```

[Congressional Record Volume 158, Number 127 (Wednesday, September 19, 2012)]
[Senate]
[Pages S6428-S6433]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

          INTERNAL REVENUE SERVICE AND 501(c)(4) ORGANIZATIONS

  Mr. LEVIN. Mr. President, our representative form of government is 
based on the premise that citizens who vote in our elections are 
informed about who is seeking to influence elections. Sadly, we 
continue to see that information obscured by organizations who are 
misusing our tax code for political gain.
  As we have discussed on this floor many times, the Supreme Court 
opened our campaign finance system to a torrent of unlimited and secret 
special-interest money in Citizens United. But even the Supreme Court 
acknowledged in Citizens United that disclosure is important:

       ``[P]rompt disclosure of expenditures can provide 
     shareholders and citizens with the information needed to hold 
     corporations and elected officials accountable for their 
     positions and supporters. Shareholders can determine whether 
     their corporation's political speech advances the 
     corporation's interest in making profits, and citizens can 
     see whether elected officials are in the pocket of so-called 
     moneyed interests.'' Citizens United v. FEC, 130 S. Ct. 876, 
     916 (2010).

  Yet, according to the Center for Responsive Politics, as of September 
13, spending on political advertising by groups that either do not 
disclose, or only partially disclose their donors, has increased four-
fold, from $32 million in the 2008 election to more than $135 million 
at the same point in the current election.
  These groups are exploiting our tax code by organizing as tax-exempt 
``social welfare'' groups and then spending tens of millions of 
undisclosed dollars on political campaigns.
  The Internal Revenue Service (IRS)--the organization that grants 
these groups their tax-exempt status in the first place--should be 
protecting the voting public from these groups that pretend to be 
acting in the social welfare but are instead engaging in partisan 
politics.
  The law in this area is clear. 26 U.S.C. Sec. 501(c)(4) states that 
``Civic leagues or organizations not organized for profit but operated 
exclusively for the promotion of social welfare, or local associations 
of employees, the membership of which is limited to the employees of a 
designated person or persons in a particular municipality, and the net 
earnings of which are devoted exclusively to charitable, educational, 
or recreational purposes'' are exempt from taxation. The word 
``exclusively'' is in the tax code for a reason. Congress didn't say 
``partially,'' or ``primarily.'' We said that these groups had to be 
operated ``exclusively'' for the promotion of social welfare. The IRS, 
in writing the implementing regulations to the statute, said that, ``An 
organization is operated exclusively for the promotion of social 
welfare if it is primarily engaged in promoting in some way the common 
good and general welfare.'' [emphasis added] By substituting the word 
``primarily'' in the regulation with the word ``exclusively'' in the 
statute, the IRS essentially redefined what Congress required a social 
welfare organization to be.
  Mr. President, I asked the IRS for an explanation as to why they have 
not

[[Page S6429]]

responded to the increasing growth of groups that parade as social 
welfare groups but are obviously organized for politically partisan 
purposes. In my letters, I asked the IRS how they interpret the 
explicit language in the tax code which says that entities must operate 
``exclusively'' for the promotion of social welfare, to allow any tax 
exempt partisan political activity by 501(c)(4) organizations. Their 
response? That the regulation has been in place for over 50 years. That 
is not an excuse if new abuses require a review of an IRS regulation.
  I also asked the IRS if they are fulfilling their enforcement 
function by notifying these groups that are obviously engaged primarily 
in political activity that they are violation of the law. Again, the 
IRS response was inadequate. During the past 6 months, according to the 
IRS letter, no notices of proposed or final revocation have been issued 
to section 501(c)(4) organizations. None. So even under the 
``primarily'' test the IRS is not enforcing the law in the face of the 
avalanche of evidence that our laws are being flouted.
  The law is clear. Even the watered-down IRS regulation is clear. It 
is time that the IRS enforces the law, or at least its own regulation.
  I ask unanimous consent that the correspondence with the IRS be 
printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

         U.S. Senate, Committee on Homeland Security and 
           Governmental Affairs,
                                    Washington, DC, July 27, 2012.
     Hon. Douglas H. Shulman,
     Commissioner, Internal Revenue Service,
     Washington, DC.
       Dear Commissioner Shulman: I am writing to express my 
     concern about how the IRS interprets the law regarding the 
     extent to which 501(c)(4) ``social welfare'' organizations 
     can engage in partisan political activity. The July 13, 2012 
     response by Lois G. Lerner, Director of Exempt Organizations, 
     to my June 13, 2012 letter was unsatisfactory.
       In the response, Ms. Lerner stated that ``The IRS takes 
     steps to continually inform organizations of their 
     responsibilities as social welfare organization to help them 
     avoid jeopardizing their tax-exempt status,'' and ``actively 
     educates section 501(c)(4) organizations at multiple states 
     in their development about their responsibilities under the 
     tax law.'' [Emphasis added.]
       Her discussion does not describe an IRS initiative to 
     ``continually inform'' or ``actively educate.'' Rather, it 
     shows the IRS is passively making some information available 
     once a 501(c)(4) entity is already in existence. Further, her 
     discussion of the explanatory materials available to the 
     public, and the materials themselves, are confusing. This 
     leads to a predictable result: organizations are using 
     Internal Revenue Code Section 501(c)(4) to gain tax exempt 
     status while engaging in partisan political campaigns. There 
     is an absurd tangle of vague and contradictory materials that 
     the IRS provides. Making the problem worse is that the IRS 
     knows there is a problem because of the public nature of the 
     activity, but has failed to address it.
