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IRS signals political donors could owe back taxes

May 12, 2011|By Kim Geiger

Lawyers for nonprofit groups that played heavily in last year's congressional elections have been poring over recent Internal Revenue Service actions that they think may be a sign the agency intends to hit big donors with bills for back taxes.

The IRS recently sent letters to five individuals who had not filed gift tax forms for donations they’d made to so-called “social welfare” groups organized under Section 501(c)4 of the tax code – a classification that allows the groups to keep secret the names of donors who fund campaign advertisements. 

The move caught the attention of campaign finance lawyers, who interpreted it as a potentially game-changing blow to the controversial groups. Some warned their clients that they may face scrutiny in the future.


FOR THE RECORD:
May 13, 12:40 p.m.: An earlier version of this post misspelled the name of law firm Mitchell Silberberg & Knupp LLP. —

“Individual contributors and 501(c)(4)s may wish to consider carefully the possible gift tax implications of contributions, and to seek the advice of counsel,” wrote Ofer Lion, an attorney at Mitchell Silberberg & Knupp LLP, in an alert posted to the firm’s website.   

Large donations to social welfare groups are technically subject to a hefty 35% gift tax. But in the past, enforcement of that rule has been lax. Campaign finance experts said broad IRS action against donors could slow the groups’ funding streams as the 2012 presidential election nears.

Last year, the IRS indicated it would step up scrutiny of groups claiming social welfare status.  But in a statement issued Thursday, the IRS said the letters were “not part of a broader effort looking at donations to 501(c)4s.”

“These 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 nonfiling of gift and estate tax returns,” the statement said. 

The IRS also sought to quell suspicions that the Obama administration could be using the agency to pursue political opponents. 

“All of the decisions involving these cases were made by career civil servants without any influence from anyone outside the IRS,” the IRS statement said.

In 2010, nonprofit groups – many of them 501(c)4s – disclosed nearly $300 million in spending on midterm election campaigns, much of it to elect Republicans, according to data compiled by the nonpartisan Center for Responsive Politics.

Gregory L. Colvin, a San Francisco attorney at the firm Adler & Covlin, who represents one of the audited donors, said he suspected the IRS action could reach many donors. Covlin said he'd spoken with at least 4 other lawyers whose clients had received letters.

"I think it’s very unfair that the IRS, after almost 30 years of not enforcing the gift tax on (c)4s, would retroactively pick out a few donors," Covlin said.  "If they’re going to collect this, they should make an announcement."

kim.geiger@latimes.com

Tom Hamburger in the Washington bureau contributed to this report.

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