IRS won’t seek back taxes from donors to political groups

Donors to nonprofit groups that have funded election advertisements in recent years will not be scrutinized for contributions they made to those groups, the Internal Revenue Service announced in a memorandum issued Thursday.

The announcement comes about two months after the IRS sent letters to five people 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 their donor names secret.

The IRS has closed its investigation into the five individuals and will not be pursuing gift taxes for past contributions made to social welfare nonprofits.

“This is a difficult area with significant legal, administrative and policy implications with respect to which we have little enforcement history,” wrote Steven T. Miller, deputy commissioner for services and enforcement, in a memo posted to the IRS website Thursday. “Until further notice, examination resources should not be expended on this issue. It is anticipated that any future examination activity would be . . . prospective only after notice to the public.”

The news was a relief to donors. Large donations to social welfare groups are technically subject to a hefty 35% gift tax. Until recently, enforcement of that rule had been lax.

“I’m fairly comfortable telling people that they can expect this holding pattern to remain in effect throughout the entire 2012 election cycle,” said Ofer Lion, an attorney at Mitchell Silberberg & Knupp LLP. “Because it takes the IRS in the order of years, not months, to do this type of analysis and come up with what their position will be.”

News of the letters had set off a flurry of speculation that the IRS might be using the hefty gift tax to crack down on what has become an increasingly popular form of campaign advertisement funding. Lawyers who represent the groups and their donors advised their clients that they may face scrutiny over their contributions, and Republicans on Capitol Hill criticized the IRS for potentially chilling political speech.

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.

“As we consider this issue, it is possible that Congress may choose to clearly articulate through legislation the applicability of the gift tax to contributions to 501(c)(4) organizations,” said a statement posted to the IRS website.

Lion called it a “not-so-subtle hint that this is something for Congress to address.”