       First, the law.
       26 U.S.C. Sec. 501(c)(4) states that ``Civic leagues or 
     organizations not organized for profit but operated 
     exclusively for the promotion of social welfare, or local 
     associations of employees, the membership of which is limited 
     to the employees of a designated person or persons in a 
     particular municipality, and the net earnings of which are 
     devoted exclusively to charitable, educational, or 
     recreational purposes'' are exempt from taxation. [Emphasis 
     added.] Merriam-Webster defines ``exclusively'' as ``single, 
     sole; whole; undivided.'' Therefore, it would appear that the 
     law prevents entities that organize under Section 
     501(c)(4)from any activity that is not operated exclusively 
     for the promotion of social welfare or an association of 
     employees.
       Consistent with the law is a 1997 letter from the IRS 
     denying tax-exempt status to a group called the National 
     Policy Forum. The letter indicates that the IRS based its 
     denial on the fact that the organization was engaged in 
     partisan political activity, stating that ``partisan 
     political activity does not promote social welfare as defined 
     in section 501(c)(4),'' and that the applicant ``benefit[s] 
     select individuals or groups, instead of the community as a 
     whole.
       One part of Internal Revenue Service Publication 557 in its 
     guidance states, consistent with the law, that:
       ``If your organization is not organized for profit and will 
     be operated only to promote social welfare to benefit the 
     community, you should file Form 1024 to apply for recognition 
     of exemption from federal income tax under section 
     501(c)(4).'' [Emphasis added]
       Another part of Internal Revenue Service Publication 557 
     starts off by agreeing with the law and states, ``Promoting 
     social welfare does not include direct or indirect 
     participation or intervention in political campaigns on 
     behalf of or in opposition to any candidate for public 
     office.'' The IRS is accurately and clearly stating, in some 
     places at least, that ``social welfare'' advocacy does not 
     include campaigning for or against a candidate or candidates.
       So far, so good--until that same Publication 557 states: 
     ``However, if you submit proof that your organization is 
     organized exclusively to promote social welfare, it can 
     obtain an exemption [from taxes] even if it participates 
     legally in some political activity on behalf of or in 
     opposition to candidates for public office.''
       That language seems inconsistent with the other referenced 
     parts of Publication 557 (as well as being inconsistent with 
     law and precedent), unless it means that the exemption isn't 
     available for the political activity portion funded by 
     501(c)(4) receipts.
       Further, an IRS regulation that interprets Section 
     501(c)(4) states that, ``An organization is operated 
     exclusively for the promotion of social welfare if it is 
     primarily engaged in promoting in some way the common good 
     and general welfare of the people of the community.'' 
     [Emphasis added.]
       So the IRS regulation says the law's requirement of 
     ``exclusively'' really means ``primarily,'' something very 
     different from ``exclusively.''
       The IRS webpage cites an internal training article which 
     states:
       ```[S]ocial welfare' is inherently an abstruse concept that 
     continues to defy precise definition. Careful case-by-case 
     analyses and close judgments are still required.'' [Emphasis 
     added.]
       Fair enough.
       In its Compliance Guide for Tax-Exempt Organizations, the 
     IRS gives direction regarding how to make a case-by-case 
     evaluation whether a communication is political. That Guide 
     says that the following factors indicate that an advocacy 
     communication is political campaign activity:
        The communication identifies a candidate for public 
     office;
       The timing of the communication coincides with an electoral 
     campaign;
       The communication targets voters in a particular election;
       The communication identifies the candidate's position on 
     the public policy issue that is the subject of the 
     communication;
       The position of the candidate on the public policy issue 
     has been raised as distinguishing the candidate from others 
     in the campaign, either in the communication itself or in 
     other public communications; and
       The communication is not part of an ongoing series of 
     substantially similar advocacy communications by the 
     organization on the same issue.
       The guide further lays out the factors that indicate when 
     an advocacy communication is not political campaign activity:
       The absence of anyone or more of the factors listed above;
       The communication identifies specific legislation, or a 
     specific event outside the control of the organization, that 
     the organization hopes to influence;
       The timing of the communication coincides with a specific 
     event outside the control of the organization that the 
     organization hopes to influence, such as a legislative vote 
     or other major legislative action (for example, a hearing 
     before a legislative committee on the issue that is the 
     subject of the communication);
       The communication identifies the candidate solely as a 
     government official who is in a position to act on the public 
     policy issue in connection with the specific event (such as a 
     legislator who is eligible to vote on the legislation); and
       The communication identifies the candidate solely in the 
     list of key or principal sponsors of the legislation that is 
     the subject of the communication.
       It is clear from the application of those factors that what 
     is going on in the U.S. with certain 501(c)(4) organizations 
     in their television advertisements are political campaign 
     activities.
       Below are two transcripts of advertisements that were put 
     on television by 501(c)(4) organizations. As you can see, the 
     subject of Advertisement #1 is a Democratic Senator, and the 
     subject of Advertisement #2 is a Republican Senator. This is 
     not a partisan issue.
