Washington, DC – On Wednesday, Chairman Sheldon Whitehouse (D-RI) led a Senate Finance Subcommittee on Taxation & IRS Oversight hearing entitled, “Laws and Enforcement Governing the Political Activities of Tax-Exempt Entities.” The hearing examined the ways in which special interests exploit weak and outdated IRS regulations to funnel massive amounts of unaccountable dark money into our elections through 501(c)(4) organizations.
So-called “social welfare” groups are exempt from taxation under section 501(c)(4) of the IRS code, and the law requires them to operate exclusively “for the promotion of social welfare.” However, these groups routinely spend large sums on political attack ads, or transfer funds to organizations that can spend money on political influence campaigns. This gaming of the system contributes to the enormous uptick in dark-money spending – a “tsunami of slime” – inundating American politics.
“We can’t tolerate a system that lets 501(c)(4) groups operate without oversight – not when they spend tens, even hundreds, of millions of dollars per election cycle without disclosing their donors,” said Whitehouse. “Citizens are denied that most basic right to know what is going on around them in their democracy.”
[WATCH: Whitehouse delivers opening remarks]
A recent report by Citizens for Responsibility and Ethics in Washington (CREW) found that 501(c)(4)s brazenly flout limits on political activity. For example, CREW found that 501(c)(4) organizations would disclose their political spending to the Federal Election Commission (FEC), but would report to the IRS under penalty of perjury that they spent no money on political activities. The IRS has done a poor job cracking down on these blatant violations of the law, letting 501(c)(4) groups operate without oversight.
“With dark money nonprofits pouring money into our political system, it is crucial that the IRS enforce existing laws on political spending by these groups, including the basic disclosure that is required on tax returns. Unfortunately, as our report demonstrates, the IRS appears to be falling short in its enforcement role even when pointed toward clear violations,” said CREW President Noah Bookbinder. “Publicly available tax returns are one of the only windows into what these groups are up to, and that window is too often closed. The IRS should prioritize enforcement of violations by nonprofits that spend money on politics and should take basic steps to rein in these social welfare groups that ignore legal requirements in order to secretly influence politics.”
Citizens United allowed unlimited spending in elections by organizations and corporations, including 501(c)(4) organizations that don’t have to disclose their donors, and political activity by 501(c)(4) groups exploded as a result. Since 2010, 501(c)(4) organizations have spent over $1 billion on political expenditures, compared with $103 million in the previous decade.
“Due to the Citizens United v. FEC decision, a lack of enforcement, and a new IRS rule enacted in 2020 which eliminated donor reporting requirements to the IRS for 501(c)(4) organizations, organizations that have tax exempt status are a major source of anonymous large political contributions, because donors are not required to identify themselves either to the IRS or to the public,” wrote Ann Ravel, former Chair of the FEC, in testimony submitted to the Subcommittee. “As a consequence of these factors, some groups that receive tax benefits for ‘social welfare work’ have been emboldened to engage in excessive political spending.” Meanwhile, Republicans have targeted the IRS in order to cow the agency into lax enforcement. When the IRS attempted to update its regulations on 501(c)(4) political activity following Citizens United, Republicans whipped up a fake scandal to justify blocking the IRS from issuing any further regulations and slashing its budget to hamper enforcement. A bipartisan Senate Finance Committee investigation and subsequent TIGTA investigation found claims about the IRS singling out conservative groups to be false.
[WATCH: Whitehouse questions the witnesses about right-wing attempts to intimidate the IRS, and on the foreign money flowing through 501(c)(4)s]
After years of Republican attacks on the IRS, big money donors and the shadowy special interest groups they support enjoy tax-exempt status by operating under the guise of promoting “social welfare,” while brazenly flouting limits on political activity. Repealing the appropriations rider that blocks the IRS from updating its rules and providing the agency the proper tools and resources to enforce the law will help nonprofits and protect our democracy.
[WATCH: Whitehouse presses the witnesses on the Trump administration’s repeal of the 501(c)(4) disclosure requirement to the IRS]
“Dark money groups are spending millions of dollars to influence our elections and the policymaking process with zero oversight or transparency. We applaud Sen. Whitehouse for holding this hearing on what Congress and the administration can do to create a democracy that is open and accountable to the people,” said End Citizens United President Tiffany Muller.
“I hope that colleagues will join me in untying the IRS’s hands and providing it the tools and resources to enforce its most basic rules. The premise of transparency in Citizens United has been violated for far too long,” concluded Whitehouse.
