Published: May 13 2011 01:00 | Last updated: May 13 2011 01:00
US tax authorities have opened investigations into five donors to non-profit political advocacy groups, a sign that the Internal Revenue Service has begun to examine more closely the activities of wealthy political activists.
Any move by the IRS to impose tax on donations to political organisations, which are known in Washington as 501c4 groups, would not only represent a radical departure in how tax authorities have treated such “gifts” over the last 30 years; it could also have a profound impact on the recent proliferation of independent political organisations in Washington that inject tens of millions of dollars into US elections.
IRS said that career civil servants in the estate and gift tax unit had opened examinations of five donors who had not filed gift tax returns. It was part of an effort to examine “non-filing of gift and estate tax returns”, but not a broader scheme to examine donations to 501c4 organisations.
“All of the decisions involving these cases were made by career civil servants without any influence from anyone outside the IRS,” it said.
The tax authority has been under pressure to take a closer look at groups such as Crossroads GPS, which is linked to Karl Rove, the former political adviser to President George W. Bush, because some campaign watchdogs have said they abuse their tax-exempt status. Such organisations are not supposed to devote all of their attention to political advocacy, but it is far from clear how – or whether – such activity is monitored by the IRS. Crossroads raised about $70m during the 2010 election cycle from mostly anonymous donors. Although Barack Obama has harshly criticised such organisations, Bill Burton, the president’s former adviser, recently created a similar group, called Priorities USA Action, in response to the influx of cash from Republican 501c4 organisations.
Prominent donors to such political advocacy groups include the conservative Koch brothers and the liberal George Soros.
It is not clear whether individual donors’ political advocacy groups regularly pay gift tax of between 35 and 45 per cent on their donations. But most campaign finance attorneys and tax lawyers in Washington say that, while it is standard practice to alert clients that it is technically feasible that the IRS could seek tax payments, the authorities have not enforced the mandate in 30 years.
One attorney who saw a letter that had been sent by the IRS but asked not to be named said one letter from the IRS stated that it had come to its attention that the individual had made a contribution to a 501c4, but that the IRS was unable to find a gift tax return filed by the individual. The letter then asked the recipient to file the gift tax return or explain to the IRS why the tax was not paid.
“I think it presents a real problem for donors. You are telling people they [might] owe 35 per cent . . . and conceivably mess up their estate tax planning. I think it could have a real effect on future giving,” the attorney said.
Although the names of the individuals who have been targeted in the five letters were anonymous, the parties’ names could become public if the matter results in a prolonged legal dispute.
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