The hue and cry that applications for nonprofit status from conservative political groups may have received extra scrutiny from the IRS is obscuring the real scandal: political groups masquerading as nonprofits to avoid having to disclose their donors. Here's an excerpt from a PRWatch.org story from February 2012:
501(c)(4) non-profits are limited in how much they can participate in electoral or partisan politics. According to the IRS, "political intervention" cannot be their "primary activity," which has been construed to mean that no more than half of their staff time or financial resources can be directed towards political endeavors (depending on how they report to the IRS).
The IRS rules on what constitutes "political intervention" are murky and rarely enforced, and groups like [Karl Rove's] GPS have been involved in a significant amount of activities that would reasonably be considered "political."
The nonprofit spent $20 million last summer on ads attacking President Obama, and millions more on ads criticizing Congresspersons for supporting the president's programs. Election law guru Rick Hasen has expressed concern about 501(c)s "becoming shadow Super PACs" as a result of this direct election activity.
Besides direct political activity, recent FEC filings indicate that several 501(c)(4)'s are transferring resources to their affiliated Super PAC, suggesting a way that corporations can disguise their political spending but still fund Super PACs.
For example, in its year-end filing with the FEC, the FreedomWorks for America Super PAC noted that it received a total of $1,336,778 from the anonymously-funded 501(c)(4) FreedomWorks Inc. While the Super PAC must list its donors in filings with the FEC, that disclosure means little when a major donor is in turn funded by secret, undisclosed sources.
"That's the laundering of secret money into a super PAC," said Fred Wertheimer, president of clean elections group Democracy 21. "The bottom line is: No one should be doing it."
The issue has received some attention in the context of state and local efforts to overturn the US Supreme Court decision in Citizens United v. Federal Election Commission.
At a hearing on disclosure of political contributions in January 2013, NY State Attorney General Eric Schneiderman noted that "Many of these groups have names that are nearly incomprehensible." David Earley, counsel at the NYU Law School's Brennan Center for Justice, reported that “At least $317 million was spent in the most recent election cycle by groups that conceal their donors.” Although federal law requires the disclosure of donors whose funds are employed for "express advocacy and electioneering communications," FEC rules have eviscerated these requirements, according to Earley, "allowing most politically active 501(c)(4)s to avoid publicly reporting any of their donors."