IRS to start over on rules governing tea party groups, other nonprofits

The IRS said Thursday it will go back and rewrite the proposed rules governing nonprofit groups and political activity, bowing to overwhelming opposition from tea party groups and free speech advocates on both ends of the ideological spectrum who feared the tax agency would hurt political debate.

In a statement, the IRS said it still intends to update its rules but will put off a hearing until after it issues a new version — and gave no timetable for moving ahead.

Conservatives hailed the move as a victory, saying that issuing a new version of the rule before the hearing is tantamount to starting over. Meanwhile, Democrats on Capitol Hill said the move was a setback for their efforts to try to push wealthy donors to the periphery of political debate.

“This delay is deeply disappointing and a real setback for democracy and faith in government,” said Sen. Charles E. Schumer, New York Democrat. “The only hope we have is when the IRS goes back, they don’t succumb to any form of political pressure and enact a very tough rule that will equally curtail liberal and conservative groups.”

It’s the latest chapter in the IRS tea party-targeting scandal that erupted a year ago, when the IRS’s internal auditor found the agency improperly targeted tea party and conservative groups who applied for status as nonprofit “social welfare” organizations. According to the audit, the agency asked inappropriate questions of conservative groups and blocked some applications for years.

As of earlier this month, some applications were still being held up — including one that has been waiting for five years.

The agency says the current rules — and a crush of new applications — created confusion, which they said led to the tea party-targeting scandal.

Under the current rules, social welfare groups, also known as 501(c)(4) organizations, are allowed to conduct political activities as long as such activities aren’t the applicant’s “primary” purpose. Many of the groups have interpreted that to mean 49 percent of their activities can be political. Organizing as a social welfare group also allows them to shield their donors from public disclosure.

The rewrite that the IRS proposed late last year would have banned a wider array of political activity, including even publishing voter guides or inviting candidates, such as sitting members of Congress, to talk to groups in the months ahead of an election.

The revision drew scathing criticism, with more than 150,000 comments — most of them negative — officially filed with the agency and with the Treasury Department, which cowrote the new rules.

Groups ranging from the American Civil Liberties Union and the League of Women Voters to the American Conservative Union said they feared the rules would stifle democratic debate.

Faced with that opposition, IRS Commissioner John Koskinen had hinted the agency would make substantial changes. And on Thursday the agency made that official.

“Consistent with what Commissioner Koskinen has previously stated, it is likely that we will make some changes to the proposed regulation in light of the comments we have received,” the IRS said in a statement. “Given the diversity of views expressed and the volume of substantive input, we have concluded that it would be more efficient and useful to hold a public hearing after we publish the revised proposed regulation.”

Republicans said putting off a hearing until after a rewrite amounts to scrapping the original rules.

“This proposed rule was wrong from the start,” said House Ways and Means Committee Chairman Dave Camp, the Michigan Republican who is Congress’s chief tax writer. “The American people spoke out loud and clear against it, and hopefully the IRS and the Obama administration will think twice before ever trying to go down this path again.”

The IRS said it is committed to still going ahead with a rewrite, but Mr. Koskinen had previously said it wouldn’t be in place for this November’s congressional elections.

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