       Television Advertisement #1:
       ``It's time to play: Who is the biggest supporter of the 
     Obama agenda in Ohio. It's Sherrod Brown. Brown backed 
     Obama's agenda a whopping 95 percent of the time. He voted 
     for budget busting ObamaCare that adds $700 billion to the 
     deficit. For Obama's $453 billion tax increase. And even 
     supported cap-and-trade which could have cost Ohio over 
     100,000 jobs. Tell Sherrod Brown, for real job growth, stop 
     spending and cut the debt. Support the new majority agenda at 
     newmajorityagenda.org.''
       Television Advertisement #2: 
       ``Before Wall Street gave him $200,000 in campaign cash. . 
     . . Before he voted to let bank CEOs take millions in 
     taxpayer funded bonuses. . . . Dean Heller was a stockbroker. 
     No wonder he voted against Wall Street reform; against 
     holding the big banks accountable. Heller even voted to risk 
     your Social Security here, in the stock market. Dean Heller: 
     he votes like he still works for Wall Street, and that's bad 
     for you.''
       Those ads, and so many like them, clearly fit the factors 
     the IRS has laid out in its guide for what constitutes a 
     political campaign activity. The advertisements make no 
     pretense at nonpartisanship; they are blatantly and 
     aggressively partisan communications.

[[Page S6430]]

       Entities that file under Section 501(c)(4) of the Internal 
     Revenue Code and take advantage of its tax exemption benefits 
     should have to make a choice: either lose their exempt status 
     (and pay taxes) or eliminate the partisan political activity.
       The IRS needs to immediately review the activities of 
     501(c)(4) entities engaging in running partisan political ads 
     or giving funds to Section 527 organizations that run such 
     ads. The IRS needs to advise 501(c)(4) entities of the law in 
     this area and the factors it will look at in reviewing 
     501(c)(4) status and tax exemption issues.
       Please provide me with the following information no later 
     than August 10, 2012:
       1. How can the IRS interpret the explicit language in 26 
     U.S.C. 501(c)(4), which provides that ??510??(c)(4) entities 
     must operate ``exclusively'' for the promotion of social 
     welfare, to allow any tax exempt partisan political activity 
     by 501(c)(4) organizations?
       2. Since partisan political activity does not meet the IRS 
     definition of ``promoting social welfare,'' how can an 
     organization that participates in any partisan political 
     activity be``organized exclusively to promote social 
     welfare?''
       3. The Exempt Organizations 2011 Annual Report and 2012 
     Work Plan states: ``As in any election year, EO will continue 
     its work to enforce the rules relating to political campaigns 
     and campaign expenditures. In FY 2012, EO will combine what 
     it has learned from past projects on political activities 
     with new information gleaned from the redesigned Form 990 to 
     focus its examination resources on serious allegations of 
     impermissible political intervention.''
       a. Typically, how long after a complaint to the IRS does a 
     compliance review begin?
       b. What approximate time does it take to review the 
     complaint?
       c. How many persons are involved in the enforcement of the 
     501(c)(4) rules?
       4. The Exempt Organizations 2011 Annual Report and 2012 
     Work Plan states that 501 (c)(4) organizations ``can declare 
     themselves tax-exempt without seeking a determination from 
     the IRS. EO will review organizations to ensure that thel 
     have classified themselves correctly and that they are 
     complying with applicable rules.''
       a. Why does the IRS allow 501(c)(4) organizations to self-
     declare?
       b. When an organization ``self declares'' as a 501(c)(4) 
     organization, how does the IRS get notice and how long does 
     it take the IRS to conduct the review to ensure that that 
     organization has classified itself correctly?
       5. The IRS Compliance Guide for Tax-Exempt Organizations 
     states:
       ``When a 501(c)(4), (5) or (6) organization's communication 
     explicitly advocates the election or defeat of an individual 
     to public office, the communication is considered political 
     campaign activity. A tax-exempt organization that makes 
     expenditures for political campaign activities shall be 
     subject to tax in an amount equal to its net investment 
     income for the year or the aggreate amount expended on 
     political campaign activities during the year, whichever is 
     less.''
       a. How does the IRS keep track of these explicit 
     communications and ensure that the organization pays this 
     tax?
       b. What is the reason for the requirement that the tax will 
     be based on ``whichever is less'' between its net investment 
     income for the year or the aggregate amount expended on 
     political campaign activities?
       c. What tax would an organization have to pay if it spends 
     all of its income on political advertising (therefore it has 
     NO net investment income)?
       6. Ms. Lerner's letter quotes the IRS webpage on Social 
     Welfare Organizations:
       ``The promotion of social welfare does not include direct 
     or indirect participation or intervention in political 
     campaigns on behalf of or in opposition to any candidate for 
     public office. However, a section 501(c)(4) social welfare 
     organization may engage in some political activities, so long 
     as that is not its primary activity. However, any expenditure 
     it makes for political activities may be subject to tax under 
     section 527(f)?'' [Emphasis added]
       a. What is the statutory basis of the language that allows 
     501(c)(4) organizations to engage in some political 
     activities?
       b. How does the IRS keep track of these political 
     activities and ensure that the organization pays the tax 
     under section 527(f)?
       7. In her July 13 letter, Ms. Lerner states that the IRS 
     also addresses the issue of political activities in the Forms 
     990 and 990-EZ.
       Are Forms 990 and 990-EZ made public? If so, where can they 
     be accessed?
       8. Internal Revenue Service Publication 557 states that, if 
     a 501(c)(4) entity can ``submit proof that [the] organization 
     is organized exclusively to promote social welfare, it can 
     obtain an exemption even if it participates legally in some 
     political activity on behalf of or in opposition to 
     candidates for public office.''
