IRS Investigation – Illegal Political Activity

The Internal Revenue released a report on February 24, 2006 summarizing its 2004 Political Activity Compliance Initiative ("PACI") project which focused on the political activity by charitable tax-exempt organizations during the 2004 election cycle.  The press release issued in connection with the Report stated that "[n]early three-quarters of 82 examinations completed to date have concluded that the tax-exempt organizations, including churches, engaged in some level of prohibited political activity."  In three cases, the prohibited activity was egregious enough to warrant the proposed revocation of the organizations’ exempt status.

The stated objective of the PACI project was to promote compliance with the IRC Section 501(c)(3) prohibition against political campaign intervention by reviewing and addressing allegations of political intervention.  The Report identifies the following challenges for the IRS presented by the issue of of political campaign intervention by 501(c)(3) organizations:

  • The activities that give rise to questions of political campaign intervention also raise legitimate concerns regarding freedom of speech and religious expression.
  • The Code contains no bright line test for evaluating political intervention; it requires careful balancing of all of the facts and circumstances.
  • The questionable activities are public and occur within the compressed period of time of the election cycle.  Keeping in mind that there are over one million 501(c)(3) organizations, media reports on the activities of a small representation of those organizations can, rightly or wrongly, create an impression of widespread noncompliance.
  • The activities that must be evaluated for potential campaign intervention can be difficult to document, because they often involve events and statements that may not be recorded or otherwise captured.
  • If the IRS determines prohibited political intervention has occurred, (i) the existing sanctions are limited to assessing penalties based on the amount spent on the intervention, which is often de minimis, or revocation, which may not be in the public interest; and (ii) the disclosure restrictions of IRC Section 6103 limit IRS’s ability to discuss its enforcement actions.

In its concluding paragraph, the Report states:

"The PACI team strongly recommends that, in future election cycles, the IRS increase its use of revocation in cases that warrant this sanction.  With the significant PACI publicity and the IRS 2006 educational efforts, organizations should clearly have an understanding of the rules and the message that the IRS is serious about enforcing the prohibition."

Click here for the Report.

Click here for the IRS Fact Sheet:  Election Year Activities and the Prohibition on Political Campaign Intervention for Section 501(c)(3) Organizations released on February 17, 2006.  Among the guidance provided by the Fact Sheet:

  • All 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.  Violations of this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.
  • Political campaign intervention includes any and all activities that favor or oppose one or more candidates for public office.  The prohibition extends beyond candidate endorsements.  Among the prohibited activities:  contributions to political campaign funds; public position statements made by or on behalf of an organization in favor of or in opposition to a candidate for public office; distributing statements (including by posting on its website) prepared by others that favor or oppose any candidate for public office; and favoring one candidate over others with respect to allowing such candidate to use the organization’s assets or facilities.  While 501(c)(3) organizations may engage in some activities to promote voter registration, encourage voter participation, and provide voter education, they will violate the prohibition on political campaign intervention if they engage in an activity that favors or opposes any candidate for public office.
  • The political campaign intervention prohibition is not intended to restrict free expression on political matters by leaders of organizations speaking for themselves, as individuals.  Nor are leaders prohibited from speaking about important issues of public policy.  However, leaders cannot make partisan comments in official organization publications or at official functions of the organization.
  • 501(c)(3) organizations may take positions on public policy issues, including issues that divide candidates in an election for public office.  However, they must avoid any issue advocacy that functions as political campaign intervention.  Even if a statement does not expressly tell an audience to vote for or against a specific candidate, an organization delivering the statement is at risk of violating the political campaign prohibition if there is any message favoring or opposing a candidate.  Key factors in determining whether a communication results in political campaign intervention include the following:
    • Whether the statement identifies one or more candidates for a given public office;
    • Whether the statement expresses approval or disapproval for one or more candidates’ positions and/or actions;
    • Whether the statement is delivered close in time to the election;
    • Whether the statement makes reference to voting or an election;
    • Whether the issue addressed in the communication has been raised as an issue distinguishing candidates for a given office;
    • Whether the communication is part of an ongoing series of communications by the organization on the same issue that are made independent of the timing of any election; and
    • Whether the timing of the communication and identification of the candidate are related to a non-electoral event such as a scheduled vote on specific legislation by an officeholder who also happens to be a candidate for public office.