Response to Reader – And Clarification on IRS Role in Approving Application For Tax Exempt Status Under 501( c)(4)

And Maybe It is Time to Simply Allow Political Groups Tax Exempt Status

[Editor's note:  Source material for this Post is from various tax code sections, Form 1024 and its instructions and, most importantly, a letter from IRS official Steven T. Miller to Senator Orrin Hatch, April 26, 2012 (link unavailable but can be found by searching the Net) in which Mr. Miller sets out in detail how the IRS investigates applications for tax exempt status under Sec. 501(c)(4).]

A regular visitor to this site has raised some very interesting questions about our Post on the IRS affair, and he (and the rest of the readers) deserve a response.  The comment in its entirety was this.

I can't agree with you about all of this. The IRS asked some group for donor lists. It might not have "forced" any group to reveal its donors, but a request from the IRS carries implicit force and should not be made if the requested information is protected from disclosure. This is especially true when answers must be provided under penalty of perjury, as I believe the IRS requested. The IRS also asked questions about the groups' views and requested documentation of their activities. Now here things get murkier for me, as I don't know what sort of showing must be made to achieve 501(c)(4) status. It might be that these kinds of requests are acceptable, even proper, in a 501(c)(4) inquiry - after all, tax-exempt status is quite a benefit and should not be afforded to groups not meeting the criteria. So putting aside the donor list and disparate treatment issues, the dispute I don't understand is whether it was ok for the IRS to request extensive non-donor list information from on

Good points.  First of all with respect to being tax exempt under Sec. 501(c)(4), IRS approval or review is not needed. A group can simply ‘self declare’ that they are tax exempt, and as long as they follow the rules and the IRS does not successfully challenge them, they remain tax exempt. 

So why do groups file an application with the IRS?  Simple, they want the assurance that goes with the IRS granting tax exempt status.  But once an application is filed the IRS has an obligation to investigate to see if tax exempt status is allowed.  This is what happened in the Cincinnati affair.

As for the issue of disclosing donors, the IRS has, or at least believes it has, the authority to ask for donor information as part of its investigation.  What it does not have is the authority to release donor information on a regular basis as part of the tax return filing, form 990.  Notice that these two areas are separate.  Asking for donor information as part of the process of approving a Form 1024 application appears to be legitimate and no organization that has voluntarily filed a Form 1024 should be surprised if the IRS asks for donor information and other information.

As for disclosure of information in the process of approving tax exempt status, that policy is proscribed by statute, not IRS discretionary policy.  And all of this has been in place and documented for decades.  All of this is known by anyone who practices in this field.  Nothing is new here other than the practice of the IRS (wrongly so) of concentrating on conservative groups.

So to answer the questions from the comment, is it ok for the IRS to request both donor and non-donor information, that answer is an emphatic YES.  That is the purpose of filing the form and subjecting the organization to IRS scrutiny, it is to make the IRS comfortable so that tax exempt status is not in question.  It would not be acceptable or legal for the IRS to require or release donor information on an ongoing basis as part of an annual return. But it would not be acceptable, legal or even logical that the IRS should  approve tax exempt status without an investigation.  Otherwise what's the point?

So what we have here are conservative groups that applied for tax exempt status under Sec. 501(c)(4) and asked to be investigated by the IRS, even though they were not required to do so, and then are outraged and furious that they were investigated by the IRS.  Huh?

The great wrong here was not the process of investigation that the IRS used.  That seems to be perfectly legal and acceptable and standard practice.  The wrong was singling out suspected conservative groups for special attention.  Even worse than wrong, it was grossly stupid.  And the result, conservative groups will be even less investigated for violating tax exempt status than they were before.

Finally, it may be time to scrap the non-election related requirement for obtaining Sec. 503(c)(4) status.  As long as a group is not a profit making firm masquerading as a tax exempt entity then it should be a tax exempt entity.  Anyway, that is the result of all of this.