Political nonprofits bungle IRS filings

Introduction

High-profile nonprofits that invest millions of dollars in political campaign ads regularly omit from their tax returns information about the companies they hire, according to a Center for Public Integrity investigation.

These annual tax documents are signed under the penalty of perjury when submitted to the Internal Revenue Service. Nevertheless, deep-pocketed groups — both conservative and liberal — appear to have bungled reporting rules requiring nonprofits to disclose the names of their highest paid independent contractors.

Three of these groups — Crossroads GPS, the Club for Growth and Patriot Majority USA— acknowledged their errors when informed of them and said they plan to correct them.

At least four others — Americans for Tax Reform, the American Future Fund, the 60 Plus Association and the Revere America Association — also appear to have made reporting mistakes but did not respond to requests for comment.

The groups’ mistakes ranged from the relatively minor — excluding one particular vendor from a longer list — to the wholesale omission of vendor information.

Take, for instance, Americans for Tax Reform and Patriot Majority USA — ideologically opposed “social welfare” nonprofits that each unleashed a barrage of political attack ads ahead of the 2012 election.

Both groups hired media buying firms and consultants to help execute their spending plans and produce advertisements, according to Federal Election Commission filings.

But when the IRS asked each group how many independent contractors received more than $100,000 in compensation, both said “zero.”

Americans for Tax Reform, a Republican-aligned group headed by anti-tax advocate Grover Norquist, paid seven firms nearly $16 million for TV ads and other messages that advocated for the election or defeat of politicians, according to FEC filings. And Patriot Majority USA, a Democratic-leaning operation led by strategist Craig Varoga, told the FEC it spent about $7.5 million on such expenditures.

In an email, Varoga said his group’s answer on its tax return amounted to “an inadvertent omission.”

He said Patriot Majority USA would file an amendment that showed the nonprofit had actually paid 17 firms more than $100,000 in 2012, with media buying firm Waterfront Strategies garnering the top spot at nearly $9.4 million.

Waterfront Strategies, which is closely tied to President Barack Obama’s political machine, is favored by several high-powered liberal political committees, as well as union and environmental organizations.

Patriot Majority USA’s other top vendors were: The New Media Firm, a media buying company (paid $2.8 million); Bynum Consulting Group, a direct mail firm ($1.6 million); Mullen & Co. for “digital media buys & production” ($1.2 million) and Fieldworks for “voter registration” ($1 million).

This type of vendor data omission could be an “intentional misstatement” to understate a nonprofit’s political activity, said Greg Colvin, a San Francisco-based attorney who specializes in nonprofit tax law — although Colvin added that they could also arise from “inadvertent mistakes.”

Marcus Owens, a Washington, D.C.-based lawyer who previously served as the director the IRS division overseeing tax-exempt organizations, agreed, noting that these groups “are players with sophisticated counsel.”

“These are not scout troops and soup kitchens,” Owens said.

This is not the first time Americans for Tax Reform’s tax returns have attracted scrutiny.

In its 2012 return, Americans for Tax Reform told the IRS that it spent $9.8 million on “direct and indirect political campaign activities” — about $6 million lower than it reported spending to the FEC on ads that endorsed or denounced specific candidates. The higher FEC figure amounted to 51 percent of the group’s spending in 2012, as previously reported by the Center for Responsive Politics.

Citizens for Responsibility and Ethics in Washington, an advocacy group, has previously filed complaints with the IRS against Americans for Tax Reform, alleging that it underreported its political expenditures and may be abusing its tax-exempt status.

Likewise, CREW officials have criticized the 60 Plus Association for characterizing the bulk of its FEC-reported political spending as “educational” rather than “political campaign activities,” as the Center for Public Integrity first reported Wednesday.

Ever since the U.S. Supreme Court’s Citizens United v. Federal Election Commission ruling in 2010, social welfare nonprofits — which are organized under Section 501(c)(4) of the tax code — have been allowed to use funds to call for the election or defeat of federal candidates so long as they do not coordinate such spending with the candidates they seek to aid.

Such overt political spending, however, must not be these groups’ primary purpose, according to federal rules. And too much spending on elections could lead the IRS to strip 501(c)(4) tax-exempt status from a group.

That’s what happened to a Democratic-aligned nonprofit called Arkansans for Common Sense earlier this year. The group spent more than $1 million in a failed effort to help Sen. Blanche Lincoln, D-Ark., win re-election in 2010.

In recent years, activists and lawmakers have called on the IRS to ensure that groups are not abusing their tax status. These social welfare nonprofits are allowed to keep their donors anonymous, unlike candidates, parties and political action committees, which must publicly disclose their funders.

The IRS is also supposed to enforce rules that prohibit a nonprofit from using its funds for the private benefit of its officers.

Tax filings for other politically active nonprofits appeared to be missing information about at least one vendor that should have been listed among the top five highest paid. These nonprofits appeared to fully report their overall political spending elsewhere in the filings.

For instance, the conservative Club for Growth paid Arizona-based political consulting firm Blue Point LLC about $660,000 in 2012 for “mail production costs” and “postage,” according to FEC records. The Club for Growth failed to disclose this relationship in its IRS filing.

And while Republican-aligned Crossroads GPS paid media buying firm Mentzer Media Services about $7.75 million in 2012 and about $650,000 in 2010, the firm was not listed among Crossroads GPS’ top five highest-paid independent contractors either year.

Moreover, the Republican Jewish Coalition didn’t list media buying firm Jamestown Associates in its IRS filing for either 2010 or 2012, despite paying the company at least $1.1 million in 2010 and $4.5 million in 2012, according to FEC records.

Jeffrey Altman, an attorney for the Republican Jewish Coalition, maintained that the group correctly filed its disclosures, citing “different reporting requirements” for the FEC and IRS. Media buying expenses, Altman argued, did not need to be reported to the IRS as “payments for services.”

But other tax lawyers contacted by the Center for Public Integrity expressed skepticism at this rationale.

“The media buyer is acting, presumably, as an agent or something like an agent of the nonprofit for the purposes of acquiring air time,” said Owens, the former IRS official. The firm “should show up on the list of independent contractors.”

The IRS itself instructs nonprofits that the definition of independent contractors encompasses “organizations as well as individuals and can include professional fundraisers, law firms, accounting firms, publishing companies, management companies and investment management companies.”

A spokesman for the IRS did not respond to requests for comment.