The Committee on Ways and Means is conducting an investigation into whether entities that qualify as tax-exempt under Code Sec. 501 are abiding by the statutory and regulatory prohibitions against certain activities and whether foreign sources of funding are being funneled through such organizations to influence America’s elections.
Committee Chairman Jason Smith, Republican of Missouri, and Oversight Subcommittee Chairman David Schweikert, Republican of Arizona, have released an open letter to groups organized under Code Sec. 501(c)(3) or Code Sec. 501(c)(4) requesting information and input on existing rules and regulations governing them and foreign sources of funding for tax-exempt organizations and what, if any, policy changes Congress should consider.
“The expansion of politics into almost all aspects of life means that activities that were previously considered nonpartisan have been made partisan—legislation and regulation have not kept up,” Smith and Schweikert wrote. “Congress may need to consider closing growing loopholes that allow the use of tax-exempt status to influence American elections.”
Code Sec. 501(c)(3) organizations are prohibited from endorsing candidates for public office or otherwise intervening in political campaigns. Code Sec. 501(c)(4) groups may engage in some political activity if politics isn’t their primary activity.
“Public reporting has raised questions about whether tax-exempt sectors are operating in a manner consistent with the laws and regulations that govern such organizations and whether foreign funds are flowing through these organizations to influence American politics,” wrote Smith and Schweikert.
The Committee learned that a Super Political Action Committee (PAC) recommended donations to 501(c)(3) organizations as “the single most effective tactic for ensuring Democratic victories” and that large donations from a wealthy donor to state election offices in 2020 may have been done in a manner that helps one political party over another. Additionally, the Committee found that significant amounts of foreign money is flowing through 501(c)(3) and 501(c)(4) organizations to influence elections.
In addition to the request for information from tax-exempt organizations, Smith and Schweikert’s open letter provides:
• Background on the laws and regulations governing 501(c)(3) and 501(c)(4) entities.
• Information on a February 2020 Government Accountability Office report on the roles, responsibilities, and perspectives of federal agencies that oversee campaign finance that found Internal Revenue Service prohibitions on political activity lack clarity, leading to confusion among tax-exempt organizations.
• Detailed concerns that already exist about the flow of funds into America’s political system and elections under the guise of charitable, religious, or educational purposes or the promotion of social welfare.
For more information about exempt organizations, see Checkpoint’s Federal Tax Coordinator ¶D-4070.
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