NAACP IRS Audit

by Kay Guinane, 2/23/2005

Prior to the November 2004 election, the IRS initiated an audit of the National Association for the Advancement of Colored People (NAACP), based on criticism of President Bush's policies. The NAACP claims the audit is politically motivated.

Update: Aug. 31, 2006: IRS Drops Case Against NAACP. See below for more details and our press statementOn Oct. 28, 2004 the National Association for the Advancement of Colored People (NAACP) announced that the Internal Revenue Service (IRS) is investigating their tax-exempt status because Chairman Julian Bond criticized the Bush administration's policies in his speech to the group's July convention. The NAACP is a 501(c)(3) organization, and as such is barred from intervening in elections, but is allowed to comment on policies and government actions. The NAACP questioned the timing of the IRS action, calling it a politically motivated attempt to silence the organization and discourage blacks from voting. The IRS denied political motivation and referred the matter to the Treasury Inspector General for Tax Administration (TIGTA). The report from TIGTA reviews the structure and implementation of IRS enforcement in the 2004 election, finding no political motivation, but not identifying whether the NAACP was in the sample of cases it reviewed.

The NAACP's problems began October 8th, when it received a notice from the IRS that an examination focused on "whether or not your organization has intervened in a political campaign" was commencing. The IRS notice said: "We have received information that during your 2004 convention in Philadelphia, your organization distributed statements in opposition of George W. Bush for the office of presidency. Specifically in a speech made by Chairman Julian Bond, Mr. Bond condemned the administration policies of George W. Bush on education, the economy and the war in Iraq." It should be noted that charities have a Constitutionally protected right to criticize administration policies.

The October 8th letter also noted a tax of 10 percent can be imposed on the group for "political" expenditures and a tax of 2.5 percent on any manager who agreed to it. This is a direct threat of personal sanctions for the NAACP's 64-person board.

Members of Congress Respond

Immediately after the NAACP announcement of the IRS audit, several members of Congress contacted IRS commissioner Mark Everson to remind him that charities have a right to "discuss or oppose various aspects of the Bush administration's policies." Representative Charles Rangel (D-NY) went a step further and issued a statement saying "This is a tactic of a police state if I've ever seen one."

The same day Senate Finance Committee ranking Democrat Max Baucus (D-MT) also wrote to Everson asking several questions, including whether the "political activity" limitation imposed on 501(c)(3) organizations has been broadened, what steps lead to the decision to examine the NAACP and if groups critical of Bush's opponent have also been examined.

The IRS Responds

On Nov. 12, 2004, IRS Commissioner Mark Everson responded to the letter from Sen. Max Baucus. Everson's letter said the IRS had not received any request to audit any group from the executive branch, but that two members of Congress requested "we look at one or more organizations in this area." Everson said those requests were treated the same as any other third party referral. The letter further denied political motivation, saying that "career employees determine whether specific information we review warrants further action."

Everson also went on describe the IRS program developed in the summer of 2004 to oversee the ban on partisan activities by charities. The enforcement effort was overseen by a committee of career employees that reviewed more than 100 cases, 60 of which were selected for examination. Details, including the identity of the groups being audited, have not been made public because tax law protects the privacy of the groups, although Everson did say the groups represent diverse viewpoints.

Everson further noted changes in the law since the Nixon era to prohibit politically motivated audits. Any White House request for IRS action must be signed by the president and reported to Congress's Joint Committee on Taxation (Internal Revenue Code Section 6103(g)). Executive branch employees and cabinet heads are prohibited from making such inquiries by Section 1105 of the IRS Restructuring and Reform Act of 1998.

NAACP Declines Summons

The IRS issued an audit summons Jan. 14, seeking information normally reported in the annual nonprofit IRS return, Form 990. On Jan. 27, the NAACP informed the IRS that it would decline to respond. They said the IRS did not follow proper procedures and the agency's actions are politically motivated. The IRS denied its motives are political and referred the allegation to the Treasury Department's Inspector General for Tax Administration.

The NAACP response said the summons was not issued for a legal reason because it is not yet due, noting, "It appears that political pressure, rather than any sound legal authority, motivated the Service to ignore the statutorily-mandated procedures for initiating an examination." The letter noted the IRS can only take action prior to filing Form 990 if it meets the requirements of Section 6852 of the Internal Revenue Code, which gives the IRS authority to act on flagrant violations of the prohibition on electioneering by 501(c)(3) organizations. The NAACP letter said, "While criticism of an administration's policies might constitute intervention under some set of circumstances, it hardly rises to the level of a 'gross violation' or a 'flagrant' expenditure. Indeed, criticism or praise of government policy is First Amendment speech of a high order in a democratic society."

On Feb. 23, IRS attorneys wrote attorneys for the NAACP saying the law gives them authority to proceed and enforce the summons. They set a March meeting for the NAACP to respond to the summons, and suggested a March 2 meeting to discuss the case.

