IRS drops probe of donors to nonprofit groups

Friday, July 8, 2011, Vol. 35, No. 27

WASHINGTON (AP) — The Internal Revenue Service is dropping its investigation of five donors for making contributions to the kind of nonprofit groups that have become popular for spending millions of dollars on political ads in the past few years, the agency announced Thursday.

The IRS was trying to determine whether the donors owed federal gift taxes for the donations. However, IRS spokesman Frank Keith said Thursday the law on gift taxes is unclear, so the agency is closing the cases and won't open any new ones until it reviews whether additional guidance or legislation is necessary.

"The Internal Revenue Service has little history to draw from in this area and the limited guidance we previously issued on this matter is almost thirty years old," Keith said. "While we review the need for additional guidance or legislation, we will not use resources to pursue examinations on this issue. Any future action we take will be prospective and after notice to the public."

At issue is whether contributors to the tax-exempt organizations — many of them donate six-figure and seven figure amounts — have to pay the 35 percent gift tax on their donations.

The IRS did not name the donors or the nonprofit groups to which they contributed. But the agency's confirmation of an investigation in May could have had a chilling effect on politically active groups that have become integral to campaigns.

In the 2010 congressional elections, a number of groups incorporated as nonprofits under Section 501(c)(4) of the tax code spent millions on political ads without disclosing their donors. The groups predominantly supported Republican candidates and causes in 2010, though both parties are expected to use them in the 2012 presidential and congressional elections.

Several key Republican members of Congress questioned whether the investigation was politically motivated. The IRS said the examinations were started by career civil servants and there was no influence from anyone outside the agency.

Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, said he is troubled that the IRS did not explain why the investigations were started in the first place. He said the guidance issued by the IRS left open the door for future audits, after new guidance is issued.

"I will continue my investigation until the complete story behind the actions of the IRS has been told," Camp said.

Sen. Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, said the decision to drop the investigation "ensures that the IRS remains free from even the hint of undue political influence. It cannot be turned into an arm of political retribution or payback. It must remain independent."