POLITICS - IRS and Dark Money Rules Update

Bet part of the reason for the delay is Republicans, they love dark money.

"IRS Delays New Rules for Dark Money Groups" by Theodoric Meyer, ProPublica 5/23/2012

After intense criticism from both ends of the political spectrum, the Internal Revenue Service has delayed indefinitely proposed rules that would have imposed new limits on social welfare nonprofits, which have pumped hundreds of millions of dollars from anonymous donors into recent elections.

The agency said yesterday it would postpone a hearing on the proposal it released in November defining more clearly what constitutes political activity for such groups, and would revise the plan to reflect some of the more than 150,000 comments it triggered.

Officials put no timeline on the process, disappointing those who had hoped the new regulations might kick in before this year's mid-term elections.

"I think it's unfortunate that new rules will be delayed even further and that we're going through another election cycle" without them, said Paul S. Ryan, senior counsel with the Campaign Legal Center.

Others called the delay a prudent step that would give the IRS an opportunity to get a crucial change right.

"They're not going to put out some slapdash rule just to check it off their list," said John Pomeranz, a Washington lawyer who works with nonprofits that spend money on politics.  He doesn’t expect the agency to finish the rules any time soon.  “I think we’ll be lucky if they’re in place for the 2016 election.”

Social welfare nonprofits have poured money into politics since the Supreme Court's Citizens United decision in 2010, which allowed corporations, unions and nonprofits to spend unlimited money on elections.

Social welfare nonprofits spent more than $256 million in the 2012 cycle alone, according to the Center for Responsive Politics.  Campaign finance watchdogs have viewed their rise with concern, fearing the influence of so-called "dark" money from secret donors, and had called for more oversight from the IRS.

Under IRS regulations, the groups can spend some of their resources on politics, but must devote themselves mostly to social welfare to keep their nonprofit status.  But the rules defining what is and isn't politics are murky.

Late last year, the IRS moved to clarify the issue, but its proposal came under fire from both the left and the right.

Conservatives complained that the rules would stifle political speech.  The American Civil Liberties Union chafed at a provision in the proposed rules that would prevent nonprofits from backing ads that even mentioned politicians in the two months before a general election.

"We have no doubt that the Service is acting with the best of intentions, but the proposed rule threatens to discourage or sterilize an enormous amount of political discourse in America," the ACLU said in its written response to the proposal.

The plan was also criticized for impeding nonpartisan election work such as voter registration drives and get-out-the-vote efforts.

The IRS, still facing fallout from accusations that it singled out the applications of conservative nonprofits for special scrutiny in the run-up to the 2012 election, decided it would make revisions.

"Given the diversity of views expressed and the volume of substantive input, we have concluded that it would be more efficient and useful to hold a public hearing after we publish the revised proposed regulation," the agency said in statement.

POLITICS - Dark Money 'Flips the Bird' to IRS Rules

"What Happens When a Dark Money Group Blows Off IRS Rules?  Nothing." by Kim Barker and Theodoric Meyer, ProPublica 4/25/2014

The Government Integrity Fund spent most of its money on election ads, despite IRS rules prohibiting a social welfare nonprofit from doing so.

To see how easy it is for a dark money group to ignore the Internal Revenue Service, look no further than the loftily named Government Integrity Fund.

The Fund, an Ohio nonprofit, spent more than $1 million in 2012 on TV ads attacking Ohio Sen. Sherrod Brown and praising his Republican opponent, Josh Mandel.  Now the Fund's tax return, which ProPublica obtained from the IRS this week, indicates that the group spent most of its money on politics — even though IRS rules say nonprofits like the Fund aren't allowed to do that.

The Government Integrity Fund was founded in May 2011 and applied later that year for IRS recognition of its tax-exempt status, swearing under penalty of perjury that it would not engage in politics but would instead "promote the social welfare of the citizens of Ohio."  Within two months, the IRS had recognized the group.

It then devoted much of its resources to backing Mandel's unsuccessful bid to unseat Brown.  As previously detailed by ProPublica, the Fund was linked to a former top Mandel staffer.

The Fund's return highlights the ways such nonprofits, known as dark money groups because they are not required to disclose their donors, can skirt IRS rules designed to limit their political activities.  Such groups are playing an increasingly prominent role in elections, spending more than $256 million on election activity in 2012.

Dark money groups can spend money on politics as long as they can persuade the IRS that their primary purpose is social welfare.  This can lead to quite creative accounting on tax forms, with groups describing ads that should qualify as political under IRS rules as "education" or "issue advocacy."

