Two-and-a-half years after the Internal Revenue Service apologized for using "inappropriate criteria" to scrutinize tea party-aligned nonprofits applying for tax-exempt status, President Barack Obama has signed into law a new measure that makes it easier for nonprofit groups to receive a tax break — or sue the agency to avoid legal limbo.
Such groups have proliferated in recent years and become increasingly active in elections in the wake of the U.S. Supreme Court’s 2010 decision in Citizens United v. Federal Election Commission.
These nonprofits, many of which are organized under section 501(c)(4) of the tax code, need not publicly disclose their donors. And their primary purpose must be the "promotion of social welfare,” not electoral politics.
More than 100 groups seeking tax-exempt recognition that were deemed to be potentially political by the IRS waited more than a year for answers from the agency, according to a May 2013 report by the Treasury Inspector General for Tax Administration.
The inspector general’s report prompted multiple congressional investigations and the resignation of several IRS officials, including Lois Lerner, who led the IRS division responsible for overseeing tax-exempt organizations.
Yet long waits and legal uncertainty did not keep some well-financed groups from being heavily involved in elections — and pushing the legal limits.
In response, many campaign finance reform advocates have called for the IRS to develop new rules clarifying the degree to which nonprofits may be involved in politics. But the new spending bill signed by Obama prohibits the IRS from issuing new rules while giving groups themselves more recourse.
Dan Backer, a Republican attorney specializing in campaign finance and tax law issues, called the development "fantastic" and predicted the tax-exempt application process would be "much faster" now for groups organized under section 501(c)(4) of the tax code.
Previously, only charities organized under section 501(c)(3) of the tax code had the ability to take the IRS to court to force a determination — or to appeal the IRS' decision about whether they should receive tax-exempt status.
Now all groups organized under section 501(c) — including charities, "social welfare" organizations, labor unions and trade associations — can sue the IRS if the agency doesn't issue a determination within 270 days.
Several conservative groups identified in the inspector general’s report had waited more than 1,000 days for the IRS to take action. Because of the long waits and intensive questioning, some withdrew their applications to for tax-exempt status.
Jan Witold Baran, head of the political law practice at the Washington, D.C.-based firm Wiley Rein, said the change will make suing the IRS "much easier and also much cheaper."
This legislative language was first introduced by Sen. Dan Coats, R-Ind., in 2014. It was included in the 233-page tax extenders bill passed by Congress last week and was incorporated into the 2,000-plus page omnibus spending bill signed by Obama on Friday.
Reached by the Center for Public Integrity, a spokesman for Coats could not immediately comment. But in a 2015 press release, Coats praised his bill for providing "a much-needed avenue of relief for nonprofits whose applications for tax-exempt status are languishing at the IRS."