In a March 10 letter to the IRS, Marcus Owens, of Caplan and Drysdale, attorney for the NAACP, stated the NAACP?s continuing objection to the summons and declined to attend the March 11 meeting. The letter asked the IRS to close the case immediately and issue a letter stating the NAACP continues to be exempt under 501(c)(3) of the tax code. It also said the IRS had indicated the NAACP's exempt status is not likley to be at risk.

TIGTA Report

The Treasury Inspector General for Tax Administration issued its evaluation of the IRS process for reviewing referrals alleging illegal political campaign intervention by charities in February. It describes the process used in detail, and said it found no indications that the random sample of cases it reviewed were handled inappropriately.

Review of the Exempt Organizations Function Process for Reviewing Alleged Political Campaign Intervention by Tax Exempt Organizations describes a Political Intervention Project (PIP) established in June 2004 to Ò¦ast trackÓ referrals and prevent recurring violations by groups exempt under Section 501(c)(3) of the tax code. A three-person committee reviewed the cases and decided which should be referred for further action.

Of the 131 cases the PIP committee reviewed, 10 were dismissed because they did not involve partisan political activities. Of the remaining 121 cases, the committee found that 80 warranted further investigation based on a Ò²easonable beliefÓ that a violation may have occurred or that examination would lead to discovery of a violation. Of these 80 organizations, 34 are religious. The report found that slightly more pro-Republican groups than pro-Democratic groups were in the pool selected for further investigation.

The report did not address whether the IRS has the authority to Ò¦ast trackÓ these cases absent a flagrant violation of the ban on partisan activity by charities. The NAACP has refused to respond to a summons in its examination, saying the law requires a finding of flagrant violation before expedited review.

Possible Partisan Politics

In January 2005, the IRS asked the NAACP for documents as part of its examination. The NAACP refused to turn over the documents, because it said the timing of the audit (before the end of the tax year) was improper and the action was politically motivated. At that point the case became a stalemate.

On March 29, 2006 the NAACP issued a press release, announcing steps it has taken to force the case into court if the IRS does not close it favorably within six months. In the release, NAACP General Counsel Dennis Hayes said, "Although the IRS has not contacted us in over a year, the agency recently released guidance confirming that the agency continues to believe that it can investigate charities for criticizing governmental policies. The chilling effect of the IRS actions is profound, and the NAACP cannot stand by and allow our constitutional freedoms to be eroded."

To force a resolution the NAACP paid what it estimates it would owe if the IRS found it has violated the ban on partisan activity. The excise tax rate is 10 percent of the cost of a prohibited communication. In this case the NAACP estimated it spent $176.48 to disseminate Bond's speech, so it sent the IRS $17.65. Hayes said this in no way represents an admission of wrongdoing. Instead, the NAACP has filed for a refund of the $17.65. The Political Activities Compliance Program (PACI) would have been contested in court if the IRS had not closed its investigation of the NAACP when it did.

On May 17, 2006 the NAACP released IRS documents obtained under the Freedom of Information Act that show seven Republican members of Congress filed complaints with the IRS against the NAACP in 2004, claiming the NAACP engaged in partisan electioneering. The NAACP has asked the Treasury Inspector General for Tax Administration (TIGTA) to review the IRS's failure to fully respond to its FOIA requests.

IRS Drops Case Against NAACP
On Aug. 31 the NAACP announced that, after the investigation lasted nearly two years, the IRS found the group did not violate the ban on partisan electioneering in 2004. The group will thus retain its tax-exempt status. The NAACP announced the IRS action at an Aug. 31 press conference. NAACP Board Chair Julian Bond told reporters at the event, "We'll continue to speak truth to power."

NAACP President and CEO Bruce S. Gordon, told reporters, "Tax-exempt organizations should feel free to critique and challenge governmental policies under the First Amendment without fear of IRS intervention." He said the investigation was a cloud that hung over the group's activities, diverting resources from its principal mission of fighting racial discrimination. Bond added, "It has never been a crime or violation for American citizens to criticize government policies and it is not a crime or a violation to do so now."

The NAACP criticized the IRS for taking nearly two years to complete the investigation, conducted under a "fast-track" process the IRS established in 2004 and continues to use in 2006. IRS letter states the agency was able to complete its investigation by watching a video of Bond's speech, noting that the "video footage allowed the Service to gain information regarding the context in which Mr. Bond's speech was made."

Bond, however, called the IRS's justification for its delay "dishonest and disingenuous," noting that the video and full text of the speech had been available on the NAACP website throughout the investigation and that no new evidence had emerged.

The case has raised questions about the legality of the IRS's new procedures for enforcing the ban on campaign intervention by charities and religious organizations. Prior to the 2004 election cycle investigations into possible violations did not begin until after a 501(c)(3) organization filed its annual information return (Form 990). The new procedures allow the IRS to initiate investigations before the Form 990 is filed, in order to prevent repeat violations.

The case also raised questions about the right of charities and religious organizations to criticize elected officials' policies, the role of partisan politics in IRS investigations, and the legality of the new IRS enforcement program. The results of this case should reassure nonprofits of their right to speak out on the issues of the day.