On the Government Integrity Fund's latest tax return — for 2012 — the group told the IRS it spent $5.2 million overall.  Of that, $2 million went to two super PACs — mostly the Fund's sister super PAC, the Government Integrity Fund Action Network — which then used the money to pay for different ads than the ones the Fund bought.  According to the filing, this $2 million made up all of the Fund's political spending in 2012.

But that didn't include an additional $1.08 million the Government Integrity Fund spent on TV ads praising Mandel and attacking Brown in the spring and summer of 2012, which ProPublica reported on in September 2012.  (The spending was tallied by Brown consultants.  The lawyer listed on the Fund's incorporation papers confirmed that the group spent more than $1 million on the ads.)

If the Fund had categorized the additional money it spent on the ads as political, almost 60 percent of its expenditures would have gone toward elections — which would seem to violate IRS rules that say a social welfare nonprofit's primary purpose can't be politics.

"Josh Mandel served our country with two tours in Iraq," one ad said.  "Now he's fighting for taxpayers, fighting for our future."  Another slammed Brown, contrasting his performance in 2012 with that of his younger self.  "Young Sherrod Brown voted more for Ohio," it said.  "Today's Sherrod Brown — he just votes the party line.  Where did the young Sherrod go?"

The ads stopped short of telling people how to vote, but three nonprofit experts who reviewed them for ProPublica said they all qualified as election ads under IRS rules.

"There's no question," said Brian Galle, a Boston College associate professor of law who has written about political activity by nonprofits.  "It's not even close.  They're blatantly political advertisements."

The Fund now appears to be inactive.  Its website is no longer operating.  The Fund's president, Thomas Norris, who signed its tax return, did not respond to requests for comment.

"I think they existed solely to help Josh Mandel," said Justin Barasky, the Brown campaign's communications director, this week.

Unraveling what the Government Integrity Fund spent in 2012 wasn't possible until recently because the group didn't file its tax return until January of this year, when it was two months overdue.  The long wait highlights one of the major problems with regulating dark money groups and their spending:  The IRS typically doesn't look at these groups until a tax return is filed, often more than a year after an election has been decided.

Even with the return in hand, several aspects of its operations remain confusing.

In one spot, the group says $4.6 million of its $5.2 million in expenditures were made as grants "and similar amounts paid."  But it doesn't identify which groups received the grants, as the IRS requires, or what the "similar amounts paid" might have gone toward.  At the end of the form, the group says only $1.1 million went toward grants — again, without saying who received the grants — with the rest of the $4.6 million going to its sister super PAC and what it classifies as "public education."

The group offers no details on what the $1.5 million attributed to education included — mathematically, though, it would have to include the ads it bought related to the Brown-Mandel race.

Experts scoffed at the idea that the ads qualified as education.

"There's no way you can claim these are education.  If this is public education, then everything is public education," said Donald Tobin, a law professor at Ohio State University who specializes in the intersection of tax and campaign finance law.  "These are clearly designed to be political ads to benefit or oppose a candidate.  And that's not social welfare activity."

The Fund attributes its remaining expenses mainly to fundraising fees paid to three companies.  No records could be found for two of the three companies.  And, according to the return, none of them raised any money for the group.

The nonprofit is not alone in how it categorizes its ad spending, as detailed in past ProPublica stories.  For example, one group, the Coalition for American Values Action, told the IRS it spent $508,491 in 2012, almost all of it for the " creation of videos to educate Americans on various issues that affect their lives," and said it spent nothing on politics.  Yet it actually donated more than three-quarters of its money to a political action committee that bought election ads.

It's an open question how vigorously the IRS, which doesn't comment on individual taxpayers like the Fund, will pursue groups for irregularities.  The agency has revoked the nonprofit status of only one social welfare nonprofit, a liberal group, and its affiliates since the Supreme Court's Citizens United decision in 2010 paved the way for dark money groups to pour hundreds of millions of dollars into outside election ads.

Experts on nonprofits say the IRS has taken an even more hands-off approach since top officials admitted the agency had targeted applications from conservative groups for extra scrutiny, sparking a scandal and investigations.

The IRS has proposed new regulations to curtail political spending by social welfare nonprofits, but the agency has acknowledged that there's virtually no chance the regulations will be in place by this year's midterm election.

"This kind of nonsense just shows that the IRS should remain committed to a meaningful set of reforms, even if they can't get them done in time for this election cycle," said Galle, the law professor.

