improperly claiming section 501(c)(4) tax-status in order to launder secret
contributions into federal elections.
Our organizations believe it is essential for Congress to enact legislation that deals with both of
these scandals: legislation that prevents improper targeting of groups and also prevents groups
from improperly using the tax code to hide donors financing their campaign activities.
The organizations include Americans for Campaign Reform, the Campaign Legal Center,
Citizens for Responsibility and Ethics in Washington, Common Cause, Democracy 21, Demos,
Public Citizen and Sunlight Foundation.
Both of the current IRS scandals stem directly from flaws in the existing IRS rules that define
eligibility for section 501(c)(4) tax-exempt status. The rules have been interpreted to permit
section 501(c)(4) groups to engage in substantial campaign activities, while the statute governing
section 501(c)(4) groups explicitly states that such groups are required to engage "exclusively"
in social welfare activities.
Campaign activities are not "social welfare" activities under the tax laws.
By legislating appropriate changes to address the flaws in the regulations, Congress will restore
the original intent to the statutory provisions governing eligibility for section 501(c)(4) tax status.
The IRS has effectively admitted that the agency wrongfully targeted conservative groups for
review based on inappropriate criteria, and its actions are currently being investigated by several
The improper targeting actions by the IRS must not be allowed to serve as cover for sweeping
under the rug blatant abuses of the tax laws by pro-Democratic, pro-Republican and independent
groups who have improperly claimed section 501(c)(4) tax status in recent elections. These
abuses played a central role in more than $250 million in secret contributions being spent by
section 501(c)(4) groups in the 2012 federal elections.
At the same time the IRS wrongfully selected for heightened review small groups based on their
names or identified interests, the agency failed to prevent prominent campaign operations from
improperly posing as section 501(c)(4) "social welfare" groups in order to hide the donors
financing their campaign activities.2
Even taking into account that the IRS regulations were flawed, these political groups did not
comply with the existing regulations and the statute, and were not entitled to section 501(c)(4)
Section 501(c)(4) of the tax laws was created to provide tax-exempt status for groups
"exclusively" engaged in social welfare activities. Section 501(c)(4) was never intended to be a
vehicle for groups to conduct substantial campaign activities.
Instead, section 527 of the tax laws provides tax-exempt status to groups that engage in
campaign activities. Section 527 groups are required to disclose their campaign donors and
expenditures while section 501(c)(4) groups do not publicly disclose their donors.
Congress must take remedial action to prevent both of the scandals at the IRS from recurring.
We strongly urge Congress either to prohibit section 501(c)(4) groups from engaging in any
campaign activity or to establish a bright-line test that permits such groups to engage only in a de
minimis, insubstantial amount of campaign activity.
If "social welfare" groups want to engage in campaign activities, they can form separate section
527 organizations. This would allow them to engage in campaign activities as tax-exempt
organizations. It would also require them to publicly disclose their campaign contributions and
The existing IRS rules governing eligibility for section 501(c)(4) tax-status were adopted in
1959, more than a half century ago. The rules are antiquated and in conflict with the statutory
requirement that section 501(c)(4) groups engage "exclusively" in social welfare activities. They
also are in conflict with court cases interpreting this statutory requirement.
Furthermore, the rules do not take account of the explosion in groups claiming to be section
501(c)(4) organizations that followed the Citizens United decision.
Citizens United for the first time permitted corporations, including nonprofits, to make
expenditures to influence federal elections. As a result, a number of new groups claimed the
right to operate under section 501(c)(4) in order to function as vehicles for keeping secret the
donors financing their expenditures in federal elections. Examples of such groups have been
widely reported in the media and brought directly to the attention of the IRS.
For example, Priorities USA was created by two former Obama Administration officials shortly
after leaving the White House with the overriding purpose of supporting President Obama in the
2012 presidential election.