       Have the following 501(c)(4) organizations a) applied for; 
     and if so, b) received the described exemption for political 
     activity from the IRS?
       a. Crossroads Grassroots Policy Strategies
       b. Priorities U.S.A.
       c. Americans Elect
       d. American Action Network
       e. Americans for Prosperity
       f. American Future Fund
       g. Americans for Tax Reform
       h. 60 Plus Association
       i. Patriot Majority USA
       j. Club for Growth
       k. Citizens for a Working America Inc.
       l. Susan B. Anthony List
       9. Have you reminded 501(c)(4)s which publicly seem to be 
     operating in the partisan political arena as to the factors 
     you will consider in determining whether they are engaging in 
     partisan political activity? If not, why not?
       I have enclosed a copy of Ms. Lerner's letter. If you have 
     any questions, please contact me, or have your staff contact 
     Kaye Meier of my staff at kaye_meier@ievin.senate.gov or 202/
     224-9110. Again, it is urgent that I receive your answers by 
     August 10, 2012.
           Sincerely,
                                                       Carl Levin,
                                  Chairman, Permanent Subcommittee
     on Investigations.
                                  ____

                                       Department of the Treasury,

                                     Internal Revenue Service,

                                 Washington, DC., August 24, 2012.
     Hon. Carl Levin,
     Chairman, Permanent Subcommittee on Investigations, U.S. 
         Senate, Washington, DC.
       Dear Senator Levin: I am responding to your letter to 
     Commissioner Shulman dated July 27, 2012, requesting 
     additional information about section 501(c)(4) organizations. 
     This response supplements the previous responses dated June 
     4, 2012 and July 13, 2012, and addresses the additional 
     questions raised in your recent letter.
       Question 1. How can the IRS interpret the explicit language 
     in 26 U.S.C. Sec. 501(c)(4), which provides that 510(c)(4) 
     entities must operate ``exclusively'' for the promotion of 
     social welfare, to allow any tax exempt partisan political 
     activity by 501(c)(4) organizations?
       We note that the current regulation has been in place for 
     over 50 years. Moreover, unlike Internal Revenue Code section 
     501(c)(3), which specifically provides that organizations may 
     ``not participate in, or intervene in . . . any political 
     campaign on behalf of (or in opposition to) any candidate for 
     public office.''), section 501(c)(4) does not contain a 
     specific rule or limitation on political campaign 
     intervention by social welfare organizations.
       Question 2. Since partisan political activity does not meet 
     the IRS definition of ``promoting social welfare,'' how can 
     an organization that participates in any partisan political 
     activity be ``organized exclusively to promote social 
     welfare?''
       As stated above, longstanding Treasury Regulations have 
     interpreted ``exclusively'' as used in section 501(c)(4) to 
     mean primarily. Treasury Regulation Sec. 1.501(c)(4)-
     1(a)(2)(i), promulgated in 1959, provides: ``An organization 
     is operated exclusively for the promotion of social welfare 
     if it is primarily engaged in promoting the common good and 
     general welfare of the people of the community.'' Applying 
     this Treasury Regulation, Revenue Ruling 81-95, 1981-1 C.B. 
     332, concluded that ``an organization may carry on lawful 
     political activities and remain exempt under section 
     501(c)(4) as long as it is primarily engaged in activities 
     that promote social welfare.''
       Question 3. The Exempt Organizations 2011 Annual Report and 
     2012 Work Plan states: ``As in any election year, EO will 
     continue its work to enforce the rules relating to political 
     campaigns and campaign expenditures. In FY 2012, EO will 
     combine what it has learned from past projects on political 
     activities with new information gleaned from the redesigned 
     Form 990 to focus its examination resources on serious 
     allegations of impermissible political intervention.''
       a. Typically, how long after a complaint to the IRS does a 
     compliance review begin?
       b. What approximate time does it take to review the 
     complaint?
       The IRS routinely receives examination referrals from a 
     variety of sources including the public, media, Members of 
     Congress or their staff, and has a longstanding process for 
     handling referrals so that they receive an impartial, 
     independent review from career employees. When the IRS 
     receives a referral about a particular organization, it is 
     promptly forwarded to the Classification unit of the Exempt 
     Organizations (EO) Examination office in Dallas, Texas. 
     Pursuant to IRM 4.75.5.4(1), within 30 days of receiving the 
     referral, the Classification staff begins evaluating whether 
     the referral has examination potential, should be considered 
     in a future year, needs additional information to make a 
     decision, or falls within the categories of matters that are 
     referred for EO Referral Committee review. Although IRM 
     4.75.5.4(1) sets a goal of 90 days to complete reviews of 
     referrals, the time it takes to fully review a particular 
     referral varies, depending on such factors as the issues 
     involved and the availability of relevant information (i.e. 
     organization's Forms 990, external sources such as media 
     reports, internet searches, etc.).
       In those cases in which the IRS needs additional 
     information about the subject of a referral that is not 
     readily available, such as its Form 990 that has not been 
     filed yet for the tax year at issue, Classification may 
     suspend classifying the referral and places it in the follow-
     up category until the additional information is available. 
     Once the additional information is received, reviewed, and 
     supports the referral being classified as having examination 
     potential, the referral is sent to unassigned inventory, 
     until a revenue agent with the appropriate level of 
     experience for the issues involved in the matter is available 
     to conduct an examination.
