A senior Democratic senator asked the IRS Wednesday to investigate third-party groups he says are manipulating tax-exempt status for political gain.

Since the Supreme Court's ruling on Citizens United vs. the FEC, political spending by such outside groups has exploded. Democrats have long said that because such spending has favored Republican candidates, the party's advantage in fundraising over Republican counterparts has been neutralized.

Wednesday's move by Max Baucus (D-Mont.), chairman of the Senate Finance Committee, is the most overt step yet taken by a Democrat aimed at countering their influence. In a letter to IRS Commissioner Doug Shulman, he asks the body to investigate whether the tax code is being used to "eliminate transparency in the funding of our elections," and if tax benefits of 501(c)(4), (c)(5) or (c)(6) groups "are being used to advance private interests."

"When political campaigns and individuals manipulate tax-exempt organizations to advance their own political agenda, they are able to raise and spend money without disclosing a dime, deceive the public and manipulate the entire political system," Baucus said in a statement.

Baucus' letter mentions no specific group by name, but cites media reports that focus on entities such as Americans for Job Security and Crossroads GPS. The latter has spent millions on an ad campaign targeting Democratic candidates for U.S. Senate on the issue of healthcare.

The groups have maintained that they abide by all relevant law.

[Editor's note: The full text of Seantor Baucus' letter is below, as posted by David Swanson (emphasis added.)]

The Honorable Douglas H. Shulman
Commissioner
Internal Revenue Service
1111 Constitution Avenue, N.W. 
Washington, DC  20224
 
Via Electronic Transmission
 
Dear Commissioner Shulman:
 
The Senate Finance Committee has jurisdiction over revenue matters, and the
Committee is responsible for conducting oversight of the administration of the federal tax system, including matters involving tax-exempt organizations.   The Committee has focused extensively over the past decade on whether tax–exempt groups have been used for lobbying or other financial or political gain.  
 
The central question examined by the Committee has been whether certain
charitable or social welfare organizations qualify for the tax-exempt status provided under the Internal Revenue Code.    
 
Recent media reports on various 501(c)(4) organizations engaged in political
activity have raised serious questions about whether such organizations are operating in compliance with the Internal Revenue Code. 
 
The law requires that political campaign activity by a 501(c)(4), (c)(5) or (c)(6)
entity must not be the primary purpose of the organization. 
 
If it is determined the primary purpose of the 501(c)(4), (c)(5) and (c)(6)
organization is political campaign activity the tax exemption for that nonprofit can be terminated.  
 
Even if political campaign activity is not the primary purpose of a 501(c)(4),
(c)(5), and (c)(6) organization, it must notify its members of the portion of dues paid due to political activity or pay a proxy tax under Section 6033(e).
Also, tax-exempt organizations and their donors must not engage in private
inurement or excess benefit transactions.  These rules prevent private individuals or groups from using tax-exempt organizations to benefit their private interests or to profit from the tax-exempt organization’s activities.     
 
A September 23 New York Times article entitled “Hidden Under a Tax-Exempt
Cloak, Private Dollars Flow” described the activities of the organization Americans for Job Security.  An Alaska Public Office Commission investigation revealed that AJS, organized as an entity to promote social welfare under 501(c)(6), fought development in Alaska at the behest of a “local financier who paid for most of the referendum campaign.”   The Commission report said that “Americans for Job Security has no other purpose other than to cover money trails all over the country.”  The article also noted that “membership dues and assessments ... plunged to zero before rising to $12.2 million for the presidential race.” 
 
A September 16 Time Magazine article examined the activities of Washington
D.C. based 501(c)(4) groups planning a “$300 million … spending blitz” in the 2010 elections.  The article describes a group transforming itself into a nonprofit under 501(c)(4) of the tax code, ensuring that they would not have to “publically disclose any information about its donors.”
 
These media reports raise a basic question: Is the tax code being used to eliminate transparency in the funding of our elections – elections that are the constitutional bedrock of our democracy? They also raise concerns about whether the tax benefits of nonprofits are being used to advance private interests. 
 
With hundreds of millions of dollars being spent in election contests by tax-
exempt entities, it is time to take a fresh look at current practices and how they comport with the Internal Revenue Code’s rules for nonprofits. 
 
I request that you and your agency survey major 501(c)(4), (c)(5) and (c)(6)
organizations involved in political campaign activity to examine whether they are operated for the organization’s intended tax exempt purpose and to ensure that political campaign activity is not the organization’s primary activity. Specifically you should examine if these political activities reach a primary purpose level – the standard imposed by the federal tax code – and if they do not, whether the organization is complying with the notice or proxy tax requirements of Section 6033(e).  I also request that you or your agency survey major 501(c)(4), (c)(5), and (c)(6) organizations to determine whether they are acting as conduits for major donors advancing their own private interests regarding legislation or political campaigns, or are providing major donors with excess benefits.
 
Possible violation of tax laws should be identified as you conduct this study.  
 
Please report back to the Finance Committee as soon as possible with your
findings and recommended actions regarding this matter.  
 
 Based on your report I plan to ask the Committee to open its own investigation
and/or to take appropriate legislative action.
 
       Sincerely,
 
       Max Baucus  
       Chairman