The Internal Revenue Service Considers Taking a Closer Look at Political Donations

May 23, 2011   

According to a recent Wall Street Journal article, the Internal Revenue Service is looking to “retroactively tax top donors to political advocacy groups” following the Supreme Courts Citizens United ruling reversing certain campaign finance laws. Specifically, donations made during the 2010 elections to IRC § 501(c)(4) nonprofit groups are being considered. Groups classified as IRC § 501(c)(4) can support candidates and legislation, but cannot be primarily political in nature. According to the IRS, large donations to these groups should have been subject to the gift tax, although enforcement has been lax in the past. Currently, individual donors can contribute $13,000 annually ($26,000 for couples), subject to a lifetime maximum of $5 million, before a 35% tax rate takes effect. In 2013 the lifetime exempted amount drops to $1 million.

Reports in the press indicate that at least five donors have been contacted by the agency for not filing gift tax returns, a requirement for large political donations. In a statement, IRS spokeswoman Michelle Eldrige wrote, “[t]hese examinations were started by employees of the Estate and Gift Tax Unit at the IRS as part of their increased efforts in the area of non-filing of gift and estate tax returns” and is not political in nature. The statement continues, “[a]ll of the decisions involving these cases were made by career civil servants without any influence from anyone outside the IRS.”

The Los Angeles Times reports that “[i]n 2010, nonprofit groups, many of them [IRC §] 501(c)(4)s, disclosed nearly $300 million in spending on midterm election campaigns, much of it to elect Republicans.” A similar article in the New York Times states, “Democrats have embraced the model, too. Bill Burton, Mr. Obamas former deputy press secretary, was skewered by critics of these groups for creating Priorities USA Action to help Democrats.” Experts predict that “broad IRS action against donors could slow the groups funding streams as the 2012 presidential election nears.”

The attorneys at Fuerst Ittleman have extensive experience in the areas of tax law and tax law litigation and will continue to monitor the changes made or considered by the Internal Revenue Service. If you have any questions regarding IRC § 501 or any other Internal Revenue Code section, do not hesitate to contact us as