irs 501c4 scandalMuch has been written in recent weeks about the way the IRS targeted certain groups for further scrutiny in terms of 501(c)(4) status. It is worth noting that none of the conservative groups looked at were actually denied 501(c)(4) tax-exempt status. The outcry is based largely on the increased scrutiny of conservative groups.

While the process followed was probably not what it should be, the whole debacle brings up an interesting question that hasn’t really been examined in great deal: Should 501(c)(4) groups even have tax-exempt status at all?

What is 501(c)(4) Status?

Donations that you make to 501(c)(4) groups aren’t tax-deductible, since these groups can actually participate in lobbying efforts and other political activities. However, the primary purpose is not supposed to be campaigning. These groups receive tax-favored status because they are supposed to be, according to the IRS, “civic leagues, social welfare organizations, and local associations of employees.”

Net income for 501(c)(4) groups is supposed to be used for educational, recreational, and charitable purposes. Campaigning, and efforts to push a political agenda, while allowed, are not supposed to be the main activities of such organizations. When an organization seems to be doing a lot more in terms of trying to get certain people elected, rather than focusing on other non-political activities, the IRS is likely to have a closer look.

Who’s Donating to 501(c)(4) Groups?

Some advocates of campaign transparency hope that this scandal, rather than shining a light on the IRS or specific groups, actually brings more attention to the 501(c)(4) status itself. Donors don’t have to be identified with these groups, so it’s easy for the wealthy to sway agendas and give large amounts of money, without “ordinary” citizens seeing exactly where the money is coming from.

For those who are interested in seeing who is influencing elections, it can be frustrating to figure out what is going on behind the closed doors (and donation ledgers) of 501(c)(4) groups. The solution, some think, is to change that part of the law and revoke tax-favored status for 501(c)(4) groups altogether.

As far as donors are concerned, it is unlikely that things would change. Donations made to 501(c)(4) groups can’t be deducted on your taxes, and if these groups lose their tax-favored status, it won’t matter to donors — unless the law is also changed to require these groups to disclose donor names and amounts.

However, such a change would impact the groups themselves. They would no longer have the tax-favored status that allows them to more efficiently use the money that comes in.

Bottom Line

While the IRS definitely needs to work harder at showing itself above partisan politics when evaluating different groups for tax-favored status, there are also questions about the law as it’s currently written. In many case, groups with blatant political missions are applying for — and being granted — 501(c)(4) status, even though many of them probably do deserve a little extra scrutiny.

What do you think of 501(c)(4) status? Should more groups be scrutinized? Is it time to do away with tax-favored status for this designation altogether?