Tuesday, July 1, 2008
In 2004, the IRS launched its Political Activity Compliance Initiative or PACI targeting alleged political activity by section 501(c)(3) nonprofit organizations. As detailed on the IRS website, such organizations are prohibited by federal tax law from engaging in any activities that support or oppose a candidate for elected public office. While the IRS is not allowed to release information about specific audits, it did report the overall results of its efforts both in 2004 and in 2006. In each year the program resulted in approximately 100 examinations, with approximately two-thirds of those examinations resulting in the IRS determining that a violation had occurred. Most violations were, however, apparently minor and/or inadvertent, based on the fact that the IRS only issued warning letters in the vast majority of cases.
Apparently because PACI is now a regular IRS program and is ongoing for the current election year, the IRS Commissioner asked the Treasury Inspector General for Tax Administration (TIGTA) to review it. In its just-released June 18, 2008 audit report (no. 2008-10-117), available on TIGTA's FY2008 audit report website, TIGTA reviewed its findings and recommendations, as well as the IRS' planned responses. One of the most significant of these was TIGTA's conclusion that the IRS did not always meet its own timetables for reviewing referrals, which led to delays in contacting offending nonprofits. TIGTA specifically urged that such contacts occur before the election at issue, so as to prevent continuing violations, although it is unclear that the IRS has the authority to begin an audit before an organization has filed its return for a given tax year in the absence of "flagrant" political activity (see Code sections 6852 and 7409, which provide special authority to assess tax and seek an injunction before the filing of the return for a year in the case of such activity). The IRS in response agreed to start its 2008 effort earlier in the election cycle and train an additional 30 agents to be part of the program. This response raises the issue of whether the IRS will be forced to ignore or at least delay actions in other areas, since overall IRS Exempt Organization Division staffing continues to remain flat. To address TIGTA's concerns about creating a consistent understanding of what activities are prohibited, the IRS also promised to ensure that all employees involved in PACI receive the same training and also receive feedback regarding why particular referrals are not selected for examination.
The IRS' planned responses to this report indicates that 2008 will be at least as active a season for enforcement of the political activity prohibition as were 2004 and 2006. It will therefore be an interesting year for political active exempt organizations for more reasons than just the presidential campaign.