Washington, D.C. — Today, Citizens for Responsibility and Ethics in Washington (CREW) filed a lawsuit against the Internal Revenue Service (IRS) in United States District Court for the District of Columbia to compel the agency to initiate a rulemaking procedure to address serious conflicts between the Tax Code’s requirements for section 501(c)(4) groups and implementing IRS regulations. Current IRS regulations grant tax-exempt status under section 501(c)(4) of the Tax Code to groups “primarily engaged” in promoting social welfare. The tax laws, however, require such groups to be “operated exclusively” for social welfare purposes.
Read CREW's complaint against the IRS
CREW Executive Director Melanie Sloan stated, “As the ongoing IRS scandal shows, the 501(c)(4) regulation is unmanageable. It clearly conflicts with the Tax Code and IRS employees are simply at a loss as to how to apply it. Remarkably, the IRS has known the regulation presents enforcement issues for more than 50 years, but has failed to act. CREW has sued to force the IRS to finally deal with this issue.”
Groups seeking or claiming 501(c)(4) status have interpreted the IRS regulation to mean they can spend up to 49 percent of their annual expenditures on electoral activities, while still maintaining tax-exempt status. During the 2012 election cycle, section 501(c)(4) groups spent nearly $255 million on elections. In April, following up on its earlier lawsuit against the IRS, CREW filed a rulemaking petition with the agency seeking a revision to this regulation to eliminate the glaring loophole that allows these tax-exempt groups to engage in substantial political activity while keeping the identities of their donors secret.
The discrepancy between the “operated exclusively” standard of the law and the “primarily engaged” language of the regulations has been controversial within the IRS ever since the regulations were enacted in 1959. The IRS revisited the problem multiple times in the 1960s and 1970s, but did nothing. Additionally, since 2011, at least two rulemaking petitions seeking to correct the problem have been filed, with the IRS responding merely that it is “aware” of the issue.
“Until now, it has been impossible to persuade the IRS or Congress to confront this issue. But now that the entire country has been educated about this previously obscure tax matter, this lawsuit may finally spur reform,” continued Ms. Sloan. “The current IRS scandal directly stems from the problematic regulation. Only by changing it can we be sure we won’t see a repeat of the current debacle.”