A new OMB Watch report finds fault with the Internal Revenue Service (IRS) program to enforce the ban on partisan activities by charities. The report's most serious findings suggest that the IRS's Political Activities Compliance Initiative (PACI) threatens the constitutional rights of nonprofit organizations and churches to speak out on issues of the day. It also suggests that the IRS exaggerated the extent of noncompliance in an agency report on its enforcement efforts in 2004. Finally, the potential for abuse of the program in order to harass or retaliate against an organization is of concern during the upcoming election season. The report raises questions and issues about the IRS enforcement initiative. It summarizes the new PACI procedures that apply to the 2006 election season and beyond, as well as the new IRS Fact Sheet 2006-17, which provides guidance on voter mobilization, individual activities by leaders, voter guides, candidate appearances, issue advocacy, business activity, web sites and combined activities. Because IRS investigations are confidential few details are known about their examinations of political activities. But some organizations under investigation or people that file complaints with the IRS have disclosed information about their specific cases. A special supplement to the report provides details of ten known cases, including the NAACP, gathered from news reports and complaints. Questions and issues raised include: Vagueness of the Facts and Circumstances Test and the Reasonable Belief Standard Charities, educational institutions, and religious organizations are prohibited from participating or intervening in any political campaign on behalf of, or in opposition to, any candidate for public office. But tax law lacks clear rules defining prohibited intervention in elections, instead considering the "facts and circumstances" of each case. Is the Political Activities Compliance Initiative a Solution in Search of a Problem? The answer is far from clear. IRS statements exaggerate the level of noncompliance by charities and religious organizations. The IRS claimed 74 percent of cases investigated involved violations, a figure based only on cases that were not dismissed after two rounds of investigation. A closer look at the IRS data reveals a very different picture. In all, no violation was found in 64 percent of all completed investigations. Is the IRS Program Effective Enforcement or an Unconstitutional Infringement on Speech? Several factors, when taken as a whole, raise constitutional concerns around the PACI program:

• the vagueness of the "facts and circumstances" test
• secrecy regarding enforcement action
• IRS statements regarding its intent to prevent repeat violations before an election
• the threat that an organization's tax-exempt status will be revoked
• lack of deadlines for closing cases

Uneven Enforcement and Harassment Issues A lack of transparency creates confusion and uncertainty about the enforcement process. Section 6103 of the tax code protects the privacy of individual charities and religious organizations. It also has prevented the IRS from adequately informing the public of the agency's interpretation of the law. Absent a bright line test, the most useful information for avoiding noncompliance comes from details of specific cases. So far what has come to light raises concern about unevenness in how the IRS treats similar fact situations. Also, publicity around the PACI program could lead to a flood of retaliatory and harassment complaints in the 2006 election year, unless the IRS develops standards to screen out such abuses of its procedures. Sanctions: Should the Law be Changed? IRS staff has recommended changes in the law that would provide them with more enforcement options. But what sort of legislative modifications are anticipated? No specific proposals have been made public. Congress could devise a bright line test, add intermediate sanctions, such as advisory letters, to the IRS enforcement tool box, or both. The conclusion and recommendations notes that the IRS's new approach to enforcement could hamper nonpartisan issue advocacy and voter education and mobilization efforts and identifies the lack of a bright line rule defining what is partisan and what is not as a major problem.