POLITICS - In the Dark

"What Newly Released Docs Tell Us About the IRS and How It Handles Dark Money Groups" by Kim Barker and Theodoric Meyer, ProPublica 4/9/2014

A GOP-led House committee voted Wednesday to seek criminal charges against former IRS official Lois Lerner, who used to run the IRS division in charge of tax-exempt groups.  In a party-line vote, the committee accused Lerner of unfairly targeting the applications of conservative groups and misleading the Treasury inspector general, which was auditing the IRS based on allegations of bias against conservative groups.

Though the committee referred Lerner to the Justice Department for prosecution, it will likely have little practical effect, as the Justice Department is already investigating the Internal Revenue Service and Lerner.  But the documents released by the committee do shed some light on the inner workings of the IRS's Exempt Organizations division and how it approached applications of social welfare nonprofits, also known as dark money groups because they spend money on elections without reporting their donors.  The influence of such groups has skyrocketed since the Supreme Court's 2010 Citizens United decision.

Here are the top five takeaways ProPublica found from the documents:

• The IRS planned to deny the application of Crossroads GPS.

Crossroads GPS spent more than $90 million from unknown donors to elect conservatives in the 2010 and 2012 elections, far more than any other dark money group.  By the beginning of 2013, the IRS was planning to deny the group's application, the documents show.

After applying to the IRS in September 2010, Crossroads started spending, and campaign-finance watchdogs started complaining.  An IRS panel considered taking a deeper look at Crossroads twice — in November 2010 and June 2011 — but rejected the idea both times.  One reviewer in November 2010 said that Crossroads was a "for-profit entity," a mistake Lerner later wrote that she found "most disturbing."

By June 2012, the IRS created a spreadsheet on Crossroads to analyze the group's TV ad costs and track whether the ads were political or issue advocacy.  A description of the group's website in an IRS spreadsheet said it "appears to be an anti-Obama Administration website; however there are educational materials on site."

In late 2012, Crossroads' application was released to ProPublica in response to a public-records request — even though it wasn't supposed to be made public.  The application showed that Crossroads told the IRS that its political spending "will be limited in amount."

The IRS received 25 referrals on Crossroads GPS between 2010 and 2012, the documents show — a referral is a complaint about a nonprofit, and can include a formal request for investigation or simply a news article.

On Jan. 2, 2013, an IRS spokeswoman, Michelle Eldridge, emailed Lerner and other IRS officials about questions from ProPublica over Crossroads' application.  "I recommend that we just let this one sit and wait out the deadline," she wrote.

In an email two days later, Lerner wrote that she had read through allegations from campaign finance watchdogs about Crossroads, adding that they "were really damning."

By Jan. 9, 2013, the IRS was drafting a denial letter to Crossroads, the documents show.  There was no more significant action until May 2, 2013, when a call was made to discuss the "draft denial letter."

Then on May 8, 2013, documents indicate that the IRS was also looking at "the draft denial of a similar case."

From May 13 until May 17, 2013, the IRS continued "working on draft of letter."  By May 30, 2013, the first working draft of the denial was finished and sent for review.

But by that point, the IRS had come under scrutiny for revelations that it had targeted Tea Party groups for extra review.  There's no proof that the letter to Crossroads was ever sent.

In an emailed statement Wednesday, Crossroads GPS President Steven Law said the group was still waiting to hear final action from the IRS on its application.  Like the House Ways and Means Committee, Law accused Lerner of improperly singling out Crossroads for extra review.

"Crossroads GPS submitted its application to the IRS for formal recognition of its non-profit status when the group was formed in 2010," Law said.  "It is now apparent that Ms. Lerner was directly and improperly involved in targeting our application, which may explain why we are still awaiting final action."

Meanwhile, Lerner's lawyer, William Taylor, said that Lerner had done nothing wrong.  "She did not interfere with the rights of any organization to a tax exemption," he said in a statement.

• The IRS also planned to deny the applications of other conservative groups that had spent on elections after telling the IRS they wouldn't do so.

Crossroads GPS wasn't the only dark money group facing denial before the IRS controversy blew up.

In response to a public-records request in late 2012, the IRS had also sent ProPublica the pending applications for five other conservative social welfare nonprofits that had told the IRS that they wouldn't spend money on politics but then did so.  The groups were Americans for Responsible Leadership, Freedom Path, Rightchange.com II, America Is Not Stupid and A Better America Now.

ProPublica wrote about the groups on Jan. 2, 2013. Nikole Flax, the chief of staff to the acting IRS commissioner at the time, forwarded the story to Lerner and two other IRS officials on the afternoon it was published in an email with the subject line, "latest article."

The same day, Lerner asked to set up a meeting to talk about the groups' applications.