[WATCH: Whitehouse delivers closing remarks]
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Senator Sheldon Whitehouse
Opening Remarks — Tax Subcommittee Hearing
Laws and Enforcement Governing the Political Activities of Tax-Exempt Organizations
May 4, 2022
Twelve years ago, the Supreme Court rested its decision in Citizens United on the false predicate that “effective disclosure” would let voters know who was speaking to them, and that important because it was the means by which it would dispel corruption. Well, instead, a torrent of dark money – a “tsunami of slime” it has been called – washed into our politics.
That torrent washed into our politics from behind a veil of organizations formed under Section 501(c)(4) of the Internal Revenue Code. Unlike most groups spending money in elections, 501(c)(4) organizations aren’t required to disclose their donors.
The statute governing these organizations states they must be “operated exclusively for the promotion of social welfare.” But the IRS muddied those waters with a regulation that allowed social welfare organizations to devote up to 49.9 percent of their spending to political activities and still qualify for 501(c)(4) status. Predictably, these organizations became conduits for the secret political spending that Citizens United said was corrupting. In the decade preceding Citizens United, 501(c)(4) organizations spent $103 million on political expenditures; in the decade following it, they spent over $1 billion. It was a hell of a tsunami.
The dark money flowing through 501(c)(4)s got darker. As soon as the IRS sought to review the explosion of these political groups after Citizens United, dark-money interests whipped up a scandal claiming the IRS was unfairly targeting conservative groups for scrutiny. Let’s set the record straight—this is false. An exhaustive 2017 report from the Treasury Inspector General for Tax Administration found no such unfair targeting of conservative groups, as did a bipartisan investigation from this very committee.
The damage was nevertheless done. The fake scandal cowed the IRS, and an appropriations rider in place since 2015 blocked the IRS from promulgating regulations to clarify political rules for 501(c)(4) organizations. This means groups flout limits on political activity with little risk to their tax-exempt, anonymized status.
As early as 2012, a ProPublica investigation found that roughly three in ten of the 501(c)(4) organizations they surveyed reported to the FEC that they had spent money on electioneering, but reported to the IRS that they had spent no money to influence elections, either directly or indirectly. It’s hard to see how both statements could be true.
A report out last week from the Citizens for Responsibility and Ethics in Washington describes several recent examples of this problem. One example is the NRA. CREW says:
Between 2008 and 2013, the NRA reported to the FEC that it spent nearly $11 million in independent expenditures [from its 501(c)(4)]. In 2012, it reported making $7,448,385 in independent expenditures, more than half of which were spent opposing Barack Obama or supporting Mitt Romney in that year’s presidential race. . . .
Remarkably, the NRA told the IRS under penalty of perjury that it spent absolutely nothing on political campaign activities between 2008 and 2013. Nor did it file a Schedule C disclosing details of its political spending.
Despite all this open and notorious predication for investigating whether there were false statements made, there’s no sign that the IRS is doing much enforcement. A 2018 Treasury Inspector General for Tax Administration report estimated that over 1,000 cases of impermissible political activity by 501(c)(4)s weren’t even forwarded to the agency’s committee tasked with recommending audits, despite meeting the IRS criteria. According to a 2020 GAO review, the IRS between 2010 and 2017 conducted only 226 examinations involving impermissible political campaign intervention. Of those, only six percent—a total of 14 examinations—involved 501(c)(4)s. That’s fewer than two per year, in the middle of that dark-money tsunami.
We can’t tolerate a system that lets 501(c)(4) groups operate without oversight – not when they spend tens, even hundreds, of millions of dollars per election cycle without disclosing their donors. Citizens are denied that most basic right to know what is going on around them in their democracy.
First, we should free the IRS to promulgate clear rules for 501(c)(4) organizations. All of them.
Second, the IRS should use the tools and resources it already has to crack down on blatant abuse. Lax enforcement sends a message that rules don’t matter.
Third, referrals need to be made of likely false statements, so that the right officials in law enforcement, who prosecute false statements as a matter of bread and butter, can do their jobs and investigate. We are aware of no referrals at all to DOJ, despite years of CREW, ProPublica and press reporting of these flagrant discrepancies.
I hope that colleagues will join me in untying the IRS’s hands and providing it the tools and resources to enforce its most basic rules. The premise of transparency in Citizens United has been violated for far too long.
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Rich Davidson (202) 228-6291 (press office)
