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Letter to Acting Commissioner Daniel Werfel, Internal Revenue Service - The IRS and 501(c)(4) Organizations


Location: Washington, DC

U.S. Senator Sheldon Whitehouse (D-RI), a leading advocate for campaign finance reform, renewed his call today for the Internal Revenue Service (IRS) to investigate organizations that abuse non-profit 501(c)(4) status by misleading the IRS about their political activity. The Senator made his case in a letter today to Acting IRS Commissioner Daniel Werfel.

501(c)(4) status allows groups to collect unlimited, undisclosed donations, but places limitations on how much political activity these groups can engage in. A number of 501(c)(4) groups have attempted to circumvent these limitations by claiming on filings that they were not engaging in political activity, when in fact they had spent millions of dollars running political advertisements. In April, Whitehouse held a hearing in his Judiciary Subcommittee on Crime and Terrorism which revealed that neither the IRS nor the Department of Justice has prosecuted a single instance of this abuse, which potentially violates at least two federal statutes.

In the wake of the recent scandal over the improper targeting of certain groups for greater scrutiny by the IRS, Whitehouse's letter asserts that the ongoing abuse of 501(C)(4) status without repercussions remains the greater scandal.

"While inappropriate targeting is deservedly being described as a "scandal,' I am concerned that attention focused on targeting is distracting from the greater scandal at the IRS, as documented at the subcommittee hearing: the failure to enforce limitations on political activity by 501(c)(4) groups and the failure to enforce federal statutes prohibiting material false statements," Whitehouse wrote.

The letter goes on to request information on how the IRS plans to address this ongoing problem. The full text of the letter is below.

In 2012, Sen. Whitehouse introduced the DISCLOSE Act, which would have required organizations spending large sums on political ads to reveal their major donors.


August 15, 2013

The Honorable Daniel Werfel

Acting Commissioner

Internal Revenue Service

1111 Constitution Avenue, NW

Washington, DC 20224

Dear Acting Commissioner Werfel:

I write to express my ongoing concern about the enforcement of statutes prohibiting material false statements on IRS filings, and about enforcement of statutory and regulatory limits on political spending by tax-exempt groups.

At an April 9, 2013 hearing of the Senate Judiciary Committee Subcommittee on Crime and Terrorism entitled "Current Issues in Campaign Finance Law Enforcement," the Subcommittee explored evidence that material false statements pertaining to political activity on IRS forms 990 and 1024 are commonplace. In a typical case, an organization engaging in significant political activity falsely claims that it has not engaged or does not plan to engage in any political activity, with the evident motive to enjoy tax advantages while evading limitations on political activity by 501(c)(4) groups. As far as can be determined from publicly available information, these false statements are not being prosecuted.

On April 25, 2013, I wrote to the Department of the Treasury and Department of Justice (letter attached) requesting assurances that both were acting to ensure that these potentially criminal material false statements were being investigated and, where appropriate, prosecuted. On July 22, 2013, Treasury wrote that it had referred my letter to the IRS, which would respond directly to me. I await your response, and in light of recent events, I supplement that letter here.

Since the subcommittee hearing, information has come to light that groups applying for tax-exempt status were selected for additional scrutiny based on words in their names suggesting they were engaged in or intended to engage in political activity. Despite initial reports to the contrary, it now appears that both conservative and progressive groups were targeted, and that there was no involvement in these decisions by senior Administration officials. While inappropriate targeting is deservedly being described as a "scandal," I am concerned that attention focused on targeting is distracting from the greater scandal at the IRS, as documented at the subcommittee hearing: the failure to enforce limitations on political activity by 501(c)(4) groups and the failure to enforce federal statutes prohibiting material false statements.

Evidence in the May 14, 2013 Treasury Inspector General for Tax Administration ("TIGTA") report highlights the need for an urgent accounting of the IRS's policies regarding limitations on political spending by 501(c)(4) groups. The report stated that inappropriate targeting was due at least in part to the fact that "there appeared to be some confusion by Determinations Unit specialists and applicants on what activities are allowed by I.R.C. § 501(c)(4) organizations," and that "this could be due to the lack of specific guidance on how to determine the "primary activity' of an I.R.C. § 501(c)(4) organization. Treasury Regulations state that I.R.C. § 501(c)(4) organizations should have social welfare as their "primary activity'; however, the regulations do not define how to measure whether social welfare is an organization's "primary activity.'"

It is imperative that Congress know why Criminal Investigation and other IRS units appear neither to investigate nor refer for prosecution false statements and violations of political spending rules by 501(c)(4) groups. Of particular interest to the Subcommittee on Crime and Terrorism are steps the IRS will take to remedy ineffective enforcement of relevant criminal statutes.

Accordingly, I request that you provide a full accounting of how the IRS enforces limitations on political spending by 501(c)(4) groups, and how it investigates material false statements about 501(c)(4) political activity. In particular, I request your assessment as to whether the "primary activity" standard has played a role in undermining the investigation and prosecution of material false statements about political activity.

I also request that you explain how the IRS intends to work with the Department of Justice going forward to ensure that violations of criminal false statement statutes 18 U.S.C. § 1001 and 2 U.S.C. § 7206 are vigorously prosecuted in this context. To the extent that failures to properly investigate or prosecute false statements have occurred at the IRS because of the confusion described in the TIGTA report, or more generally because the IRS is, as former FEC Chairman Brad Smith testified, not "equipped or structured" to "oversee[] political activities," it confirms the need for greater Department of Justice involvement in such investigations.

As Marcus Owens, the former IRS head of Exempt Organizations said recently, "[w]hen an organization applies to the I.R.S. and says it's not going to engage in political acts at the same time it is clearly doing so . . . there is a crime there and that crime is intentionally misleading the I.R.S. in tax administration." This is, in my opinion, the primary scandal facing the IRS, and it is one that must be addressed quickly and decisively. I look forward to hearing your plan for doing so.


Sheldon Whitehouse

United States Senator

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