IRS dumps proposed nonprofit rule

WASHINGTON—The Internal Revenue Service (IRS) announced late Thursday it will revamp a controversial rule proposal that would have drastically curtailed the activity of many tax-exempt organizations.

The agency came under heavy criticism last November when it proposed changing the guidelines for social welfare organizations, classified as 501(c)(4)s, to prohibit a long list of “candidate-related political activity.” Groups ranging from Americans for Prosperity to the Sierra Club would have been barred from, among other things, using words like “support,” “oppose,” and “defeat”—even when no candidate was mentioned. Virtually all conservative and some liberal groups spoke out against the proposal.

“I am pleased the Internal Revenue Service has at least temporarily heeded the serious concerns expressed by myself and countless others,” said Rep. Darrell Issa, R-Calif., who has led a House investigation into IRS targeting of conservative groups.

The IRS says it will work on crafting a new rule, leaving some critics unsatisfied. “The IRS should completely abandon any attempt to rewrite these longstanding rules instead of trying to find another way to harass American taxpayers,” said Rep. Steve Scalise, R-La., chairman of the conservative Republican Study Committee (RSC).

Early this year, Scalise and 80 RSC members submitted a public comment opposing the new rule, saying it was overly broad and would “severely limit” such nonpartisan activity as voter registration drives. That comment was one of more than 150,000 that organizations and individuals submitted to the IRS—a number IRS Commissioner John Koskinen said doubled all public comments from the past seven years.

Not all of those comments were negative: Supporters of the new rule say it would help reign in civic organizations that have become far too involved in political activity. Donald Tobin, a professor at Ohio State University’s Moritz College of Law, told me nonprofit organizations could engage in all the same activities as a 527 political organization—but they would have to disclose their donors.

Sen. Chuck Schumer, D-N.Y., said the new rule would bring accountability to the election process and said the “delay is deeply disappointing and a real setback for democracy and faith in government.”

At a March hearing, Koskinen, who took over the IRS in December, told House lawmakers the rule was developed before his arrival, and promised to weigh both sides before making a final decision. Koskinen told me he was more interested in the quality of the arguments made in the public comments rather than the quantity in favor or against.

Koskinen had already said the rule likely would not take effect this year, but this latest development guarantees that nothing will change before the November elections.

Jay Sekulow, chief counsel at the American Center for Law and Justice, said Thursday's announcement reflects that the initial proposal was “deeply flawed and unconstitutional.” Sekulow, who represents 41 conservative groups suing the federal government over the IRS targeting, said he still believes the IRS is “institutionally incapable” of correcting itself: “We continue our legal challenge against the IRS and will vigorously oppose the on-going attempt by the IRS to justify its illegal behavior by implementing a rules change.”