The IRS Political Activities Compliance Initiative

Church Law and Tax 2006-09-01 The IRS Political Activities Compliance Initiative Richard R. Hammar, J.D.,

Church Law and Tax 2006-09-01

The IRS Political Activities Compliance Initiative

The IRS received several complaints of political activity by tax-exempt organizations during the 2004 election campaign. It responded by launching a ‘Political Activities Compliance Initiative’ that carefully examined the political activities of 110 exempt organizations, including several churches. In 2006 the IRS released a Final Report on its Political Activities Compliance Initiative based on 82 examinations that had been completed. The final report not only presents the IRS’s conclusions, but also unveils new procedures for the 2006 election season. All the examinations resulted from referrals and covered only a small segment of the tax-exempt community, which includes more than 1 million tax-exempt 501(c)(3) organizations in the U.S.

Nearly three-quarters of 82 examinations have concluded that the tax-exempt organizations, including churches, engaged in some level of prohibited political activity. Most of these exams concerned one-time, isolated occurrences of prohibited campaign activity, which the IRS addressed through written advisories to the organizations. In three cases involving tax-exempt organizations that were not churches the prohibited activity was serious enough to warrant the IRS proposing the revocation of the organizations’ tax-exempt status.

IRS Commissioner Mark W. Everson observed, ‘While the vast majority of charities, including churches, did not engage in politicking, our examinations substantiated a disturbing amount of political intervention in the 2004 electoral cycle. As the 2006 electoral season approaches, we are going to provide more and better guidance and move quickly to address prohibited activities.’

Some of the specific instances of political intervention include the following:

• Charities, including churches, distributing diverse printed materials that encouraged their members to vote for a particular candidate (24 alleged; 9 determined).

• Religious leaders using the pulpit to endorse or oppose a particular candidate (19 alleged; 12 determined).

• Charities, including churches, endorsing or opposing a candidate on their website or through links to another website (15 alleged; 7 determined).

• Charities, including churches, disseminating voter guides or candidate ratings that encourage readers to vote for particular candidates (14 alleged; 4 determined).

• Charities, including churches, placing signs on their property that show they support a particular candidate (12 alleged; 9 determined).

• Charities, including churches, giving improper preferential treatment to certain candidates by permitting them to speak at functions (11 alleged; 9 determined).

• Charities, including churches, making cash contributions to a candidate’s political campaign (7 alleged; 5 determined).

The IRS identified confusion with the prohibition of campaign intervention, ‘especially in cases concerning churches.’ It noted that church leaders often erroneously believe that the prohibition is ‘limited to expressly endorsing or opposing candidates.’ As a result, ‘the majority of the alleged acts of campaign intervention at church services or functions were not express endorsements. In fact, the circumstances often suggested that the pastor made a conscious effort to avoid an express endorsement, yet made an indirect endorsement clearly conveying a message on behalf of, or in opposition to a candidate.’

The report ‘strongly recommends’ that, in future election cycles, the IRS will ‘increase its use of revocation in cases that warrant this sanction.’

The report outlines new procedures for the 2006 election period that will ensure that all referrals the IRS receives from the public, as well as activity the IRS itself uncovers, are reviewed expeditiously, and treated consistently and fairly. As a part of its approach to combating this activity, the IRS has also begun educational efforts to help ensure that charities have advance notice of the rules against engaging in political activities. In particular, it has released a ‘fact sheet’ (discussed fully in this article) that provides detailed examples of the types of activities the IRS investigated during the 2004 election cycle. The examples and related commentary are intended to help tax-exempt organizations, including churches, better understand what activity constitutes prohibited political intervention.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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