IRS Denies Exemption to Small Political Organization, Casting Shadow on Larger Groups

A decision by the Internal Revenue Service to revoke the tax-exempt status of a small political nonprofit organization may foreshadow an investigation into similar groups that are spending millions of dollars on the 2012 U.S. presidential election, Bloomberg News reports.

According to Marcus Owens, a former head of the IRS's exempt organizations division, the decision sends a signal that the agency might turn its attention after November's election to organizations such as Crossroads GPS, which was started by former President George W. Bush's chief political strategist, Karl Rove, and Priorities USA, co-founded by a former Obama aide. Both are registered as 501(c)(4) organizations and can raise donations from individuals and corporations without having to reveal the names of donors.

While the organization in question wasn't named in the agency's recent decision, Bloomberg News has confirmed that it was Emerge America, a San Francisco-based organization that works with nine state affiliates to train Democratic women candidates. As a result of the decision, Emerge America is now incorporated under section 527 of the tax code, which requires it to disclose the names of its donors.

While watchdog groups are likely to continue to press the IRS to investigate specific 501(c)(4) organizations in the months to come, it is unlikely that any of the largest will be required to change their tax status under the Internal Revenue Code until after the elections in November. "Once [the IRS] decides that something is a priority, they have capable people who have a long history of being involved in looking at political activities of exempt entities," said Frances Hill, a law professor and tax expert at the University of Miami. "I don't think they're going to turn a blind eye to this."