Aug 3, 2004 -- Press Release: IRS Must Stop 527s' Evasion of Disclosure Requirements

Campaign Legal Center: IRS Must Stop 527s' Evasion of Disclosure Requirements

Press Contact: Mark Glaze (tel. 202-271-0982)

The Campaign Legal Center today urged the Internal Revenue Service to take action against an emerging practice in which 527 organizations are evading the disclosure requirements enacted by Congress in 2000.

Internal Revenue Code section 527, from which these groups take their name, makes full disclosure of contributors - names, the amount contributed and certain other information - a condition of exemption from federal income tax. If an organization fails to disclose the required information, it becomes subject to a penalty of 35 percent of the amount not disclosed.

In the current political cycle, however, certain section 527 organizations are taking the position that they may choose to pay the penalty while retaining their exempt status. Unfortunately, certain language in the instructions accompanying the disclosure form (Form 8872) might appear to support this position, while other language in the instructions underscores the mandatory nature of disclosure.

The Campaign Legal Center today called on the IRS to issue immediate guidance making it clear that disclosure is required to maintain exempt status. Disclosure is not discretionary for section 527 organizations and enforcing the disclosure requirement is not discretionary for the IRS.

The IRS has also never issued instructions for paying the penalty. It is not clear whether the penalty is due at the time of the nondisclosure or whether the organization can delay paying the penalty until the end of its fiscal year, which will be long after any election which they are attempting to influence. The Legal Center also called on the IRS to clarify the procedures and timing of the payment of the statutory penalties.

The Supreme Court in McConnell v. FEC underscored the importance of disclosure in the overall structure of federal election law. It found that voters have a First Amendment right to information about the funding of organizations seeking to influence federal elections.

"Given that the Federal Election Commission has abdicated its responsibility to enforce the requirements of federal election law by treating these organizations as political committees that disclose their contributors and expenditures to the FEC, voters must turn to the IRS to exercise their First Amendment right to know who is funding campaign activity," said Frances R. Hill, Tax Program Director of the Campaign Legal Center. "Failure of the IRS to do its duty in this matter is another element of the pervasive moral hazard created by the failure of the IRS to provide relevant practical guidance to organizations that wish to comply and to take timely enforcement actions with respect to organizations that adopt a strategy of noncompliance."

The Campaign Legal Center letter, directed to IRS Commissioner Mark Everson, urges the agency to issue guidance that makes it clear that the emerging problem of nondisclosure constitutes a violation of the section 527 exemption, and could result in loss of tax exempt status.

The Campaign Legal Center is a non-partisan, non-profit watchdog organization that works for strong enforcement of the nation's campaign finance laws.

Click here to view the letter sent to the Commissioner of the IRS regarding the 527s.