I.R.S. Drops Audits of Political Donors
by STEPHANIE STROM, The New York Times, July 7, 2011
The Internal Revenue Service on Thursday abandoned its effort to force five big-ticket donors to pay gift taxes on contributions they made to nonprofit advocacy groups that are playing an increasing role in American politics.
“Until further notice, examination resources should not be expended on this issue,” Steven T. Miller, deputy commissioner for services and enforcement, wrote in a memo posted on the I.R.S. Web site.
“This is a difficult area,” Mr. Miller wrote, “with significant legal, administrative and policy implications with respect to which we have little enforcement history.”
The memo was a sharp reversal for the tax agency, which had invoked a rarely used, 30-year-old ruling to warn the five donors in February that they might owe gift taxes on their donations. Organizations heavily financed by conservative donors like David Koch, or in the case of Crossroads GPS, tied to top Republican strategists like Karl Rove, would have come under such newly enforced rules, were they to be imposed across the board.
News of those audits broke in May, after lawyers representing the donors complained about them in an American Bar Association meeting. Neither the donors nor the organizations to which they made the gifts that prompted the I.R.S. audits have been disclosed publicly.
The issue electrified the political world, where such advocacy groups, known as 501(c)4 organizations for the section of the tax code under which they are established, have become powerful players in recent years.
Mr. Rove’s group and Priorities USA, a new liberal advocacy group set up by two former Obama administration officials, Bill Burton and Sean Sweeney, are attracting ever larger war chests in support of campaigns and causes because they can offer their donors anonymity, unlike political action committees and 527 organizations.
The I.R.S. audits became public just as such groups were ramping up for the 2012 election cycle, and a group of six senators led by Senator Orrin Hatch, Republican from Utah, wrote to the I.R.S. commissioner Douglas H. Shulman raising concerns that its effort to impose gift taxes on donations to these groups was politically motivated and in violation the First Amendment.
“This decision today ensures that the I.R.S. remains free from even the hint of undue political influence,” Mr. Hatch said in a statement on Thursday. “It cannot be turned into an arm of political retribution or payback.”
Similarly, David Camp, Republican of Michigan and chairman of the House Ways and Means Committee, questioned the process the I.R.S had used to challenge the five donors and whether the Obama administration, which has been critical of the increasing power of advocacy groups, was involved.
On Thursday, Mr. Camp issued a statement saying that while he welcomed Mr. Miller’s decision, he remained concerned that the I.R.S. had not ruled out future gift taxes on or audits of such donations. “I remain troubled that the I.R.S. has failed to explain what prompted these audits in the first place,” he said.
The I.R.S. has said that the White House had nothing to do with its audits, and its original statement said they were begun by lower-level employees and that administration officials were not notified. Frank Keith, an I.R.S. spokesman, said Thursday that the estate and gift tax unit had in fact suspended those audits in March, although the agency’s initial confirmation of the audits did not mention any such action.
“All decisions to open, suspend and close the audits were made by career civil servants and were not the result of any outside influence,” Mr. Keith said.
Mr. Miller’s memo today indicated that no new inquiries would be made of donors to such groups until these issues had been studied and a broader policy developed, on a timetable he left open-ended. Greg Colvin, a lawyer for one of the five donors under audit by the I.R.S., called the memo issued Thursday “at least a temporary victory.”
“They might sometime in the future decide to apply the tax,” Mr. Colvin added. “But in my experience, they can go for a very, very long time if they’ve got a tough issue where there is difficult public policy, contradictions, constitutional questions, debate over what Congress intended. They could keep this on ice for decades.”
Mr. Colvin and other lawyers said the I.R.S. turnaround might lead to a spate of refund requests from donors who made contributions to advocacy groups and paid gift taxes. “It makes sense to file a protective claim to avoid losing out by virtue of the statute of limitations expiring,” said Marcus Owens, a lawyer who formerly headed the I.R.S. division that oversees nonprofit groups.
Mr. Keith, the I.R.S. spokesman, said taxpayers had the right to file for a refund of any tax they had paid. “However, I’m not saying how the I.R.S. would treat such a claim, whether it would be honored or denied, and the field directive” — Mr. Miller’s memo — “doesn’t speak to that, either,” he said.