IRS Drops Investigations of Big Donors to Advocacy Groups

In a surprise about-face, the Internal Revenue Service announced today that it has dropped any consideration of enforcing gift taxes on donations made to nonprofit advocacy groups.

Several big donors to advocacy groups had reported this spring that they had received questions from the IRS about whether they should have paid gift taxes, a move some Republican lawmakers speculated could have been the result of Obama administration pressure. Many advocacy groups, classified under Section 501(c)(4) of the tax code, spent heavily on political ads in the 2010 election cycle.

Steven T. Miller, a deputy commissioner of the IRS, said in a statement that because so many questions had been raised about the application of the gift tax, the agency would no longer spend time or money pursing its enforcement.

An IRS statement on the announcement added that it’s possible Congress would consider legislation to clarify the taxes that apply to donors to advocacy groups.

Donors can’t give charitable contributions to such groups because they engage in efforts to influence voters, but the IRS had said a rarely enforced law meant that donors probably should pay gift taxes for their support of such groups. (Gift taxes apply to money exchanges of $13,000 or more.)

The IRS took pains to make clear that Obama officials had not suggested the gift tax audits. In May an IRS spokeswoman, Michelle Eldridge, noted that investigations of donors to advocacy groups were all started “by career civil servants without any influence from anyone outside the IRS.”

While some lawmakers, including House Ways and Means Chairman Dave Camp, Republican from Michigan, and Senate Finance Committee Ranking Member Orrin Hatch, Republican from Utah, were happy to hear the news, they questioned why the action had been considered at all.

Rep. Camp and Sen. Hatch and several other Republican lawmakers had sent letters to the IRS questioning the impetus for the IRS investigation.

Greg Colvin,  a lawyer for nonprofits who said that one of his clients had received an audit letter, applauded the IRS move.

“They did exactly the right thing,” Mr. Colvin said. “This has been neglected for 30 years and it would not have been fair to subject five or 50 or any number of contributions to 501(c)4s to a gift tax.”

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