Tax reform: Bright line at the end of the tunnel

Despite what many in the media have said, tax reform is not dead; it is still very much on Congress’ agenda. The time frame in which it can be accomplished remains uncertain; however, there is one tax change they should agree on and move forward with immediately.

It’s not divisive, and it has bipartisan support: Congress should fix IRS tax administration for nonprofit organizations, particularly with regard to the definitions of political activity for tax-exempt organizations.

ADVERTISEMENT
The allegations earlier this year of misconduct by the IRS in handling applications for tax-exempt status by nonprofit organizations that engage in political activity have made it clear that the current standards used to determine what constitutes political activity are blurry and difficult to understand for both IRS employees and nonprofit applicants.

Democrats and Republicans agree that “political activity” needs to be clearly defined.  Without clear and objective rules, many nonprofit organizations of all stripes will continue to opt out of the democratic process in fear of unknown consequences from the IRS.  Many charities, for example, do not engage in permissible nonpartisan voter work for fear that such actions might result in loss of their charitable status.  Other nonprofits, including social welfare groups and trade associations, push the envelope because of ambiguity in the rules.  Overall, it is an unfair situation where bigger, more aggressive organizations move forward while risk-adverse smaller groups sit on the sidelines.

Fortunately, a group of nonprofit leaders and tax law experts have been working for the past four-plus years to figure out how to draw bright lines that define political activity under the tax code, aptly naming their work the Bright Lines Project.  The team’s work, now spearheaded by Public Citizen, provides a clear framework on how to create clear bright line definitions for political activity for nonprofit organizations. 

The proposal makes it clear that tax-exempt organizations that endorse or contribute to the campaign of a political candidate or party are engaged in political activity, something charities are already prohibited from doing.  That proposal also notes that organizations that refer to a candidate and reflect a view about that candidate are also engaging in political activity.  However, the proposal carves out several important exemptions that create a roadmap with clear pathways for nonprofit organizations to play a genuine role in our democracy without fear of IRS audits or sanctions.

It is encouraging that leaders from both sides are invested in addressing tax reform. Both Republicans and Democrats agree that the tax code needs to be revamped and the goals should be to create jobs, spur corporate domestic investment, and simplify the tax code for all taxpayers.  The partisan disagreement lies in how to achieve these goals.

Tax reform is going to be a long uphill battle, but Congress can start with embracing clear definitions of political activity now.  The Bright Lines Project has provided a blueprint for moving forward. 

Halloran is project coordinator for Public Citizen’s Bright Lines Project.