Discuss as:

Meet the new player in the 2012 campaign: the Internal Revenue Service

Updated at 3:05 pm ET Democratic members of Congress and campaign spending disclosure advocates are demanding that the IRS crack down on political donations to tax-exempt groups called 501c4’s under the tax code for overstepping their bounds, going beyond their role as supposed social welfare organizations into political advocacy.

Groups such as the American Action Network, backing Republicans, and Priorities USA, backing Democrats, have 501c4 status and need not disclose their donors. But such groups are also supposed to be “social welfare” organizations that don’t have politics as their primary purpose.

All the media attention given to super PACs and to colorful, publicity-seeking donors such as Sheldon Adelson, has diverted attention from what’s likely the more important money spigot, the money 501c4’s spend on political advertising.  As with super PACs, donors are not limited in the amounts they can give to these 501c4 groups.

Recommended: High court rules against FCC in clash over profanity, nudity on TV

A new study by the Center for Public Integrity and the Center for Responsive Politics shows that more political spending was done by 501c4s in the 2010 elections than by Super PACs, which raise unlimited sums of money but are required to disclose their donors.

“Super PACs -- while you hear a lot about them -- are not going to be the vehicle of choice for a majority of the money that’s going to flow into elections,” said Rep. Chris Van Hollen, D-Md., who is pushing for legislation to require disclosure of donors to 501c4s if they engage in political activity. Van Hollen is also suing the Federal Election Commission to try to restrict ads run by 501c4s.

But Democrats are in a somewhat conflicted position: on the one hand litigating against 501c4s, and yet in some cases benefitting from money spent by the Democratic-aligned 501c4s.

For those seeking to conceal where their political spending is going, “this is an easy way to buy a disclosure shield -- you just move it into a c4,” said Frances Hill, a law professor at the University of Miami law school and an expert on tax exempt groups, who spoke Wednesday at a panel discussion in Washington sponsored by the Center for Responsive Politics.

The IRS, in its “work plan” or agenda for the current fiscal year, announced that it would be spending time reviewing 501c4’s for their political activity, said Marcus Owens, a Washington lawyer who is the former head of the IRS’s Tax Exempt Division.

Despite the sometimes muddled legal definition and nature of the 501c4 groups, Hill said the IRS has been clear and “robust” in saying that such groups “may not provide direct benefits primarily to its members and contributors.” So for a group that is seeking to elect a particular person as president or senator and whose members will gain from his election, that may raise IRS audit and enforcement flags.

Recommended: Commerce Secretary Bryson resigns following health scare

Hill called on Congress to pass legislation more sharply defining what a 501c4 group can and cannot do.

But those seeking to spur the IRS into action may need to wait a long time for some indication of progress. Those filing a complaint with the IRS about a supposedly abusive 501c4 have “no standing to force the IRS to take action on such complaints and sometimes may never even know if the IRS takes an action,” said Heidi Abegg, another Washington lawyer with expertise in non-profits.

A 501c4 that is abusing its social welfare status to do hard-core politicking could face an audit and lose its tax-exempt status. But the IRS has a less than one percent audit rate of non-profit organizations, said Abegg. The IRS usually waits until a tax return is filed by the non-profit to see if it is obeying the rules and “an IRS audit may not start until almost two years after the activity has occurred,” Abegg said.

Donors to a 501c4 could be hit with the federal gift tax on large donations -- up to 50 percent of the amount they give, said Owens. “You have a real potential exposure and if the IRS was aggressively applying its published position and the position it prevailed on in three court cases, you’d probably need to hire a phalanx of lawyers to get ready to fight with the IRS,” he said.

But he noted that the IRS announced last summer it was summarily ending a series of gift tax audits of donors to 501c4 groups. “There was an enormous outpouring of concern expressed by Republican members of Congress” to the IRS about the audits, said Owens.

Republicans continue to defend the 501c groups from increased scrutiny by the Internal Revenue Service. On Friday Senate GOP Leader Mitch McConnell gave a speech at the American Enterprise Institute complaining about the IRS and the Obama administration using their powers “to harass or intimidate those who participate in the political process.”

“Sen. McConnell is trying to pressure the IRS not doing its job in revealing that some of these organizations are masquerading as educational and charitable organizations and are being used for political purposes,” said Van Hollen.

In a letter Monday to IRS Commissioner Douglas Shulman, Senate Finance Committee ranking Republican Sen. Orrin Hatch of Utah, joined by McConnell and eight other Republican senators, complained that the IRS “is requesting the names of donors and contributors to organizations that apply for tax exempt status. In doing so, the IRS appears to be circumventing the statutory privacy protections that Congress has long provided donors.”

The Republican senators said that due to an IRS rule that allows public inspection of groups’ applications for tax exemption, the donors’ names could be made public. The letter warned that “the public release of private donor information exposes citizens to possible harassment and intimidation by those who oppose the goals of the charitable organization.”    

The new flow of political money from corporations and labor unions was made possible by the Supreme Court’s 2010 Citizens United decision and a subsequent decision by the appeals court in Washington which struck down a ban on independent political speech by corporations, unions, non-profit groups and groups of individuals. Such speech regulation is unconstitutional under the First Amendment, the court held.

Those rulings didn’t change the long-standing ban on direct contributions by corporations, unions and non-profit groups to a candidate.

The Supreme Court is now weighing whether it should take the case of a challenge to a Montana law which bans independent political spending by corporations.