IRS Accused of Failing to Aggressively Track Tax-Exempt Organizations

Campaign-finance watchdog groups are questioning the ability of the Internal Revenue Service to track soft-money fundraising in light of a multi-million-dollar mistake by the Republican Governors Association.

They also say the IRS has little incentive to enforce accurate reporting because the organization is tax-exempt under tax code section 527. At the same time, the issue raises serious issues with how the RGA keeps its books, the congressional newspaper The Hill reported.

The RGA has told the IRS that last year it failed to report more than $3 million it raised in the months preceding the gubernatorial races in Kentucky, Louisiana, Mississippi and the recall of California Gov. Gray Davis. The organization also failed to report nearly $4 million in expenditures.

Filings also show that the RGA underreported receipts for the last three months of 2002 by nearly $4.5 million.

Derek Willis, an analyst with the Center for Public Integrity, said the amendments not only raise questions about the ability of the RGA to keep accurate books, but also the IRS soft-money tracking system.

"It’s difficult to imagine this occurring in the FEC system. We don’t know enough about the way the IRS enforces [accurate reporting]," he said. Watchdog groups agree, saying that similar mistakes by a political committee regulated by the Federal Election Commission would at least result in an audit if not fines.

Under Section 527, certain types of political organizations can raise money without paying income tax on it. Congress requires these 527 political organizations to disclose contribution and distribution amounts.

RGA spokesman Harvey Valentine attributed the problems to "growing pains." He said the organization raised money at a furious pace, generating nearly $16 million for GOP candidates in 2003. "The CFO got overwhelmed and got behind and never really caught up," Valentine said.

A new financial officer discovered the discrepancies, ordered an audit and reported the mistakes to the IRS.

Larry Noble, a former general counsel at the FEC who is now he executive director of the Center for Responsive Politics, that the IRS is less concerned about tax-exempt organizations; the emphasis is on making sure that organizations that pay taxes follow the law.

"I think the IRS and everyone recognizes that the IRS was not set up as a disclosure agency," he said. "I think the question is whether the IRS is equipped to deal with the type of disclosure and the type of analysis required."

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