Crossroads GPS was created by Karl Rove with the overriding purpose of electing Republican
candidates and defeating Democratic candidates. Rove himself made clear that Crossroads GPS
is a political operation, not a "social welfare" group, in a Wall Street Journal op-ed he published
on August 1, 2012. Rove said in the op-ed that Crossroads GPS had spent more than $53 million for
ads "attacking Mr. Obama's policies or boosting Mr. Romney."
American Action Network, a pro-Republican group, reported 70 percent of its expenditures in
2010 to the FEC as "independent expenditures" and "electioneering communications." Under
any interpretation of the IRS rules, this group does not qualify as a section 501(c)(4) "social
Americans Elect, a group established to nominate and run an independent candidate for President
in 2012, registered as a political party on state ballots all across the country. There is no way
that a political party registered on state ballots can also qualify as a section 501(c)(4) "social
These groups were campaign operations, not "social welfare" organizations. It appears clear that
the groups were improperly claiming section 501(c)(4) tax-status so that donors could secretly
finance their campaign expenditures in federal elections.
In the case of Priorities USA and Crossroads GPS, they also had affiliated Super PACs. Donors
supporting their campaign activities were given the choice: give your contribution to the section
527 Super PAC and the contribution will be publicly disclosed or give your contribution to the
section 501(c)(4) "social welfare" organization and you can remain anonymous.
There is no indication that the IRS has taken any action to prevent these four groups or any other
groups playing prominent roles in the past two federal elections from improperly claiming
section 501(c)(4) tax status.
It is a cardinal rule of our political system that campaign expenditures and the sources of the
contributions used to finance them should be disclosed to the American people.
The Supreme Court has long recognized the constitutionality and importance of requiring
disclosure to inform citizens about campaign finance activities. In 2010, the Supreme Court in
the Citizens United case by a vote of 8 to 1 upheld the constitutionality of requiring corporations
making independent expenditures, including nonprofit groups, to disclose their campaign
activities. (Citizens United itself is a section 501(c)(4) group.)
Recognizing the vital role that campaign finance disclosure plays in informing citizens and
providing accountability, Justice Anthony Kennedy wrote in the Citizens United decision:
With the advent of the Internet, prompt disclosure of expenditures can provide
shareholders and citizens with the information needed to hold corporations and elected
officials accountable for their positions and supporters. . [D]isclosure permits citizens
and shareholders to react to the speech of corporate entities in a proper way. This
transparency enables the electorate to make informed decisions and give proper weight to
different speakers and messages.
The Citizens United decision also noted that the Supreme Court had earlier upheld campaign
finance disclosure laws to address the problem that "independent groups were running electionrelated advertisements while hiding behind dubious and misleading names."
In an even more recent Supreme Court case, Doe v. Reed, Justice Antonin Scalia vigorously
defended the role disclosure plays in a democracy. In a concurring opinion supporting the
constitutionality of disclosure for ballot measure signatories, Justice Scalia said, "Requiring
people to stand up in public for their political acts fosters civic courage, without which
democracy is doomed."
The IRS has a statutory responsibility to ensure that groups claiming the tax benefits provided to
section 501(c)(4) organizations are in fact entitled to this tax-status and are not misusing the tax
laws. It is the responsibility of the IRS to protect the integrity of the tax laws and the interests of
The twin scandals at the IRS now lie before Congress.
If Members are really interested in solving the two IRS scandals regarding section 501(c)(4) tax
status - wrongful IRS targeting of groups and blatant abuse by some groups of the tax laws -
Congress can do so promptly.
We strongly urge Congress to enact new rules to govern eligibility for section 501(c)(4) tax
status that eliminate, or minimize through a bright line test, the ability of such groups to engage
in campaign activity. This would restore the original intention of section 501(c)(4) to apply only
to "social welfare" groups, and not to campaign operations. It would also prevent any recurrence
of the current scandals at the IRS.
Americans for Campaign Reform
Campaign Legal Center
Citizens for Responsibility and Ethics in Washington