NEW YORK — The Obama administration moved on Tuesday to curb political activity by tax-exempt nonprofit organizations, with potentially major ramifications for some of the biggest and most secretive spenders in American politics.
New rules proposed by the Treasury Department and the Internal Revenue Service would clarify both how the IRS defines political activity and how much nonprofits are allowed to spend on it. The proposal covers not just television advertising, but also bread-and-butter political work like candidate forums and get-out-the-vote drives.
Long demanded by government watchdogs and Democrats who say the flow of money through tax-exempt groups is corrupting the political system, the changes would be the first wholesale shift in a generation in the regulations governing political activity by nonprofits.
The move follows years of legal and regulatory shifts, including the Supreme Court’s Citizens United ruling in 2010, that have steadily loosened the rules governing political spending, particularly by those with the biggest bank accounts: corporations, unions, and wealthy individuals.
But the proposal also thrusts the IRS into what is sure to be a polarizing regulatory battle, with some Republicans immediately criticizing the proposal Tuesday as an attack on free speech and a ploy to undermine congressional investigations into the agency’s handling of applications from Tea Party groups.
“Before rushing forward with new rules, especially ones that appear to make it harder to engage in public debate, I would hope Treasury would let all the facts come out first,” said Representative David Camp of Michigan, the chairman of the House Ways and Means Committee.
Political spending by tax-exempt groups — from Crossroads Grassroots Policy Strategies, co-founded by Republican strategist Karl Rove, to the League of Conservation Voters — has skyrocketed to more than $300 million in 2012, from less than $5.2 million in 2006, according to the Center for Responsive Politics. Much of the money has been funneled through chains of interlinked nonprofit groups, making it even harder to determine the original source.
‘Before rushing forward with new rules . . . I would hope Treasury would let all the facts come out first.’
And unlike political parties and super PACs, political nonprofits are permitted to keep the names of donors confidential, making them the vehicle of choice for deep-pocketed donors seeking to influence campaigns in secret.
Nick Ryan, the founder of the American Future Fund, which spent at least $25 million on political advertising last year, said, “Unfortunately, it appears that the same bureaucrats that attempted to suppress the speech of conservative groups in recent years has now put together new rules that apply to (c)4 groups but do not apply to liberal groups like labor unions.”
“I wish I could say I am surprised,” Ryan added, “but I am not.’’
The final rules are unlikely to be issued until after the 2014 election, after a public comment period.
The administration’s proposal would apply to nonprofits organized under Section 501(c)4 of the tax code, which are granted tax exemption in exchange for devoting themselves to the promotion of “social welfare.”
Under current rules, promoting social welfare can include some political activity, along with unlimited amounts of lobbying. Some of the largest political nonprofits — like Americans for Prosperity, backed by conservative philanthropists Charles and David Koch — have used that provision to justify significant expenditures on political ads.
But under the new proposal, a broad swath of political work would be classified as “candidate-related political activity” and explicitly excluded from the agency’s definition of social welfare. Those activities include advertisements that mention a candidate within 60 days of an election as well as grants to other organizations making candidate-related expenditures.
“Depending on the details, this could be dramatic,” said Marcus S. Owens, a former chief of the IRS’ exempt organizations division.
The rules could also affect more traditional conservative and liberal advocacy organizations, including Tea Party groups whose complaints of harassment by IRS employees prompted the resignation of several high-ranking IRS officials last spring. Distributing voter guides, for example, would automatically count as political activity.
Jay Sekulow, a lawyer representing more than three dozen of the groups in a federal lawsuit against the IRS, described the new proposal as a further attack on free speech. “This is a feeble attempt by the Obama administration to justify its own wrongdoing with the IRS targeting of conservative and Tea Party groups,” he said in a statement.
Administration officials described the new proposal as a response to widespread complaints that the existing regulations were too vague, leading to inconsistent or arbitrary enforcement. The IRS would be better equipped to enforce the rules, the officials said, if they were clearer, while nonprofit groups would be better able to comply.
“This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations,’’ said Mark J. Mazur, the assistant Treasury secretary for tax policy.
Some lawyers said they worried that the new rules, particularly those that could apply to grass-roots organizing, could unfairly burden bona fide social welfare groups. Others suggested that tighter restrictions on social welfare groups would hasten the migration of political money into other kinds of entities whose campaign spending is not subject to IRS jurisdiction.