The IRS hasn't done much to regulate political spending from outside groups. IRS's 'feeble' grip on big political cash

The Billion-Dollar Buy: About this series

Like never before, big dollars are having a big impact on politics and governance. This series examines how the new wide-open fundraising landscape will affect the 2012 campaigns.

See also: Sheldon Adelson: Inside the mind of a mega-donor | Inside Koch world | GOP groups plan record $1 billion blitz | Rove hits big: Birth of a mega-donor | Myth of the small donor | The new normal: $9 million for a rural House seat | Secret money funds GOP door-knockers | The billion-dollar bust?



The deep-pocketed conservative group Americans for Prosperity has spent $72 million on ads bashing Democrats so far this year.


It spent $39.4 million on ads and organizing in 2010, when it helped deliver the midterm elections for Republicans.

So when the Koch brothers-backed nonprofit set up shop back in 2004, how much did it tell the Internal Revenue Service it planned to spend on elections?

Zero dollars.

Surely, the IRS is hopping mad and has a team of auditors trying to get to the bottom of this massive discrepancy.

Actually, no.

Since the IRS granted its tax exemption in 2004, Americans for Prosperity has never received so much as a phone call, a letter or an inquiry from the agency about its spending , according to Chairman Art Pope.

AFP has turned in its tax returns every year, just as the law requires, reporting that it did not spend a dime on politics — an answer that seems implausible from a common-sense perspective, but one that the IRS appears to have accepted as consistent with its vague and ambiguous definition of political activity.

AFP isn’t alone; at least $134 million in ads , mail, phone calls and other political spending this election have come from tax-exempt groups that said they didn’t plan to spend money on political campaigns, according to a POLITICO analysis of records filed with the IRS and the Federal Election Commission, as well as news reports and press releases.

If you’re looking for the cop on the beat for much of the outside spending in 2012 — when Republican-allied groups alone intend to spend upwards of $1 billion — stop by the IRS, one of the most feared and hated government agencies around.

Except when it comes to political spending, the IRS is more like a toothless tiger.

Unlike campaigns or super PACs, which the FEC regulates as political committees, groups like AFP operate under a once-sleepy section of the Tax Code — 501(c)4 — written decades earlier to allow a range of groups to avoid paying taxes while serving a social benefit. The 501(c)4 groups are able to:

• Raise and spend unlimited donations, without ever publicly disclosing where they got the money.

• Pay no corporate income taxes on any of those donations.

• Do all that raising and spending without filing a single piece of paper with the IRS until months after Election Day.

• Operate in the shadows of an IRS bureaucracy that won’t tell reporters, or even members of Congress, who has applied to create 501(c)4 groups, how it evaluates applications or whether it’s approved particular groups.

Even some members of Congress say they feel stonewalled in their requests for basic information.

Sen. Carl Levin (D-Mich.), one of several lawmakers dogging the IRS over its apparent inaction in the face of the 501(c)4 spending surge, sees the irony in the situation.

“We have case after case in this office of little folks that the IRS goes after for assessments — small business that they go after — where they used their highly aggressive tactics,” Levin said. “And you’ve got huge amounts of money being spent here, but very, very feeble, weak enforcement of the law.”

Levin and other lawmakers such as Sen. Orrin Hatch (R-Utah), have spent months trying to get the IRS to explain itself. “Getting information out of them is like pulling teeth,” Levin said.

Pretty sweet deal? That’s right. Just ask the groups. who have essentially written their own rulebook for political spending in the wake of federal court rulings and FEC gridlock that have eroded election laws over the last few years. Operatives and their billionaire donors have taken full advantage of the leeway given them by the IRS, which has yet to raise even the first public question about any of the 501(c)4 groups behind the explosion of TV ads.

In fact, groups can operate as 501(c)4 nonprofits without ever applying for, or being granted, that status by the IRS — a process that can take years.

The Karl Rove-conceived Crossroads GPS applied for nonprofit status in September 2010, but the IRS still won’t tell the group (or POLITICO) what the status is or when it will act. That didn’t stop Crossroads from spending about $42 million around the 2010 election — mostly on hard-hitting ads attacking Democrats — and another $123-million-and-counting in the run-up to 2012, according to FEC and IRS filings and analyses of the group’s press releases.

The Dick Morris-affiliated League of American Voters has been waiting more than three years for its nonprofit approval. The group used that time to raise at least $8.2 million but has said little about what it’s doing with its cash, beyond a few FEC-disclosed donations to political committees like Crossroads GPS’s sister super PAC, American Crossroads.

And the Eric Cantor-linked 501(c)4 YG Network, which requested tax exemption in February, has spent at least $1.4 million — mostly on ads and mailers mostly boosting Republicans.

