Thursday, July 25, 2013

House May Investigate Auditing of Section 501(c)(3) Groups

The Washington Times reports that House Republicans are considering “a major expansion of their investigation into the Internal Revenue Service’s targeting of conservatives” by looking into the government’s audits of nonprofits.  Some leaders of organizations exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (i.e., charities) reportedly find the audits “fishy” because of the IRS’s basically contemporaneous special scrutiny of tea party groups seeking recognition of exemption under section 501(c)(4). The story says that charities audited for the first time during this period include the Billy Graham Evangelistic Association (the "BGEA"), the Clare Boothe Luce Policy Institute and the Family Research Council.

Readers, kindly indulge me as I express an earnest plea for maintaining a nonpartisan, legally informed perspective in this matter.  And, if it makes any difference, please understand that this perspective comes from someone who personally has long admired the leadership of the BGEA for their moral integrity and historic commitment to proclaiming the Gospel.

It is entirely appropriate for the IRS to audit a section 501(c)(3) entity to determine whether it is operating within the constraints imposed by Code section 501(c)(3).  In general terms, these constraints include a prohibition against political campaign intervention (such as publicly endorsing identified candidates for public office) and limitations on lobbying.  We can debate whether the law should be relaxed – and I have argued elsewhere that it should (somewhat).  But the IRS is charged with enforcing current law.  If the IRS discovers that a charity has engaged in public discourse of proposed laws or canddiates – and the Washington Times reports that BGEA did so in an election year – it is hardly unreasonable for the government to audit the organization to establish whether its activities complied with the law. Indeed, it is not uncommon for watchdog groups to alert the IRS when they have evidence that an entity may have crossed the line.  Further, because there are other requirements for tax exemption under Code section 501(c)(3) (e.g., the prohibition against private inurement), an audit should probe the organization’s compensation policies, other transactions with insiders, and other aspects of its internal affairs.  Naturally, the audit will feel intrusive.  It is.  It must be intrusive to be effective.  It will also be time-consuming.

I have no idea whether groups identified in the story were selected for audit for the wrong reasons.  Nor am I arguing that looking into the matter further is pointless.  But news that a handful of religious or politically conservative section 501(c)(3) organizations have been audited, particularly when they have made public statements about proposed laws or candidates in an election year, seems quite a bit different from allegations that section 501(c)(4) applications were systematically processed according to buzzwords that distinguished tea party groups from others. 

Section 501(c)(3)s and section 501(c)(4)s are subject to very different constraints on political activity.  I urge caution before greatly expanding the investigation and devoting more public resources to it if it appears that the section 501(c)(3) organizations in question were visibly active participants in the political process during an election year. 

Hat tip: TaxProf Blog

JRB

http://lawprofessors.typepad.com/nonprofit/2013/07/house-may-investigate-auditing-of-section-501c3-groups.html

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