IRS Probe Sheds Light on Nonprofit Election-Year Surge

IRS Probe Sheds Light on Nonprofit Election-Year Activity Boost
Representative Dave Camp, chairman of the House Ways and Means Committee, left, questions Steven Miller, who was forced out as acting commissioner of the Internal Revenue Service (IRS), bottom center, during a committee hearing with Representative Sander Levin, a Democrat from Michigan, in Washington, D.C., on May 17, 2013. Photographer: Andrew Harrer/Bloomberg

Patriot Majority USA, a social welfare nonprofit, told the Internal Revenue Service that its mission is “to encourage a discussion of economic issues.” In exchange for keeping its donors private and paying fewer taxes, it must limit its involvement in politics.

Yet last year Patriot Majority, run by Democratic operative Craig Varoga in Washington, spent at least $7.5 million on TV ads attacking Republican candidates on issues such as women’s health screenings and equal pay. With the Nov. 6 election over, the nonprofit shows signs of going dormant with e-mails bouncing back unopened and phone calls unanswered.

Patriot Majority’s practices offer a glimpse of what may catch the eye of those monitoring a vast gray area in the U.S. tax code that applies to charities and social welfare groups.

Examples abound across the political spectrum: American Future Fund, founded by Republican strategists, sees its budget swell by a factor of 10 in election years, a phenomenon that Fred Wertheimer, president of the Washington-based campaign-finance advocacy group Democracy 21, said “raises serious questions” about whether the group is a political entity masquerading as a nonprofit.

Today, the U.S. House Ways and Means committee will hold what is to be the first in a series of hearings probing the IRS’s recent admission that it targeted Republican-leaning nonprofit applicants for extra scrutiny.

Gaming the System

Campaign-finance watchdogs want the session to include a fuller discussion of how some Democratic and Republican nonprofits can game a system intended to encourage citizens to engage in charitable endeavors and support projects or programs that broadly benefit communities.

“I am sure you will agree that no organization, regardless of its political leanings, should be able to misuse one tax-exempt status to circumvent the donor disclosure requirements,” Representative Christopher Van Hollen, a Maryland Democrat, wrote in a letter yesterday to the Ways and Means committee.

David Vance, a spokesman for the Campaign Legal Center, a Washington group pushing for more political money disclosure, called it “absurd” that even the IRS doesn’t understand how to interpret whether social welfare organizations are “primarily” political in nature -- a determination President Barack Obama yesterday also called on Congress to help define.

A nonprofit status includes two benefits not available to organizations that register as political committees: They are able to keep their donors secret and pay fewer taxes. As a tradeoff, political campaigning must not be a “primary” activity.

Interpreting Regulations

Campaign finance attorneys, operating without clear regulations, have taken that to mean no more than half of expenditures can be related to politicking. Confounding the issue further is the murky definition of what amounts to “politics.”

An ad promoting clean-coal policy, for instance, is often defined as an “issue ad.” For some interpreters of the law, it crosses the line to become a campaign ad when a candidate’s name is inserted with advice on how to vote, although there isn’t universal agreement on that.

There are more than 1.5 million tax-exempt organizations on record with the IRS, according to databases provided to Bloomberg News. The Center for Responsive Politics, a Washington-based political spending watchdog, documented 180 of them that together spent about $308 million on political activities for the 2012 election that had to be disclosed to the Federal Election Commission. Republican-leaning entities accounted for 85 percent of that, according to the center.

Application Surge

The number of groups applying for IRS approval under the social welfare section of the tax code, 501(c)(4), almost doubled to 3,357 last year from 1,735 in 2010, according to an Inspector General’s report released this week.

The investigation concluded the IRS had improperly used key words such as “Tea Party” and “patriots” to designate nonprofit hopefuls for extra attention.

In all, 298 applicants were tagged by the IRS for deeper review, of which the Tea Party groups represented only about a third, the report said. The others were captured through more general search words and measures.

The mistake by the IRS was that, in searching Tea Party and Patriot organizations by name, employees tagged almost all of them, a standard not applied to any other group, according to the inspector general’s report. So far, no Tea Party group has said it was denied nonprofit status, and many have been approved for it.

Anti-Republican Patriots

The nonprofit Patriot Majority contains one of those key words, although isn’t Republican-friendly.

The group has existed in different -- and sometimes simultaneous forms -- since 2005. Varoga boasts in his online biography that he helped re-elect Senate Majority Leader Harry Reid of Nevada in 2010 by advertising through Patriot Majority. Varoga didn’t return calls or e-mails yesterday or May 15.

Patriot Majority’s nonprofit has a companion super-political action committee, called Patriot Majority PAC. That super-PAC, which reports its donors and all political activity to the FEC, raised about $400,000 for the 2012 election, almost exclusively from labor groups.

The super-PAC’s nonprofit sister organization made a political investment that was almost 19 times greater than that, which meant most of the money contributed to the two Patriot Majority entities went through the one that kept the donors’ names secret.

Attack Ads

Patriot Majority ran ads attacking Senator Dean Heller, a Nevada Republican, on his “ties to Big Oil,” his voting record on equal pay for women and his position on whether health screenings should be covered by insurance. Heller won.

How much of a budget the nonprofit had last year remains to be seen; its tax forms aren’t due until November. In 2011, the group raised $2.9 million, and the year before -- Reid’s re-election year -- it raised $5.2 million, tax documents show.

Apart from the $7.5 million in TV ads and election materials Patriot Majority reported to the FEC last year, the secret-donor nonprofit disclosed just one other expenditure: a $500,000 TV and online ad campaign in August that blasted the “billionaire oil tycoons” Charles and David Koch for using their own nonprofits “to buy this year’s election and advance their agenda.”

Varoga, in an interview Aug. 22 with Bloomberg News, declined to name his nonprofit’s donors or detail its budget. “We didn’t make the rules, we just play by them,” he said.

American Future Fund

One of last year’s other nonprofit political spenders was the American Future Fund, based in Des Moines. Iowa State Senator Sandy Greiner, a Republican, is its board president.

The group mentions “education” and “public” numerous times in its tax forms, language that backs up its label as a social welfare nonprofit organization. Its pitch to the IRS: “Promote conservative free-market principles.”

Last year, the nonprofit reported to the FEC spending $25.4 million on campaigns. Its biggest assist went to Republican presidential challenger Mitt Romney through ads that played his speeches and warned against four more Obama years.

It hasn’t filed 2012 tax forms, so the proportion of its budget that was devoted to politics has yet to be seen.

In 2011, the nonprofit scraped by on a fraction of its 2012 haul. It raised $2.6 million and spent itself into the red, its tax documents show. The year before, for the midterm elections that toppled the House Democratic majority, the nonprofit raised $23.3 million, according to the tax forms. Revenue in 2009 didn’t crack $1.5 million.

The group didn’t return calls, e-mails or social-media messages yesterday.

Democracy 21 and Campaign Legal Center have urged IRS to probe the legitimacy of politically active nonprofits, including Crossroads GPS, a group that supported Romney, and Priorities USA, a nonprofit that worked with a similarly named super-PAC to help Obama’s re-election effort.

“There are two major issues with the IRS, the targeting of conservative groups, which should have never been done, and the proliferation of groups that have given every indication they are anything but social welfare groups,” Wertheimer said.

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