IRS sends mixed messages to nonprofits

Will the role of the Internal Revenue Service in policing the political activities of nonprofit organizations be an issue in next year’s election? History suggests it should be. The IRS’s actions in the past election cycle leave nonprofits, especially church organizations, concerned and uncertain about the future.

Last month, All Saints Episcopal Church in Pasadena, Calif., announced that the IRS had sent it a letter closing the IRS’s examination into alleged political activities of the church in 2004.


The examination had been triggered by a sermon delivered by a guest speaker at the church on the Sunday before the presidential election, on the topic, “If Jesus Debated Sen. Kerry and President Bush.”

After praising both candidates for being “devout Christians,” the guest pastor assured the congregation that “good people of profound faith will be for either George Bush or John Kerry for reasons deeply rooted in their faith” and expressly stated, “I don’t intend to tell you how to vote.”

The IRS nevertheless asserted that the sermon constituted campaign intervention, which is prohibited for churches and other tax-exempt organizations under section 501(c)(3) of the Internal Revenue Code. Yet curiously, and somewhat confusingly, it still closed the examination.

The IRS’s perplexing action in the All Saints examination follows similar false starts that it has recently made in attempting to enforce the prohibition against political campaign intervention by 501(c)(3) organizations.



For instance, the IRS initially asserted that the NAACP had engaged in such activity when its chairman, Julian Bond, made a speech at the organization’s national convention in 2004 that was critical of Bush administration policies. It later gave up on that theory after the NAACP threatened to take the issue to court.

The IRS similarly quit its examination of Focus on the Family, which was alleged to have violated its exemption conditions when its chairman James Dobson endorsed Republican candidates in 2004. And those are just the publicly known cases.

Anecdotal evidence suggests that the IRS has issued other churches self-contradictory letters such as the one issued to All Saints, both asserting a campaign intervention violation and letting the church retain its exemption without further action.

In the wake of the IRS’s actions, and going into another presidential election year, the scope of the prohibition against campaign activities is still unclear.

The IRS has issued guidance on the subject, but it’s so vague and general as to be of practically no assistance for organizations that may have a legitimate reason, consistent with their underlying charters or focus, to speak out on current moral or policy issues.

Moreover, the IRS’s uneven efforts to apply the campaign intervention rules leave it open to the charge that it pursues selective enforcement based merely on whether the organization has a high profile or, worse yet, based on the political content of the actions at issue, such as whether the organization is perceived as being for or against the Bush administration.

Certainly All Saints and the NAACP had reason to believe that they were subjected to examination only because they had hosted speakers highly critical of Bush administration policies.

Of course allegations that the IRS has been used improperly by a presidential administration in power are not new — and have usually turned out to be wrong.

For example, the Watergate hearings revealed that the Nixon administration attempted to target its political enemies for IRS investigations, an effort that was thwarted only when cooler heads in the Treasury Department and IRS ignored the request.



In the late 1990s, there were numerous claims that the IRS had commenced examinations of Clinton administration opponents, to the point that the Joint Committee on Taxation was eventually commissioned to review the matter.

After an exhaustive investigation, it issued a report in 2000 concluding that there was “no credible evidence” that individuals or organizations had been improperly selected for examination based on their political views.

To avoid such suspicions, the IRS must follow the law scrupulously and act with great tact and care. Sadly, that does not appear to have been the case in the IRS’s recent efforts.

For instance, the Internal Revenue Code contains a unique requirement that an examination of a church can be started only after approval by a “high-level Treasury official,” defined as a regional commissioner or someone higher.

But the IRS has recently admitted that at least some examinations of churches were commenced improperly without such review and approval.

Documents obtained under the Freedom of Information Act indicate that the All Saints and NAACP examinations were commenced based primarily on media reports of the speeches at issue, even though the actual texts were also publicly available.

Yet, because the organizations declined to cooperate with the IRS, the agency later closed both cases based on no more information than was available when it started the investigations.

All Saints has also learned that high-level career employees of the Justice Department were involved early in its examination and long before any formal referral of a case from the IRS. Whether political appointees of Justice were also involved remains to be investigated.

This is not the way to build confidence that the IRS is administering its examination and enforcement efforts fairly. The IRS’s haphazard selection of cases to investigate, followed by its confused and self-contradictory resolutions of such cases, only adds to the uncertainty facing exempt organizations.



When coupled with the large gray areas in the law, the IRS’s activities may justifiably lead organizations to believe that the IRS seeks to intimidate rather than provide clear and helpful guidance on political intervention. One hopes that in the coming election year the IRS does a better job.

Christopher S. Rizek is a tax attorney with Caplin & Drysdale in Washington.