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Defying the Odds

Defying the Odds
New book about the 2016 election.

Sunday, May 15, 2011

Enter the IRS

An Internal Revenue Service effort to collect gift taxes on large individual donations to social advocacy groups, which eventually could include the new political organizations that cropped up in the 2010 midterms, is already drawing threats of lawsuits.

According to one attorney familiar with the backroom discussions, the groups could challenge the IRS on two fronts: that the gift tax was not intended to apply to such donations, and that the IRS failed to give notice that it intended to begin enforcing the tax, after two decades of nearly no action.

In the years since 2008, more groups came onto the scene. In the 2010 midterms, two GOP giants were founded with the help of former Bush adviser Karl Rove: American Crossroads, which discloses donors, and Crossroads GPS, which doesn’t. The majority, $43 million, of the $70 million Crossroads officials said they collected flowed through the non-disclosing organization.

“There are a whole heck of a lot of people misusing (c)(4) groups as a means of getting around campaign finance regulations, and we lack a coherent system of laws to deal with that,” said Donald B. Tobin, a legal expert on campaign finance and tax laws at the Moritz College of Law at Ohio State University. “Now here’s a stick, frankly, that says there are consequences for doing that.”

In a statement released Thursday, Michelle L. Eldridge, a spokeswoman for the I.R.S., said that the inquiries were initiated by agency employees, not White House or other Obama administration officials, “as part of their increased efforts in the area of nonfiling of gift and estate tax returns.”

The letters informed donors that investigations had been opened to determine why a gift tax form had not been filed, and requested that donors submit records of all donations in the year 2008, according to a redacted copy obtained by The New York Times.

While tax lawyers who learned of the investigations have been issuing warnings to clients of potential trouble on a broader scale, the I.R.S. statement denied casting a wider net, “These examinations are not part of a broader effort looking at donations to 501(c)(4)’s.”

This denial seems inconsistent with the IRS Exempt Organizations workplan:
Section 501(c)(4), (5) and (6) Organizations. In recent years, our examination program has concentrated on section 501(c)(3) organizations. Beginning in FY 2011, we are increasing our focus on section 501(c)(4), (5) and (6) organizations. With the additional information available on the new Form 990, we will look at issues including political activity, inurement and the extent of compliance with the requirements for tax exemption by organizations that self-identified themselves as a section 501(c)(4), (5) or (6) organization.

Liz Peek writes at Fox:

The IRS has gone out of its way to portray this unprecedented inquiry as the labor of two “career civil servants” in the estate and gift tax department, trying to suppress suspicions that the move is politically motivated. Still, the Financial Times calls the move a “radical departure in how tax authorities have treated such “gifts” over the last 30 years.”

The timing of the investigation is, to put it mildly, suspect. The media has emphasized that while the Koch brothers, Karl Rove and other leading conservatives have supported such organizations, uber-liberal George Soros might also be caught in the net. That is true, but Republicans are unquestionably much bigger supporters of such groups.

From a 1997 article in The Cato Journal:

Some observers point out that political considerations may influence enforcement activities such as audits. The blatant use of the IRS for political purposes is not new. During the Kennedy presidency, a mysterious IRS organization called ‘‘The Ideological Organizations Audit Project’’ was formed to investigate right-leaning groups; among those apparently targeted was Young Americans for Freedom (Davis 1997: 246). The Special Services Staff (SSS) was formed during the Nixon administration to coordinate ‘‘all IRS activities involving ideological, militant, subversive, radical, and similar type organizations’’ (Davis 1997: 88).