IRS May Be Unaware of 9,774 Political Non-Profits, Watchdog Says

(Bloomberg) -- There are are 9,774 politically-active tax-exempt organizations that may have failed to notify the Internal Revenue Service of their existence or submit the paperwork to operate tax-free, according to a new calculation from an agency watchdog.

The IRS has not done enough to identify non-compliant organizations, despite having various sources of data that would allow it to do so, the Treasury Inspector General for Tax Administration said in a report Thursday. The groups are required to notify the IRS within 60 days of forming that they intend to operate as a “social welfare” group organized under tax code Section 501(c)4.

The IRS could also be failing to collect millions in penalties and fees owed by these social welfare groups, the report said.

The revelation comes as the IRS is seeking to finish regulations that would allow the groups to keep their donor lists secret unless they are requested by the agency. The groups can engage in politics as long as they don’t spend more than half of their money on campaign advertisements or activities to sway an election. Donors don’t have to be disclosed to the public.

‘Resource Intensive’

The IRS said it has not sought to crack down on these groups because it “would be a resource-intensive process and resources would be better used in other priority areas, e.g., processing applications for tax-exempt status,” according to the report. The agency also said it would be burdensome to assess penalties because the requirement is recently new -- first mandated in 2016 -- and many of the organizations are managed by volunteers with limited knowledge of tax laws.

Both organizations and their officers can be fined for failing to submit the proper paperwork to the IRS. The report said those figures could total more than $95.9 million.

“Many of these organizations may not have understood or even been aware of the notification requirement because many of them filed other documents that informed the IRS of their existence,” the report said.

Organizations with 501(c)4 status include the National Rifle Association, the Democratic Socialists of America, the AARP and Americans for Prosperity, the conservative group backed by billionaire Charles Koch.

The 501(c)4s have been the subject of public scrutiny because they have much more leeway to engage in political activities than non-profit charities. And, because their donor lists aren’t public, critics have called them “dark money” organizations.

Donor Privacy

That’s caused some prominent lawmakers, including the top Democrat on the Senate Finance Committee, Ron Wyden, to oppose the IRS effort to permit these groups to keep their donors private. The regulations, antecipated this year, are expected to say that the IRS wouldn’t require the tax-exempt groups to disclose their donors, unless the IRS needed the information for an audit.

The IRS has found it difficult to audit these organizations, partially because it can be hard to get the information that they exist, as the TIGTA report noted. Some groups also form and dissolve before the 60-day deadline to inform the IRS of their existence, making it nearly impossible for the agency to find them.

The report’s authors calculated the number of potentially non-compliant tax-exempt groups by searching through records of organizations that had filed a tax return but not the paperwork to qualify as a tax-exempt. The researchers also looked IRS historical records to determine the estimate of non-compliant groups.

Treasury Secretary Steven Mnuchin has said the future regulations would protect donor privacy because the IRS doesn’t need the information to enforce tax laws. Wyden says the move could makes it easier for foreign interests to influence elections.

Organizations still need to maintain the names and addresses of their donors, and the IRS could request that information, according to guidance from the agency. Charities organized under section 501(c)3, which receive tax-deductible donations, are still required to report their donors. Those groups are barred from spending money to influence elections.

Under the 2010 U.S. Supreme Court ruling in the Citizens United case, almost any organization can spend unlimited amounts of money to support or oppose candidates for office, provided they don’t coordinate with a campaign. Federal contractors, national banks and foreign nationals are still barred from spending, though current disclosure rules can make it nearly impossible for regulatory bodies to find out who contributes to outside groups.

To contact the reporter on this story: Laura Davison in Washington at ldavison4@bloomberg.net

To contact the editors responsible for this story: Joe Sobczyk at jsobczyk@bloomberg.net, Anna Edgerton

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