Why Tax-Exempt Groups are a Political Minefield for the IRS

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Smaller organizations, such as many of those caught up in the IRS's recent scandal, may have been victims of confusion about the law, and a lack of well-paid election law experts.

When the dust settles, however, Democrats may be hard pressed to find support for their efforts to tighten campaign finance laws in a way that creates more disclosure and less political spending.

"No one is going to want to touch [tax-exempt groups] with a 10-foot pole now," said Ken Gross, an election law expert and former counsel to the Federal Election Commission. "The IRS's involvement in these issues has been radioactive. And the whole debacle has legs, and those looking to make something out of it will make sure that it has long legs."

Although they didn't spell it out, when Senate Democrats wrote letters to the IRS in 2010 and 2012 asking for additional scrutiny of tax-exempt groups that appeared to be deeply involved in political activity, it was an attempt to rein in the influence of the Crossroads organization, which is believed to have spent tens of millions of dollars supporting Republican candidates in 2010.

"We urge the IRS to take these steps immediately to prevent abuse of the tax code by political groups focused on federal election activities," those Democrats wrote in 2012.

Watchdog groups such as the Campaign Legal Center and Democracy 21 had no qualms about specifically naming Crossroads GPS in a request to the IRS commissioner for an investigation.

"This is an area where some groups have been using 501(c)4s to evade disclosure when they should have been political organizations," Gross said. "Many of these groups that were seeking 501(c)4 status were partisan political entities that should be 527s [which are required to disclose their donors] and not 501(c)4s. Trying to put them into a 501(c)4 status is shoe-horning them, and trying to put a square peg into a round whole."

Yet, the IRS primarily succeeded in halting the activity of smaller Tea Party and conservative organizations, which may or may not have been engaged in heavy political activity.

Larry Noble, the president and CEO of Americans for Campaign reform, said that the IRS can't shirk its duty to review applications to make sure groups are following the law, but confusion in this area of tax law reigns.

"The IRS is called upon to review these groups and make sure they are complying with the law, which means they cannot undertake as a primary purpose political activity," said Noble, who was formerly the general counsel of the Federal Election Commission. "IRS is vague in defining what political activity is and what primary purpose is," and that has "left a lot of people guessing."

ABC News' Shushannah Walshe contributed to this report.

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