IRS Reverses Course on Audits of Donors to Politically Active Nonprofits

The Internal Revenue Service has reversed its decision to audit several major donors to nonprofit 501(c)(4) organizations, which can participate in campaign activity as long as it is not the organization's primary purpose, the New York Times reports.

The audits were made public in May after the IRS sent letters to several donors informing them that their contributions to nonprofit political advocacy organizations might be subject to a 35 percent gift tax, in accordance with a rarely enforced thirty-year-old statute. Unlike Section 527 organizations, which are exempt from the gift tax and whose primary purpose is to influence election results, (c)(4)s are not required to disclose their donors.

With (c)(4) organizations likely to receive an influx of donations in the run-up to the 2012 election cycle, questions were raised about whether the audits were politically motivated — notably by a group of six senators led by Orrin Hatch (R-UT), who argued that the audits violated the First Amendment. Similarly, Rep. David Camp (R-MI), chairman of the House Ways and Means Committee, questioned whether the Obama administration had been involved in the decision.

For its part, the IRS has said the audits were initiated by career civil servants without consulting or informing any administration officials. In a publicly released memo, IRS deputy commissioner for services and enforcement Stephen T. Miller indicated that no new audits would be made regarding the application of the gift tax on such contributions until the issues were studied and a broader policy developed. Opponents of the audits welcomed the decision but expressed concern that the tax might still be applied in the future.

"Until further notice, examination resources should not be expended on this issue," wrote Miller in the memo. "This is a difficult area with significant legal, administrative, and policy implications with respect to which we have little enforcement history."

Stephanie Strom. "I.R.S. Drops Audits of Political Donors." New York Times 07/07/2011.