       Once in inventory, there are numerous factors that can 
     affect how long it takes to

[[Page S6431]]

     complete the examination process. While it is difficult to 
     predict how long any single examination will take, for cases 
     closed in FY 2011, the average time it took to close a case 
     was 210 days.
       c. How many persons are involved in the enforcement of the 
     501(c)(4) rules?
       The Exempt Organizations (EO) function is responsible for 
     the enforcement of section 501(c)(4) statutory rules and 
     regulations as well as those applicable to all other types of 
     tax-exempt organizations.
       For FY 2011, the total number of EO staff was 889. Other 
     than the 14 employees in the Director's office, the three EO 
     offices are staffed as follows:
       Rulings and Agreements (R&A), which includes EO 
     Determinations and EO Technical, ensures organizations meet 
     legal requirements during the application or private letter 
     ruling process, and through guidance. In FY 2011, R&A had 332 
     employees.
       EO Examinations (Exam) is comprised of various units, 
     including the Classification unit, the EO Compliance Unit, 
     and the Review of Operations unit. Exam develops processes to 
     identify areas of noncompliance, develops corrective 
     strategies, and coordinates with other EO functions to ensure 
     compliance, so that organizations maintain their exempt 
     status. In FY 2011, Exam had 531 employees.
       EO Customer Education and Outreach (CE&O) coordinates, 
     assists and supports the development of educational materials 
     and outreach efforts for organizations to understand their 
     responsibilities under the tax law. In FY 2011, CE&O had a 
     staff of 12 employees.
       The employees in these functions are responsible for the 
     regulation of all types of tax-exempt organizations, 
     including section 501(c)(4) organizations.
       Question 4. The Exempt Organizations 2011 Annual Report and 
     2012 Work Plan states that 501(c)(4) organizations ``can 
     declare themselves tax-exempt without seeking a determination 
     from the IRS. EO will review organizations to ensure that 
     they have classified themselves correctly and that they are 
     complying with applicable rules.''
       a. Why does the IRS allow 501(c)(4) organizations to self-
     declare?
       The Internal Revenue Code expressly provides that certain 
     tax-exempt organizations must give notice to the IRS, by 
     filing an application for exemption, in order to claim tax-
     exempt status. The Internal Revenue Code does not require an 
     organization to provide notice to the IRS to be treated as 
     described in section 501(c)(4). By contrast, for example, 
     Section 508 generally requires an organization to provide 
     notice to the IRS before it will be treated as described in 
     section 501(c)(3).
       b. When an organization ``self declares'' as a 501(c)(4) 
     organization, how does the IRS get notice and how long does 
     it take the IRS to conduct the review to ensure that the 
     organization has classified itself correctly?
       As with other tax exempt organizations, organizations 
     claiming to be tax-exempt under section 501(c)(4) generally 
     are required to file a Form 990 on an annual basis.
       The Exempt Organizations office of the IRS is responsible 
     for the compliance of over one million organizations with 
     diverse goals and purposes. In order to ensure the highest 
     degree of compliance with tax law while working with limited 
     resources, EO maintains a robust and multi-faceted post-
     filing compliance program that conducts reviews of exempt 
     organizations in various ways, such as:
       Review of Operations (ROO) reviews: Because a ROO review is 
     not an audit, the ROO carries out its post-filing compliance 
     work without contacting taxpayers. Instead, the ROO looks at 
     an organization's Form 990, website, and other publicly 
     available information to see what it is doing and whether it 
     continues to be organized and operated for tax-exempt 
     purposes. If it appears from a ROO review that an 
     organization may not be compliant, the organization is 
     referred for examination.
       Compliance checks: In a compliance check, IRS contacts 
     taxpayers by letter when we discover an apparent error on a 
     taxpayer's return or wish to obtain further information or 
     clarification. A compliance check is an efficient and 
     effective way to maintain a compliance presence without an 
     examination. We also use compliance check questionnaires to 
     study specific parts of the tax-exempt community or specific 
     cross-sector practices.
       Examinations: Examinations, also known as audits, are 
     authorized under Section 7602 of the Code. For exempt 
     organizations, an examination determines an organization's 
     continued qualification for tax-exempt status. We conduct two 
     different types of examinations: correspondence and field.
       Because the IRS cannot review every existing organization 
     in every tax year, we use the review techniques described 
     above to maximize our coverage of the tax exempt sector in 
     both our general program work and our project work. The 
     project work, which results from our strategic planning 
     process, is designed to focus on specific areas affecting the 
     EO sector and to direct more effective use of our resources 
     in the effort to strengthen compliance and improve tax 
     administration. Described in the EO 2012 Work Plan, the 
     sections 501(c)(4), (5) and (6) Self-Declarers is one such 
     project. This project focuses on organizations that hold 
     themselves out as being tax-exempt rather than seeking IRS 
     recognition of their exempt status.
       Question 5. The IRS Compliance Guide for Tax-Exempt 
     Organizations states:
       ``When a 501(c)(4), (5) or (6) organization's communication 
     explicitly advocates the election or defeat of an individual 
     to public office, the communication is considered political 
     campaign activity. A tax-exempt organization that makes 
     expenditures for political campaign activities shall be 
     subject to tax in an amount equal to its net investment 
     income for the year or the aggregate amount expended on 
     political campaign activities during the year, whichever is 
     less.''
       a. How does the IRS keep track of these explicit 
     communications and ensure that the organization pays this 
     tax?
