Incomplete disclosure

Introduction

Disclosure documents from the Internal Revenue Service reveal that political non-profit organizations have amended filings to include previously unreported contributions and expenditures—some in excess of $1 million—yet have faced little, if any, sanction.

IRS records reviewed by the Center for Public Integrity contain three dozen examples in which the difference between the original and amended reports was at least $100,000, including nine where the total gap was $1 million or more. Some of those amendments covered 2002 activity but were not filed until earlier this year, a time lag of more than 15 months. Other committees filed reports on paper when IRS rules required them to submit electronic forms. Yet the forms contain few references to any fines or penalties paid, and none by committees with the largest amounts of late or previously undisclosed activity.

In contrast, some committees that have failed to file reports, whether due to oversight or ignorance of the law, have paid tax penalties, records and interviews show. Critics of the IRS said the agency’s enforcement effort was ineffective and uncertain.

Although the tax agency has a formula for calculating fines for non-disclosure, there are few details on the enforcement process or even whether committees are disciplined for making incomplete reports or missing filing deadlines.

Late or incomplete filings of contributions or expenditures trigger a penalty “calculated by multiplying the amount of contributions and expenditures that are not disclosed by the highest corporate tax rate, currently 35 percent,” according to a 2003 IRS document. The same applies to non-filers.

“It’s just another instance of the IRS exempt organizations division failing to do its job,” said Frances R. Hill, a tax expert who teaches at the University of Miami School of Law and studies political non-profits.

Hill said that the IRS has not provided enough guidance on the process of paying penalties for violations of disclosure requirements. The lack of instructions—the IRS describes how to calculate the penalty for non-disclosure but does not specify how it should be paid—could encourage committees not to comply with the law, she said.

“Unless the IRS enforces this, they are contributing to the kind of circumvention of election law that the Supreme Court condemned in [its ruling on the 2002 federal campaign finance law.]”

The Center for Public Integrity submitted questions for this report to the IRS through a spokesman, but received no response.

Such 527 committees have raised almost $267 million during the 2003-04 election cycle and have spent $240 million influencing elections at the local, state and federal levels. Many committees filed reports last week covering activity through June 30, 2004.

The list of committees that have filed substantial amendments spans the political spectrum, but Republican and Democratic groups and labor unions are among the most frequent.

The Republican Governors Association, which raises money to support GOP gubernatorial candidates, has in the past year filed 17 amended disclosure forms containing nearly $14.6 million not included on the initial filings, but there is no indication from the filings that the group has been fined for failing to disclose all of its receipts and expenditures.

Four of the RGA’s 17 amendments each totaled more than $1 million. The largest single gap between an original and an amended filing — more than $4.2 million from a report covering the first three months of 2002 — was by the College Republican National Committee, which helps to promote GOP causes and candidates on campus.

The 17 amended reports filed by the RGA in theory could cost the organization more than $5.1 million if the 35 percent tax rate were assessed on the total amount not previously disclosed, but records give no indication that any penalty has been paid. The group’s largest payments to the U.S. Treasury are labeled “Payroll taxes” and no records described as fines or penalties appear on the RGA filings. The amendments came as a result of the RGA’s own review of its finances, not from IRS enforcement action, the group has said.

A spokesman for the RGA did not return telephone and email messages left by the Center.

The RGA was one of several 527 groups to file an amendment reporting less money than the original filings, ranging from roughly seven dollars to $1 million less. Roughly a quarter of these involve labor union 527s, although organizations such as GOPAC, Planned Parenthood and the RGA also filed reports totaling less money than prior filings. The Service Employees International Union report covering July through September 2002 trimmed more than $750,000 in contributions and more than $250,000 in expenditures from its initial filing.

Unlike the Federal Election Commission, which issues press releases announcing fines and administrative agreements with federal committees found to be in violation of campaign disclosure laws, the IRS does not release enforcement information either in aggregate or individual form. While the FEC makes public the letters it sends to committees that have missed reporting deadlines, the IRS does not. The tax agency can, as part of an agreement with a violator, require the committee to make public the final settlement, Hill said.

