IRS Taking Closer Look at Large Gifts to Politically Active Nonprofits

IRS Taking Closer Look at Large Gifts to Politically Active Nonprofits

In an effort to enforce an oft-ignored statute that has been on the books for almost thirty years, the Internal Revenue Service has sent audit letters to several major donors informing them that their gifts to nonprofit political advocacy organizations may be subject to a 35 percent gift tax, Roll Call reports.

The enforcement effort targets donations to nonprofit 501(c)(4) organizations, which can participate in campaign activity as long as it is not the organization's primary purpose. Such groups played a significant role in the 2008 election cycle and have proliferated since the 2010 Citizens United Supreme Court decision rolled back corporate and union campaign spending limits. Unlike Section 527 organizations, which are exempt from the gift tax and whose primary purpose is to influence election results, (c)(4)s are not required to disclose their donors.

Although (c)(4) organizations are expected to play a significant role for both parties in the 2012 election cycle, the move by the IRS to enforce the statute could complicate matters for wealthy donors. Under the statute, individual gifts of $13,000 or more are taxable at a 35 percent rate, with a $5 million lifetime exemption for gifts made after 2010 and a $1 million exemption for gifts made in 2009 or 2010. Many wealthy individuals have already taken advantage of those exemptions as part of their estate planning efforts, however.

While some legal experts have criticized the IRS for targeting past donations to (c)(4)s without first making an announcement about the policy change, the only way for donors to mount a legal challenge is to sacrifice the anonymity that made their contributions so attractive in the first place.

"Major donors to the new political organizations may have to pay a heavy premium for staying in the shadows," David Donnelly, national campaigns director for the Public Campaign Action Fund, told the Associated Press. "It's clear that the law says these secret political donors can't have it both ways: If they choose to influence elections, they have to do it in the open or pay the taxman."

Stephen Ohlemacher. "IRS Investigating Donors to Nonprofit Groups." Associated Press 05/12/2011. Stephanie Strom. "I.R.S. Moves to Tax Gifts to Groups Active in Politics." New York Times 05/12/2011. Amanda Becker. "IRS Eyes Big Donors." Roll Call 05/12/2011.