       Tax-exempt organizations filing Forms 990 or 990-EZ are 
     required to report political activities. Organizations that 
     engage in direct or indirect political campaign activities 
     are also required to complete Schedule C of Form 990 or 990-
     EZ. Organizations subject to tax under section 527(f) are 
     required to comply with the statutory reporting and payment 
     rules. The IRS also receives referrals regarding such 
     activities from a variety of sources that are handled through 
     an impartial, independent review. See the response to 
     question 3 for the description on the IRS referral process.
       b. What is the reason for the requirement that the tax will 
     be based on ``whichever is less'' between its net investment 
     income for the year or the aggregate amount expended on 
     political campaign activities?
       The statute under section 527(f) explicitly states that a 
     501(c) organization is subject to its tax based on ``an 
     amount equal to the lesser of--(A) the net investment income 
     of such organization for the taxable year, or (B) the 
     aggregate amount expended during the taxable year for such an 
     exempt function.''
       c. What tax would an organization have to pay if it spends 
     all its income on political advertising (therefore it has NO 
     net investment income)?
       Under the statute cited above, an organization that 
     otherwise meets the requirements of section 501(c)(4) social 
     welfare tax-exempt status, which spends all its income on 
     political advertising and has no net investment income would 
     not owe any tax under section 527(f). It may however, through 
     such spending (and depending on the otherwise applicable 
     facts of the case), no longer qualify as an organization that 
     is tax-exempt under section 501(c)(4).
       Question 6. Ms. Lerner's letter quotes the IRS webpage on 
     Social Welfare Organizations:
       ``The promotion of social welfare does not include direct 
     or indirect participation or intervention in political 
     campaigns on behalf of or in opposition to any candidate for 
     public office. However, a section 501(c)(4) social welfare 
     organization may engage in some political activities, so long 
     as that is not its primary activity. However, any expenditure 
     it makes for political activities may be subject to tax under 
     section 527(f). [Emphasis added.]
       a. What is the statutory basis of the language that allows 
     501(c)(4) organizations to engage in some political 
     activities?
       Please see responses to questions 1 and 2, above.
       b. How does the IRS keep track of these political 
     activities and ensure that the organization pays the tax 
     under section 527(f)?
       Section 501(c)(4) organizations filing Forms 990 or 990-EZ 
     are required to report political activities. Organizations 
     that engage in direct or indirect political campaign 
     activities are also required to complete Schedule C of Form 
     990 or 990-EZ. Organizations subject to tax under section 
     527(f) are required to comply with the statutory reporting 
     and payment rules. The IRS also receives referrals regarding 
     such activities from a variety of sources that are handled 
     through an impartial, independent review. See the response to 
     question 3 for the description on the IRS referral process.
       Question 7. In her July 13 letter, Ms. Lerner states that 
     the IRS also addresses the issue of political activities in 
     the Forms 990 and 990-EZ.
       Are Forms 990 and 990-EZ made public? If so, where can they 
     be accessed?
       Yes, Forms 990 and 990-EZ are made public. Tax-exempt 
     organizations are required to make their returns widely 
     available for public inspection. Organizations are required 
     to allow the public to inspect the Forms 990, 990-EZ, 990-N, 
     and 990-PF they have filed with the IRS for their three most 
     recent tax years. Exempt organizations also are required to 
     provide copies of these information returns when requested, 
     or make them available on the Internet. The annual 
     information returns also are available from the IRS, as well 
     as from third-party sources that post them on their websites.
       Question 8. Internal Revenue Services Publication 557 
     states that, if a 501(c)(4) entity can ``submit proof that 
     [the] organization is organized exclusively to promote social 
     welfare, it can obtain an exemption even if it participates 
     legally in some political activity on behalf of or in 
     opposition to candidates for public office.''
       Have the following 501(c)(4) organizations a) applied for; 
     and if so, b) received the described exemption for political 
     activity from the IRS?
       a. Crossroads Grassroots Policy Strategies
       b. Priorities U.S.A.
       c. Americans Elect
       d. American Action Network
       e. Americans for Prosperity
       f. American Future Fund
       g. Americans for Tax Reform
       h. 60 Plus Association
       i. Patriot Majority USA

[[Page S6432]]

       j. Club for Growth
       k. Citizens for a Working America Inc.
       l. Susan B. Anthony List
       Initially, to clarify, section 501(c)(4) organizations do 
     not receive ``exemption for political activity.'' Rather, 
     organizations are recognized under section 501 (c)(4) as tax-
     exempt when they demonstrate that they plan to be primarily 
     engaged in activities that promote social welfare. If they 
     meet that standard, the fact that they engage in other 
     activities that do not promote social welfare, such as 
     political campaign intervention, will not preclude 
     recognition of their tax-exempt status. Whether an 
     organization meets the statutory and regulatory requirements 
     of section 501 (c)(4) depends upon all of the facts and 
     circumstances, and no one factor is determinative.
       As discussed in our response to you dated June 4, 2012, 
     section 6103 of the Internal Revenue Code prohibits the 
     disclosure of information about specific taxpayers unless the 
     disclosure is authorized by some provision in the Internal 
     Revenue Code. The IRS cannot legally disclose whether the 
     organizations on your list have applied for tax exemption 
     (unless and until such application is approved). Section 61 
     04(a) of the Code permits public disclosure of an application 
     for recognition of tax exempt status only after the 
     organization has been recognized as exempt.
