The Internal Revenue Service ( IRS ) said it is dropping an inquiry involving five U.S. taxpayers who made gifts to a type of nonprofit group used in recent elections to underwrite advertising and other political expenses.
The IRS, which said today it was ending the probe, had sought to determine if the five taxpayers owed gift taxes for donations to nonprofit groups organized under section 501(c)(4) of the U.S. tax code. The IRS didn’t identify the donors.
News reports of the inquiry led to criticism of the agency, especially from Republican lawmakers, who said the scrutiny could chill political speech.
The IRS has asserted the authority to collect gift taxes from the groups. There is little evidence it has collected the taxes over the past 30 years.
IRS spokesman Frank Keith said in a telephone interview that investigations were opened by employees of the IRS gift tax division who thought there were clear gift tax violations.
After consulting with “upper management and the counsel’s office, they realized that it was not that clear-cut,” Keith said. “There are compelling arguments on both sides of the argument.”
The nonprofit groups receiving the gifts are known as social welfare organizations. They are allowed to participate in political activity as long as that activity is not their primary purpose.
No Contribution Limits
Social welfare groups are attractive vehicles for political giving because they aren’t subject to contribution limits or required to disclose the identity of donors.
Both parties benefit from the work of such organizations. In the 2010 election cycle, groups backing Republican causes and candidates outspent groups that supported Democratic candidates by a 7-to-1 ratio. At least one of the donations under scrutiny was made in 2008, not 2010.
The agency’s action today did not go far enough, said House Ways and Means committee chairman Dave Camp, who was among at least seven lawmakers who complained about the inquiry to the IRS after it became public in May. Six Republican members of the Senate Finance Committee questioned the IRS action separately.
Camp, a Michigan Republican, said in a statement today that he remains “troubled that the IRS has failed to explain what prompted these audits in the first place.”
“Furthermore, the IRS has failed to clarify that the gift tax will not apply to future political donations,” said Camp, who said he would continue his investigation into why the IRS launched its inquiry.
Senator Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, said the IRS announcement leaves questions unanswered.
“Retroactive enforcement of the gift tax in this highly politicized environment raises legitimate concerns and demands further explanation,” Hatch said in a statement.
The IRS has maintained that politics played no role in the decision to scrutinize the gift tax donors.
“All of the decisions in this matter were made by career civil servants without regard to any outside influence,” Keith said.
In a brief statement on its website, the IRS said any future action would come only after it has given public notice.
The IRS also posted a memo from Steven T. Miller, deputy commissioner for services and enforcement, outlining the agency’s reasoning for ending the probe.
“This is a difficult area with significant legal, administrative and policy implications with respect to which we have little enforcement history,” the memo said.
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