Every year, the Department of the Treasury and the Internal Revenue Service (IRS) request public comments on recommendations for their Guidance Priority List to identify tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other guidance for the year. OMB Watch recently submitted comments that urge the IRS to prioritize the creation of a bright-line definition of prohibited political activity for tax-exempt charities and religious organizations. Such clarity is particularly important given recent findings that IRS agents have not properly differentiated between permissible advocacy and activities that are considered partisan election intervention.

501(c)(3) tax-exempt organizations – charities, educational institutions, and religious organizations, including churches – are prohibited from participating or intervening in any political campaign on behalf of, or in opposition to, any candidate for public office. However, IRS regulations do not clearly define political intervention. The IRS relies on a "facts and circumstances" test to determine, on a case-by-case basis, what is and is not permissible. Consequently, groups are left with little precedent to guide their decision making. In 2004, the IRS began the Political Activities Compliance Initiative (PACI) program, targeting alleged illegal political activity by 501(c)(3) organizations.

In its recent comments to the IRS, OMB Watch recommends the creation of a rule that unambiguously defines prohibited political intervention activities to protect basic constitutional rights of free speech and association. OMB Watch's submission notes the downside to the current uncertainty: "groups feel more comfortable vacating their issue advocacy prior to an election rather than inadvertently violating the law. It is necessary to remove the chilling effect of the current vague facts and circumstances test so that 501(c)(3) organizations can become fully engaged in activities that support election reform and the goals of the Help America Vote Act." The comments continue, "If IRS employees do not understand the difference between permissible and impermissible activities, nonprofit organizations certainly can not be expected to understand the overly vague standard of when partisan activity has occurred."

The OMB Watch comments also suggest that the IRS take into account the U.S. Supreme Court's 2007 decision in Federal Election Commission v. Wisconsin Right to Life (WRTL) in providing clarity on permissible election activities. In WRTL, the Court exempted genuine issue advocacy from the "electioneering communications" ban on corporate-funded broadcasts that refer to federal candidates within 60 days of a general election or 30 days of a primary.

The IRS could use the Federal Election Commission (FEC)-approved regulation for permissible issue advocacy as a starting point for guidelines. According to the FEC rules, if the focus of a broadcast or other advertisement is on a legislative issue, and an officeholder is urged to support that legislation or the public is called upon to support a position and contact an officeholder, that ad is not an electioneering communication. However, the FEC regulation is also problematic in that it does not draw a specific standard and, as a result, deciding whether a communication is permissible is subjective.

Further evidence supporting the need for regulatory clarity is provided in a new Treasury Inspector General for Tax Administration (TIGTA) audit report on the IRS PACI program for the 2004 election season. TIGTA found that the IRS overstated the number of cases with confirmed prohibited political activity. Specifically, TIGTA notes the confusion that the IRS places on nonprofits when the agency does not communicate whether political intervention occurred. Fifteen of the closing letters TIGTA reviewed "did not specifically state whether the IRS determined that the prohibition against political intervention had been violated, which can be confusing for tax exempt organizations that spend resources on a lengthy examination." Furthermore, TIGTA reviewed 99 cases and found that 14 of them were incorrectly classified as a violation of the prohibition.

TIGTA recognized the difficulty organizations face while going through the arduous examination process. Its report said, "When organizations have not violated the prohibition on political activity, clear feedback is needed to notify the tax exempt organization that it may continue to operate consistent with its tax exempt status and to provide assurance that the alleged political actions did not violate prohibited political activity guidelines. Similarly, when tax exempt organizations have violated the prohibition on political activity, clear feedback is needed to ensure that prohibited activities are stopped and that corrective actions are taken to prevent these types of activities in the future."

Other interesting points from the review of the 2004 cases include:

• Most organizations were investigated for a violation of a single prohibition
• The investigations included questionable activities in the form of printed and electronic material and verbal statements
• Three cases from the 2004 election remain open
• Most of the examinations involved local organizations
• Approximately half of the cases involved churches

The report made two recommendations: 1) closing letters should clearly state whether a violation was confirmed, and 2) IRS examiners should have guidance on the use of the correct disposal code when political intervention is not substantiated.

Currently, the facts and circumstances test does not bode well for any effective enforcement of the law. The majority of cases where the IRS determined political campaign intervention had occurred were resolved by issuing a written advisory with a warning and no penalty. In only six cases did the IRS revoke an organization's tax-exempt status, and in no case did the IRS impose the excise tax penalty provided in the law.

The IRS is responsible for releasing a PACI report on cases from the 2008 election season. However, it is unclear when that report will be complete.