NAICU Washington Update

Tax Laws of Tax-Exempt Entities Examined on Capitol Hill

May 06, 2022

The Senate Finance Committee’s Subcommittee on Taxation and IRS Oversight held a hearing focusing on the current tax laws governing tax-exempt entities and the oversight and enforcement of those laws by the IRS.  The majority of the hearing dealt with whether or not the IRS exercises proper oversight of tax-exempt organizations that attempt to influence political activity, primarily 501(c)4 groups.

Overall, committee members argued over increased disclosure of donations and activities of nonprofit organizations that support a certain party or candidate, rather than universal increased disclosure and transparency for all politically-active tax-exempt groups.

Under the committee’s microscope were 501(c)4 groups, which are tax-exempt organizations that exist to promote causes related to social welfare, and are commonly active in partisan political and advocacy-related causes.  The hearing examined whether some 501(c)4 groups violated the limits of political activity, including the raising of so-called “dark money” or funds raised by undisclosed donors.  During this portion of the hearing, the National Rifle Association received a good deal of scrutiny for its political activity.  

Witnesses providing testimony included:
  • Philip Hackney, Associate Professor of Law, University of Pittsburgh School of Law
  • Bradley A. Smith, Chairman and Founder, Institute for Free Speech
  • The Honorable Ann M. Ravel, Former Chair (2015), U.S. Federal Election Commission (FEC)
  • Scott Walter, President, Capital Research Center
The issue of foreign money and foreign influence also surfaced during the hearing, with Ravel testifying that during her time at the FEC, she saw evidence of foreign influence on U.S. elections, and little IRS focus or intervention.

While 501(c)3 groups are exempt from federal taxation and are organized and operated for religious, charitable, scientific, and educational purposes among others, they are prohibited from supporting specific candidates or parties. Though there was no mention of nonprofit colleges and universities during the hearing, the last witness, Walter, advocated for further investigation of 501(c)3 organizations whose fundraising primarily benefits democratic candidates, parties, and activities, instead of 501(c)4 organizations that have spent far less on conservative candidates, parties, and activities.  

In addition, Walter also stated that 501(c)3 groups should not engage in get out the vote efforts because so many of these groups are partisan.  He felt the tax laws governing the prohibition of partisan political engagement by many 501(c)3 groups is being largely ignored.  This line of thought is in contrast to the current requirement under the Higher Education Act that colleges and universities must engage in voter registration activities in order to participate in the federal student aid programs.  

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