House May Investigate Auditing of Section 501(c)(3) Groups

The Washington Times reports that House Republicans are considering“a major expansion of their investigation into the Internal Revenue Service’stargeting of conservatives” by looking into the government’s audits ofnonprofits.  Some leaders of organizationsexempt from federal income tax under section 501(c)(3) of the Internal RevenueCode (i.e., charities) reportedly find the audits “fishy” because of the IRS’sbasically contemporaneous special scrutiny of tea party groups seekingrecognition of exemption under section 501(c)(4). The story says that charitiesaudited for the first time during this period include the Billy Graham Evangelistic Association (the “BGEA”), the Clare Boothe Luce Policy Institute and the Family Research Council.

Readers, kindly indulgeme as I express an earnest plea for maintaining a nonpartisan, legally informedperspective in this matter.  And, if itmakes any difference, please understand that this perspective comes fromsomeone who personally has long admired the leadership of the BGEA for their moral integrity and historiccommitment to proclaiming the Gospel.

It is entirely appropriatefor the IRS to audit a section 501(c)(3) entity to determine whether it is operatingwithin the constraints imposed by Code section 501(c)(3).  In general terms, these constraints include aprohibition against political campaign intervention (such as publicly endorsingidentified candidates for public office) and limitations on lobbying.  We can debate whether the law should berelaxed – and I have argued elsewhere that it should (somewhat).  But the IRS is charged with enforcing currentlaw.  If the IRS discovers that a charityhas engaged in public discourse of proposed laws or canddiates – and the Washington Times reportsthat BGEA did so in an election year – it is hardly unreasonable for thegovernment to audit the organization to establish whether its activitiescomplied with the law. Indeed, it is not uncommon for watchdog groups to alertthe IRS when they have evidence that an entity may have crossed the line.  Further, because there are other requirementsfor tax exemption under Code section 501(c)(3) (e.g., the prohibition againstprivate inurement), an audit should probe the organization’s compensationpolicies, other transactions with insiders, and other aspects of its internal affairs.  Naturally, the audit will feelintrusive.  It is.  It must be intrusive to be effective.  It will also be time-consuming.

I have no ideawhether groups identified in the story were selected for audit for the wrongreasons.  Nor am I arguing that lookinginto the matter further is pointless. But news that a handful of religious or politically conservative section501(c)(3) organizations have been audited, particularly when they have made publicstatements about proposed laws or candidates in an election year, seems quite abit different from allegations that section 501(c)(4) applications were systematicallyprocessed according to buzzwords that distinguished tea party groups fromothers. 

Section 501(c)(3)s and section501(c)(4)s are subject to very different constraints on political activity.  I urge caution before greatly expanding theinvestigation and devoting more public resources to it if it appears that the section501(c)(3) organizations in question were visibly active participants in thepolitical process during an election year. 

Hat tip: TaxProf Blog

JRB