Those groups say they’re awaiting tax-exempt status, though the IRS won’t confirm that. Other groups freely admit that they’re not planning to apply — and the IRS doesn’t make them. They include the deep-pocketed centrist group Americans Elect, which dropped $893,000 this month boosting independent Angus King in his bid for a Maine Senate seat, and the liberal research outfits American Bridge 21st Century Foundation and Media Matters Action Network — which between them have raised at least $11.7 million.

Then there’s Priorities USA, which has raised at least $2.3 million in secret money to boost President Barack Obama, but won’t tell POLITICO whether it’s applied for 501(c)4 tax status or ever plans to. The IRS told POLITICO it has “ no record of the tax-exempt status” for Priorities — the same answer it gave when asked about Crossroads GPS, American Bridge 21st Century Foundation, Media Matters Action Network, the League of American Voters and others.

Meanwhile, the IRS is having trouble keeping track of its paperwork on the matter. It actually lost the original application filed by Americans for Prosperity and a sister foundation, which together constitute one of the most active outfits in American politics. Also lost: the acceptance letter to the groups.

Lost applications aren’t uncommon, POLITICO found, despite the IRS’s stern instructions warning nonprofits to keep a copy of their acceptance letters “in your permanent records” because it could “help resolve any questions regarding your status.”

The IRS says it’s “aware of the current public interest” in the surge in nonprofit politicking and will may consider changes to the rules, according to a letter it sent in July to a pair of watchdog groups. It also told Sen. Levin it was reviewing 1,600 applications for 501(c)4 tax-exemption and examining another 70 groups that had already been granted it. The agency also said it’s looking at groups that claim 501(c)4 status without applying.

But IRS spokesman Grant Williams wouldn’t say why it was taking so long to process Crossroads GPS’s exemption application, why the IRS couldn’t say whether groups like Priorities USA had submitted similar applications and why the agency couldn’t find the approved applications of several groups.

“Federal law just strictly prohibits us from discussing or commenting on any particular case,” Williams said.

When it was pointed out that federal law actually requires the IRS to provide the records of approved groups like those it lost, he replied, “Well, that’s our response.”

And the IRS was equally tight-fisted when POLITICO filed Freedom of Information Act requests for correspondence related to inquiries from lawmakers and watchdog groups about the IRS’s handling of 501(c)4 issues.

The IRS first said it wouldn’t speed up its search despite the groups’ efforts to influence the 2012 election, because, to the IRS, “that’s not really a compelling need,” said Valerie Barta, a senior tax law specialist.

“Just telling us that the IRS is doing some shady stuff — well, you know, we get accused of that all the time,” Barta added.

Months later, the IRS found 91 pages of such correspondence, only to withhold all of them.

The stinginess with information is likely not what Justice Anthony Kennedy had in mind when he cast the swing vote in the 2010 Citizens United ruling that struck down decades of campaign cash restrictions as unconstitutional infringements on free speech. Kennedy stressed in the majority opinion that voters should know who’s footing the bill for campaign ads.

“The First Amendment protects political speech; and disclosure permits citizens and shareholders to react to the speech of corporate entities in a proper way,” Kennedy wrote. “This transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages.”

Kennedy even noted the Internet could provide the platform for the “prompt disclosure of expenditures [that] can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters.”

Of course, the ability to give anonymously is one of the main reasons some rich donors prefer 501(c)4 groups to super PACs, donations to which are regularly disclosed in reports posted on the FEC’s website. In contrast, the IRS is neither nimble nor transparent, agree lawmakers overseeing the agency from across the political spectrum, reporters, watchdogs and Washington lawyers who represent political non-profits.

Horror stories abound about errors and delays in processing the litany of paperwork the IRS requires from political nonprofits, from the form clearing lawyers to represent the nonprofits before the IRS ( form 2848) and the exemption requests themselves ( form 1024).

“I’ve had them lose pages of 1024 applications – not the whole thing – and be unable to locate form 2848 on multiple occasions, including one client where I had to resend the exact same form about three times,” said a Washington lawyer who represents politically active nonprofit groups.

And the agents have other things to do than just look at political spending. One of the lawyer’s 501(c)4 clients was audited by “an agent who has last been auditing Elks Clubs in southwest Virginia — no kidding — and had no idea that (c)4s could lobby.”

It’s possible that, even if the IRS wanted to, it lacks the resources to closely track and police all the 501(c) groups. The IRS says it has 1,000 employees overseeing tax law compliance for more than 1 million nonprofits of all stripes — from churches to unions. The agency takes an average of 210 days to handle a complaint, but often has to wait months before beginning the process, it told Levin, adding it had not revoked or proposed to revoke the exemption of a single 501(c)4 group from March to September.