Fines paid to the IRS appear to be a rare occurrence: a search of the Center for Public Integrity’s database of 527 filings shows only a handful of payments to the IRS described as a “penalty” or “fee”, rather than income tax payments on employees. (Prior to late 2002, the IRS did not require organizations to list a purpose or date for an expenditure; both are now required.) In one instance, Voices for Working Families, a labor-union backed group, paid $866 to the IRS on March 31, 2004; an expenditure marked “Penalty & Interest.”

Rep. Christopher Shays, a Connecticut Republican who was a primary sponsor of the 2002 federal campaign law and has sought FEC regulation of 527 committees, said that the IRS is the wrong agency to have oversight.

“Having the IRS enforce 527s is like having car mechanics regulate food safety. It is not, and should not be, their responsibility to enforce election law. The key to regulating 527s is to overhaul the FEC so they do the job they were created to do,” Shays said.

Little-known before the 2000 presidential election, 527 committees became notorious after a group known as Republicans for Clean Air paid for broadcast advertisements attacking Arizona Sen. John McCain’s environmental record as McCain was seeking the Republican presidential nomination. Because the group did not have to file any records of its donors or expenditures, it remained unknown until newspapers discovered its financial backers.

Subsequently, Congress passed a law requiring such groups to register and report contributions and expenditures with the IRS, and also mandated that the IRS build a Web-based disclosure system. Even though the agency now makes every 527 filing available on its Web site, paper filings are not fully incorporated into search forms or into the data made available for download to news organizations and the public.

Late filing seems to be a problem for several organizations. Republicans Abroad International, which solicits money from Americans living outside the United States, filed a report on June 25, 2004, covering the first six months of 2003—nearly a year after it was due. Among the report’s $41,700 in expenditures were roughly $7,300 in payments to the IRS and Treasury Department described as tax penalties. An official for the group said it reached an agreement with the IRS but did not discuss its details.

The group’s Deputy Director, Ryan King, said that Republicans Abroad reached an agreement with the IRS.

“It’s a bit convoluted, but given our situation, they were fine,” he said of his dealings with the IRS.

King would not comment on whether the IRS assessed any fines for the late filing, but the group’s Mid-Year 2003 report contains a $1,341 payment to the IRS and another $5,986 to the Treasury Department, both labeled as “Tax Penalties.” The Republicans Abroad report contained a combined total of $120,150 in contributions and expenditures, meaning a 35 percent penalty would be $42,052.50.

In addition to the examples cited above, other committees have sent in reports months after they were due or failed to file electronically when required:

• Humane USA, an animal rights group, filed seven reports on April 12, 2004, covering activity between 2001 and 2004. Although registered with the IRS since December 2001, the committee filed no reports of the $155,000 raised and $153,000 spent during that time until this year. An official for the group said it had been fined $5,500 by the IRS but planned to contest the amount.
• The National Federation of Republican Women filed its Year-End 2003 report, which included $1.2 million in spending and was due at the end of January, on May 21, 2004—and on paper, to boot.
• The Laborers’ International Union 527 sent its Year-End 2003 filing on April 20, 2004, detailing $464,000 raised and $569,000 spent.
• The Leadership Forum, which has connections to top Republican members of the House of Representatives, was more than a month late in filing its Year-End 2003 report, which was received on March 5, 2004.
• The Service Employees International Union, which has one of the largest political committees and is a strong backer of Democratic candidates, filed two reports covering 2003 political activity on paper, despite a federal law mandating electronic filing for committees that raise or spend more than $50,000 a year. (It has filed electronically in 2004.)

Political committees that report to the IRS follow a filing schedule that is similar to the one federal political committees use when sending reports to the FEC, although FEC committees have to file additional reports detailing contributions of at least $1,000 received during the 12 days before the election.

The FEC can levy civil penalties that usually peak at the total amount of money involved in the violation, agency spokesman Bob Biersack said. The FEC’s announcements of violations say that in the case of missing or late filings, “[c]ivil money penalties will be determined by the number of days late, the amount of financial activity involved, and any prior penalties for reporting violations. Election sensitive reports (reports and notices filed prior to an election) will receive higher penalties.”

The FEC can review committees that fail to file required disclosure reports, Biersack said, and said a massive restatement of finances by a committee “would make it much more likely that it would lead to an audit.”