       Searching the names exactly as provided, our records show 
     that the following organizations have been recognized by the 
     IRS as tax exempt under section 501(c)(4).

     Americans For Prosperity
     American Future Fund
     60 Plus Association
     Patriot Majority USA
     Citizens for a Working America Inc.

       With respect to the other organizations for which you 
     inquired, we will be able to determine if they have been 
     recognized by the IRS as tax-exempt with additional 
     information, such as an address or EIN, that specifically 
     identifies the organization. Organizations often have similar 
     names or maintain multiple chapters with variations of the 
     same name. With respect to many of the other organizations 
     you identified, numerous organizations in our records have 
     very similar names. IRS staff can work with your staff in 
     identifying the specific organizations for which you are 
     interested. IRS staff is also available to assist your staff 
     to navigate searchable databases on the IRS public website. 
     As previously discussed, information on organizations with 
     applications currently pending legally cannot be provided 
     unless and until the application is approved. Please note 
     that organizations that hold themselves out as tax-exempt 
     without IRS recognition and organizations that have pending 
     applications for recognition are required to file annual 
     returns/notices.
       Question 9. Have you reminded 501(c)(4)s which publicly 
     seem to be operating in the partisan political arena as to 
     the factors you will consider in determining whether they are 
     engaging in partisan political activity? If not, why not?
       As described in the July 13, 2012 response, the IRS takes 
     several steps to continually educate organizations of the 
     requirements under the tax law and inform them of their 
     responsibilities to avoid jeopardizing their tax-exempt 
     status. We believe these steps ensure the IRS administers the 
     nation's tax laws in a fair and impartial manner.
       I hope this information is helpful. If you have questions, 
     please contact me or have your staff contact Catherine Barre 
     at (202) 622-3720.
           Sincerely,

                                             Steven T. Miller,

                                           Deputy Commissioner for
     Services and Enforcement.
                                  ____

         U.S. Senate, Committee on Homeland Security and 
           Governmental Affairs,
                                  Washington, DC, August 31, 2012.
     Hon. Douglas H. Shulman,
     Commissioner, Internal Revenue Service,
     Washington, DC.
       Dear Commissioner Shulman: Thank you for the August 24, 
     2012 response by Steven T. Miller, Deputy Commissioner for 
     Services and Enforcement, to my July 27, 2012 letter.
       I find it unacceptable that the IRS appears to be passively 
     standing by while organizations that hold themselves out to 
     be ``social welfare'' organizations clearly ignore the tax 
     code with no apparent consequences.
       Frankly, the response that ``long standing Treasury 
     Regulations have interpreted `exclusively' '' as used in 
     section 501(c)(4) to mean ``primarily'' and the argument that 
     ``section 501(c)(4) does not contain a specific rule or 
     limitation on political campaign intervention by social 
     welfare organizations'' are not persuasive. The word 
     ``exclusively'' as written in the statute is clear and speaks 
     for itself. Its clarity is not diminished because the section 
     does not mimic words in another section, which words are also 
     clear.
       As a follow-up to your letter, I would like to know the 
     following:
       1. If the IRS determines that an organization that has been 
     given 501(c)(4) status has not engaged primarily in social 
     welfare activities, but instead was primarily engaged in 
     activity within the scope of section 527, what are the 
     consequences for the organization? What are the consequences 
     for such an organization having not filed timely Forms 8871 
     and 8872? Must they file such forms after the fact? What 
     taxes would be due? Will contributions that already have been 
     made to that organization be taxable to that organization?
       2. How many 501(c)(4) organizations which appear to be 
     primarily engaged in political activity have been notified by 
     the IRS within the last 6 months that they may be in 
     violation of the law?
       It is urgent that I receive your answers promptly, and no 
     later than September 10, please.
           Sincerely,

                                                   Carl Levin,

                               Chairman, Permanent Subcommittee on
     Investigations.
                                  ____

                                       Department of the Treasury,

                                     Internal Revenue Service,

                             Washington, D.C., September 14, 2012.
     Hon. Carl Levin,
     Chairman, Permanent Subcommittee on Investigations, U.S. 
         Senate, Washington, D.C.
       Dear Senator Levin: I am responding to your letter to 
     Commissioner Shulman dated August 31,2012, requesting 
     additional information about section 501(c)(4) organizations. 
     This response supplements the previous responses dated June 
     4, 2012, July 13, 2012 and August 24, 2012, and addresses the 
     additional questions raised in your recent letter.
       Question 1. If the IRS determines that an organization that 
     has been given 501(c)(4) status has not engaged primarily in 
     social welfare activities, but instead was primarily engaged 
     in activity within the scope of section 527, what are the 
     consequences for the organization? What are the consequences 
     for such an organization having not filed timely Forms 8871 
     and 8872? Must they file such forms after the fact? What 
     taxes will be due? Will contributions that already have been 
     made to that organization be taxable to that organization?
       If an IRS audit or examination concludes that a section 
     501(c)(4) organization does not engage primarily in social 
     welfare activities, the IRS may revoke the tax-exempt status 
     of that organization. If the tax-exempt status is revoked, 
     the organization is a taxable entity effective, in general, 
     as of the first day of the tax year under examination. The 
     organization is required to file Federal income tax returns, 
     generally a Form 1120, U.S. Corporation Income Tax. The tax 
     treatment of the organization's contributions and other 
     income is determined under normal rules of Subtitle A.
