Nonprofit Advocacy and Lobbying

IRS Halts Targeted Audits of Charities That Lobby

At a meeting on April 24, 2003 with representatives of seven organizations from across the nonprofit
sector, Internal Revenue Service (IRS) officials stated that they were halting an IRS program in
which a sample of charities was audited because they reported lobbying activities. The IRS,
however, indicated that it was not examining organizations simply because they had made a
501(h) lobbying election, contrary to concerns raised by some of these organizations as recently
reported in the press. We, the nonprofit groups that attended that meeting, applaud the move by
the IRS, but we urge the IRS to take strong, affirmative steps to remind the nonprofit sector that
lobbying by charities is legitimate.

Representatives of the Alliance for Justice, Charity Lobbying in the Public Interest, the Council on
Foundations, INDEPENDENT SECTOR, the National Committee for Responsive Philanthropy, the
National Council of Nonprofit Associations, and OMB Watch met with senior staff from the IRS
Exempt Organizations division. The groups had requested the meeting after learning several
weeks ago that the IRS appeared to be targeting audits on some public charities that reported
more than $10,000 in expenditures for lobbying. At that time it appeared that charities that had
made the 501(h) election were being targeted for audits.

Steve Miller, the director of exempt organizations for the IRS, confirmed that lobbying by charities
had been a factor in selecting a group of organizations for audit, but he said that the project had
not specifically targeted charities making the 501(h) election. Miller said that lobbying, combined
with other factors, was one of nearly 20 different sets of criteria the IRS had been testing to see if
any of these sets of criteria could be used as “non-compliance indicators” – tests to identify
organizations violating federal tax law. Forty-six organizations have already been audited under
the lobbying set of criteria, said the IRS’s Miller, and another 50 to 100 organizations similarly
selected were pending some action by IRS field offices. To date, however, targeting groups that
lobby has not uncovered any significant violations of the law. The lobbying-related indicator that
the IRS used in this program “doesn’t seem to work,” according to Miller.

Miller stated that the IRS would halt this effort for the time being. No further organizations will be
included in this program. Of the 50 to 100 audits still pending in the field under this program, IRS
staff will complete any audits already begun and will review a Form 990 for any selected organization for which the audit has not yet begun. Unless this review suggests some problem with the return, IRS field agents will close the case without auditing the organization. The IRS is internally reviewing all of these cases to determine whether some enforcement effort around lobbying might be advisable in the future.

Although Miller emphasized that these audits had not been specifically targeted to charities that
had made the 501(h) election, he responded to the concern on the point by agreeing to consider
changes to the Internal Revenue Manual (the guide for IRS staff). The Manual previously had
suggested that IRS examiners use neither the 501(h) election nor lobbying by electing
organizations as grounds, by themselves, for examination because charities making the 501(h)
election were more, not less, likely to be complying with the law. Miller said that the IRS would
look at whether this assumption was valid and that he would consider adding language to
the Manual related to how or when the IRS would audit charities that lobby. In addition to
considering changes to the Manual, Miller expressed continued IRS support for the position
stated in speeches and letters by IRS officials over the past 25 years that the IRS would not
select charities for examination simply because they made an election under 501(h).

The members of Congress who passed the 501(h) law likewise appreciated the important policy
role that lobbying by charities can play. As then-Senator Robert Dole put it during the debate:
“Charities can be and should be important sources of information on legislative issues.”

Although he expressed concerns about competing priorities and the limited resources of the IRS,
Miller agreed to consider conducting additional public outreach to spread the word that lobbying
within the legal limits is a legitimate activity for charitable organizations and that simply making
the 501(h) election will not attract IRS scrutiny.

Miller also agreed to communicate with the nonprofit sector if the IRS decides to implement any
future change to the IRS position that charities will not be selected for examination simply for making a 501(h) election.

The organizations represented at this meeting with the IRS are co-signing this statement to
reiterate our belief that the nonprofit sector has a unique and vital role to play in the public policy
process. We will continue to encourage nonprofits to promote good public policy, and we will
oppose any threats to the rights of nonprofits to engage in policy matters. More specifically, we
urge the IRS not only to act swiftly to restore the protection for electing charities once stated in
the Internal Revenue Manual but also to help us promote lobbying and other advocacy as a
legitimate and essential aspect of the larger work of the nonprofit sector. Finally, we respectfully
suggest to the IRS that charities that recognize their right to lobby and that are sufficiently aware
of the law to comply with their reporting obligations on the Form 990 are likely to be poor targets
for the limited enforcement resources available to the IRS at this time.

Whatever action the IRS, Congress, or others may take, our organizations will work to keep the
sector informed about future developments in this area.

Alliance for Justice
Charity Lobbying in the Public Interest
Council on Foundations
INDEPENDENT SECTOR
National Committee for Responsive Philanthropy
National Council of Nonprofit Associations
OMB Watch