If history is any guide, any investigations won’t bear fruit until years after the election, as was the case with the FEC’s clampdown on the 527 nonprofit groups that played a major role in 2004, including Swift Boat Veterans and POWs for Truth, and Progress for America Voter Fund on the right, and MoveOn.org Voter Fund, the Media Fund, and America Coming Together on the left.

Democratic lawmakers and watchdog groups insist there are grounds for the IRS to rebuke the 501(c)4s for ignoring the Tax Code’s requirement that they operate “exclusively” for the promotion of social welfare. Instead, the IRS explains that for 50 years, it has interpreted “exclusively” to mean “primarily.”

Therefore, IRS Deputy Commissioner for Services and Enforcement Steven . Miller wrote to Levin, nonprofits “may carry on lawful political activities and remain exempt under section 501(c)4 as long as it is primarily engaged in activities that promote social welfare.”

Creative lawyers and operatives have largely taken that to mean that 501(c)4 groups can spend as much as 49 percent of their total budget on politics. But deep-pocketed groups like Crossroads GPS often don’t count as political spending grants to other politically active 501(c)4s, let alone their own often-hard-hitting issue ads, despite the fact that the FEC requires such ads be disclosed as “electioneering communications” when aired close to an election.

The vague IRS definition of political activity is likely why some of the most aggressive conservative advertising outfits out there told the agency they didn’t plan to spend “any money attempting to influence the selection, nomination, election, or appointment of any person to any federal, state, or local public office or to an office in a political organization,” despite the fact that many ads appear political in nature.

That also explains why even when 501(c)4 groups report political activity to the IRS on their annual tax filings, it’s often in far smaller amounts than they report to the FEC and state election authorities, as detailed in a ProPublica analysis of 2010 tax returns.

In a twist, AFP this year will report some ads as political spending for the first time, but not because the IRS demanded it alter its filings. Rather, its board voted in August to air ads expressly urging Obama’s defeat — partly because a March federal court ruling would have required groups that aired less explicit electioneering communication ads to disclose their donors.

“Once the decision came down, we decided, well, we’re not going to disclose our donors,” said AFP President Tim Phillips, explaining the shift. “We thought it was a terrible decision, but obviously we complied with it when it was in effect,” he said . Nonetheless, AFP shifted back to less-explicit electioneering communication ads after a federal appeals court unanimously overturned the decision last month.

Regardless, AFP isn’t planning to update its 2004 application for tax-exempt status, “because it was correct at the time,” said AFP Chairman Pope. “We just need to update our disclosure the next time our 990 is due.”

The IRS was never really meant to be in this position , and its hands have been tied by aggressive conservative litigators targeting all manner of campaign cash restrictions. The 2002 McCain-Feingold bill seriously curtailed the utility of 501(c)4 groups by barring corporations or unions from funding electioneering communications. But in 2007, the Supreme Court dramatically narrowed that restriction, and Citizens United did away with it entirely, while overturning laws barring corporations and unions from spending directly on harder-hitting ads expressly advocating for or against candidates.

At the same time, the six-member FEC fell into deep partisan gridlock that has stymied efforts to aggressively enforce existing rules, much less enact new ones to fill the gaps left by court decisions.

American Future Fund founder and President Nick Ryan said Citizens United changed the game. AFF, which has spent at least $14 million on ads in 2012, told the IRS it didn’t intend to spend money on politics in 2008 when it was forming. “At the time the application was filed, AFF had no intent to violate a law that had been on the books since the 1940s, and told the IRS it would not do so,” Ryan said.

Sen. Hatch has both expressed concern over reports the agency’s given a hard time to conservative tea party groups seeking 501(c)4 status and asked the IRS for evidence it was scrutinizing the pro-Obama Priorities USA.

He doesn’t see the need for any changes in the law , however. “We have good language in the law that allows the IRS to really go after them if they don’t abide by the rules of a 501(c)4 situation,” Hatch told POLITICO. “So I don’t think we need to change anything.”

Efforts to enact tougher disclosure laws or spending restrictions on 501(c)4 groups have failed amidst allegations of political bias, with AFP’s Pope casting them as a plot “to intimate donors, intimidate activists and intimate concerned citizens.”

But Pope also asserted that most nonprofits would prefer to have more “bright guidelines from the IRS,” explaining “the IRS, the FEC, the tax laws and campaign finance laws do not work together and it does cause confusion.”

No matter what rules are enacted and how strictly they’re enforced, though, he predicted, people would find a way to spend on politics. “Free speech, I’m glad to say, in a positive sense, is like a balloon. You squeeze it on one side and it will balloon out on another side, and voices will be heard.”

Manu Raju contributed to this report.