       Whether an organization no longer qualifies to be tax-
     exempt under section 501(c)(4) does not determine whether it 
     is a political organization under section 527. Section 
     527(e)(1) defines a political organization as a party, 
     committee, or other organization that is organized and 
     operated primarily for the purpose of directly or indirectly 
     accepting contributions or making expenditures for an exempt 
     function (as defined in 527(e)(2)). If an organization meets 
     this definition, then its tax status is determined under 
     section 527.
       Subject to certain exceptions, to be tax-exempt under 
     section 527, a political organization is required to give 
     notice electronically to the Service. The required notice 
     form is Form 8871, Political Organization Notice of Section 
     527 Status. To be tax-exempt, the political organization must 
     file Form 8871 within 24 hours after the date on which it was 
     established. If the organization has a material change in any 
     of the information reported on Form 8871, it must file an 
     amended Form 8871 within 30 days of the material change to 
     maintain its tax-exempt status. When the organization 
     terminates its existence, it must file a final Form 8871 
     within 30 days of termination.
       An organization that is required to file Form 8871, but 
     fails to file on a timely basis, will not be treated as a 
     tax-exempt political organization for any period before the 
     date Form 8871 is filed. The taxable income of the 
     organization for any period in which it failed to file Form 
     8871 (or, in the case of a material change, the period 
     beginning with the date of the material change and ending on 
     the date it satisfies the notice requirement) is subject to 
     tax and must be reported on the annual income tax return Form 
     112Q-POL. The tax is computed by multiplying the 
     organization's taxable income by the highest federal 
     corporate tax rate, currently 35 percent. For purposes of 
     computing its taxable income for any period, the organization 
     includes its exempt function income (including contributions 
     received, membership dues, and political fundraising 
     receipts), minus any deductions directly connected with the 
     production of that income, but may not deduct its exempt 
     function expenditures for the period.
       Generally, tax-exempt political organizations that have, or 
     expect to have. contributions or expenditures exceeding 
     $25,000 during a calendar year are required to file Form 
     8872, Political Organization Report of Contributions and 
     Expenditures, beginning with the first month or quarter 
     during the calendar year in which they accept contributions 
     or make expenditures. A tax-exempt political organization 
     subject to the periodic reporting requirement may choose to 
     file Form 8872 on a monthly basis or on a quarterly/
     semiannual basis, but it must file on the same basis for the 
     entire calendar year. In addition, tax-exempt political 
     organizations that make contributions or expenditures with 
     respect to an election for federal office as defined in 
     527(j)(6) may be required to file pre-election reports for 
     that election.
       A tax-exempt political organization that does not timely 
     file the required Form 8872, or that fails to include the 
     information required on the Form 8872. must pay an amount 
     calculated by multiplying the amount of contributions and 
     expenditures that are not disclosed by the highest federal 
     corporate tax rate, currently 35 percent.

[[Page S6433]]

       Question 2. How many 501(c)(4) organizations which appear 
     to be primarily engaged in political activity have been 
     notified by the IRS within the last 6 months that they may be 
     in violation of the law?
       When the IRS examines a section 501(c)(4) organization, the 
     objective of the audit is to determine whether that 
     organization qualifies for tax-exempt-status as a social 
     welfare organization. As discussed in our June 4, 2012 
     response to your March 30, 2012 letter, that determination 
     looks to whether the organization is primarily engaged in 
     activities that promote social welfare, not organized or 
     operated for profit, and the net earnings of which do not 
     inure to the benefit of any private shareholder or 
     individual. The examination looks at the activities engaged 
     in during the complete taxable year at issue. Although the 
     promotion of social welfare does not include direct or 
     indirect participation or intervention in political campaigns 
     on behalf of or in opposition to any candidate for public 
     office, a section 501(c)(4) social welfare organization can 
     engage in political activities as long as it is primarily 
     engaged in activities that promote social welfare.
       If the IRS believes that an organization does not meet the 
     requirements under section 501(c)(4), the IRS notifies the 
     organization of its intention to revoke the organization's 
     exempt status, explaining the law and reasons for the 
     proposed revocation. The organization has 30 days from the 
     date of that letter to protest or appeal the determination 
     before a final revocation letter is issued to the 
     organization.
       During the past six months, no notices of proposed or final 
     revocation were issued to section 501(c)(4) organizations. 
     Note that the IRS currently has more than 70 ongoing 
     examinations of section 501(c)(4) organizations (this 
     includes examinations for a variety of issues, some of which 
     include whether the organization is primarily engaged in 
     activities that promote social welfare). It is also important 
     to note that the Service also maintains a determination 
     process to review the operations of an organization to 
     determine whether it should be recognized as tax exempt. In 
     this area, we also review compliance with the legal 
     requirements, including whether an organization is primary 
     engaged in activities that promote social welfare. There are 
     currently more than 1,600 organizations in the determination 
     process seeking recognition as a section 501(c)(4) 
     organization. The level of political activity is an issue in 
     a number of these determination cases.
       I hope this information is helpful. If you have questions, 
     please contact me or have your staff contact Catherine Barre.
           Sincerely,

                                             Steven T. Miller,

                              Deputy Commissioner for Services and
     Enforcement.

                          ____________________
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