IRS seeks to clarify new campaign finance disclosure law

Introduction

A campaign finance law intended to resolve questions about unregulated soft money is generating as many questions as answers. The legislation targeting so-called “Section 527” groups has led to a flood of inquiries at the Internal Revenue Service amid confusion and complaints about the interpretation of which groups must file under the law.

The campaign finance law, which took effect on July 1, is the first campaign finance legislation signed into law in two decades. It aims to identify political organizations’ funding sources previously not subject to disclosure. But initial attempts to implement the law have produced confusion as to which groups were subject to file with the IRS by an August 1 deadline.

Senators and representatives involved in drafting the new law sent the IRS a letter two weeks ago advising the IRS that it was the agency’s obligation to force these groups to disclose their unreported and unlimited soft money contributions and expenditures. The Congressional letter urged the IRS to provide guidance so that relevant organizations could react to the legislation.

In response to the letter and a deluge of inquiries, the IRS released a detailed ten-page clarification that addresses potential loopholes in the broad language of the law.

The IRS is soliciting comments from the tax and federal election communities in an effort to clarify the law. In the meantime, the IRS is calling for all tax-exempt groups-local, state, or national-that engage in campaign activity that do not file with the Federal Election Commission to file a notice of organization with the IRS.

Results from first filing

Nearly 5,000 political groups filed notice of organization with the IRS in the month after the law was enacted. But that is expected to be only a small fraction of what is to come. The IRS posted 955 of the filings in the first phase of its public disclosure of organizations that seek to affect the outcome of local, state, or federal elections.

In a review of the first 955 filings, the Center for Public Integrity found very few of the groups previously identified by the Center as 527 groups-the very groups the law intended to regulate.

The Center has tracked Section 527 groups since last December and lists groups campaigning this election cycle on its website. Only three of the groups on the Center’s list were posted in the initial IRS public release. Any that have not filed may lose their tax-exempt status and have to pay a tax of 35 percent on their net receipts, including contributions they receive.

The Center analysis of the IRS documents found that more than 90 percent were formed to affect state or local elections and nearly half were candidate committees. Political parties made up 13 percent of the reported groups while labor unions represented one-tenth and business interests had 7 percent of the committees registered.

Under-shooting

Analysts say the campaign finance reform measure faces an uncertain future. Ken Gross, a federal election attorney with Skadden, Arps, Slate, Meagher and Flom in Washington, D.C., said the law won’t accomplish what it set out to do, because it was drafted hastily and without a clear intent. “While I think this law is capturing some of those groups, there are arguments that some of the stealth PAC groups don’t have to file with the IRS and that is the ultimate irony. This law was meant to capture information that wasn’t subject to disclosure while some groups intended for disclosure can get out of it.”

Meanwhile, some organizations either refuse to file or argue that the new law doesn’t apply to their group. Leadership PACs, fund-raising committees run by influential incumbents, have in the past been able to accept unlimited and undisclosed soft money contributions. House Majority Whip, Tom DeLay, R-Texas, has such a group: the Americans for Republican Majority. James Bopp, attorney for a 527 group associated with DeLay, told the Center that some of the groups he represents are considering reorganizing to avoid disclosure.

And just because a group files with the IRS does not mean that the content of the notices is sufficient to give the public a good sense of who is behind a particular group. One group from Lanham, Maryland, took the filing as seriously as a cartoon, listing Minnie Mouse as a contact person and Mickey Mouse as the custodian of records.

Overwhelming the IRS

Section 527 exempts from taxes any group organized to “influence the selection, nomination, election or appointment of an individual to a federal, state, or local public office or office in a political organization.” Such a broad category includes every candidate committee from county commissioner to state senate, all party committees at state and local levels, and interest groups.

The IRS has now become responsible for receiving statements of organizations from these types of political groups and monthly or quarterly reports from those groups that specifically participate in tax-exempt political activities like issue ads, direct mail campaigns, or get-out-the-vote efforts.

IRS employees have struggled to deal with a surge of inquiries around the clock, while also processing disclosure forms to post on their Web site in a timely manner, in accordance with this new law. An IRS agent told the Center the agency was unprepared to receive so much data at once, and the reason for delay in processing the information has also been because the law is so recent that groups may not know it applies to them or haven’t had time to file everything required. The IRS is not making elaborate efforts to put the word out-no special campaign or mechanism has been put into place but for the IRS’s press releases that have come out on the subject.

Legal reaction to the new law

Tax experts who spoke with the Center said that lawyers are planning a constitutional challenge to the new law. The case could be based on one of two rationales: the First Amendment right to free speech or a First Amendment freedom of association, which the Supreme Court upheld in a 1958 case regarding the anonymity of members of the National Association for the Advancement of Colored People who had reason to fear retribution. Legal action is anticipated to come forth this election cycle, although the courts most likely won’t decide the issue before the November election.