The Ways and Means Committee found that four of the five groups had been subjected to heightened scrutiny, and three were audited, though it's not clear which ones.  The IRS recognized both America Is Not Stupid and A Better America Now last year.  Americans for Responsible Leadership was also recognized in October 2013 — despite spending almost $10 million on elections in 2012 and paying a record-breaking fine in California for violations of election laws.

In January 2013, Lerner also indicated more social welfare nonprofits would be denied.  On Jan. 31, she emailed the chief of the IRS office of appeals, saying that in the next few months her office believed appeals would "get a lot of business" regarding denials of social welfare applications.

"I told them (the appeals group) this is a place where we have worked very hard to be consistent and have all our cases worked by one group, and suggested they (sic) might want to do something similar," Lerner wrote, adding that her office was being audited because of allegations of political bias in these cases.  "If I were you, this is definitely something I'd want to be aware of and have a high level person overseeing and reporting regularly (sic) to me.  You were in TEGE (the Tax Exempt/Government Entities division) long enough to understand how dangerous what we do can be."

The documents included spreadsheets of the application status of various groups, including one providing aid in Pakistan and another trying to set up a medical marijuana dispensary as a charity.  One spreadsheet indicated that a Tea Party group could be approved as a social welfare nonprofit but not as a charity.

But of all the groups listed in a 2011 spreadsheet as being flagged for review, only Emerge America and its affiliates ended up being denied.  Those groups trained Democratic women to run for office.

• The IRS really is not equipped to police elections — and knows it.

In the documents Wednesday, Lerner acknowledges how poorly the IRS monitors these groups, which are allowed to spend money on elections as long as they can justify they primarily work to benefit the community at large.

At one point, on Jan. 7, 2013, she wrote an email complaining that the IRS was not following up with groups that hadn't filed their tax returns, or Form 990s.  She wrote that if the IRS only opened audits on groups that filed tax returns, "that's a big hole in the system."

"Then you have newspapers telling us what the orgs (sic) are doing, but we never look," she wrote.  "If the org has been around log (sic) enough to owe us a 990 and they aren't filing to hide what they are alleged to have done, it should be our job to go out and get the 990 and then determine whether the allegations — that are very strong — are true."

"My level of confidence that we are equipped to do this work continues to be shaken," she wrote in another email.  "I don't even know what to recommend to make this better."

Officials from two campaign-finance watchdog groups, Democracy 21 and the Campaign Legal Center, said Wednesday that they had met with Lerner and other IRS officials in early January 2013 over their allegations that several social welfare nonprofits, including a liberal group and a nonpartisan one, were overly political.  They said Lerner refused to talk about individual taxpayers.

"We left the meeting extremely frustrated because neither Ms. Lerner nor her colleagues revealed anything," said Paul S. Ryan, senior counsel for the Campaign Legal Center.  "I would use the word 'frustrated' in general in our attitude toward the IRS."  He later added, "The IRS hasn't done anything" to enforce restrictions on political spending with these groups.

• Most new liberal groups don't apply to the IRS.

Social welfare nonprofits don't have to be recognized by the IRS, because donations to them are not tax-deductible.  They just have to incorporate as social welfare nonprofits in their state of choice.

Conservative groups typically have applied for recognition anyway, possibly because their donors want the IRS seal of approval.

One of the most active liberal dark money groups, Patriot Majority USA, has been recognized by the IRS.  But other liberal groups have taken advantage of the loophole.  Often, they incorporate, never apply to the IRS, spend money on elections and then fold after filing a tax return or two.

The newly released documents show that one of the most prominent liberal dark money groups, Priorities USA, never applied to the IRS for recognition.

Liberal dark money groups have been much less active in elections than conservative ones since the Citizens United decision.  About 85 percent of the anonymous money spent in 2010 and 2012 came from conservative groups.  Priorities USA, despite being run by top liberal operatives, reported spending nothing on federal elections in 2012.

• Lerner may have considered applying to work at a leading liberal social welfare nonprofit.

On Jan. 24, 2013, she emailed two senior IRS officials, asking if Organizing for Action — the nonprofit formed from the leftovers of President Barack Obama's campaign organization — had applied for IRS recognition.

One of the officials, Holly Paz, told Lerner she wasn't sure.

Another IRS official, Sharon Light, said she thought it likely that OFA would follow Priorities USA's path and not apply.  "But maybe not," she added.  She noted that while OFA would be run from Chicago, it would also have a Washington office.

"Oh — maybe I can get the DC office job!"  Lerner emailed back.

It is unclear whether she was joking.