Politics

09.20.12

Our Toothless Campaign Finance Watchdogs

As more and more money floods the political world, our regulations are struggling to keep up. Part three of a Daily Beast series.

This is the third and final installment in a series by The Daily Beast, in partnership with the Center for Responsive Politics, on the influx of money into the 2012 campaign. To read part one, click here. To read part two, click here.

The gold rush excesses of the super-PAC economy are encouraged by a Wild West mentality, where all boundaries are pushed in the absence of strong laws. The mechanisms for enforcing the rules are toothless and totally unsuited for the task at hand.

The Federal Election Commission would seem to be the obvious agency to regulate the system, but experts say the odds that it will hand down harsh penalties for, say, illegal coordination between a super PAC and a campaign are extremely low. In recent years, the FEC—which is run by six commissioners, three Republicans and three Democrats—has been routinely deadlocked with party-line votes.

“There was always a partisan split on the agency. But there used to be more of an institutional concern that we have a law here to enforce,” says Larry Noble, who served as general counsel to the FEC for 13 years. “What happened in the 2000s is that commissioners were appointed who were very upfront about the fact that they didn’t believe in the law—and they felt the election laws were unconstitutional in many respects… Over the past ten years or so, you’ve had a great increase in three/three splits due to the fact that they won’t compromise. And so you have a less aggressive commission.”

If the FEC isn’t going to aggressively regulate this world, who will? Another possibility is the IRS, specifically the tax-exempt division, which oversees the approximately 1.6 million organizations in the United States that claim tax-exempt status—about 97,000 of which are 501(c)(4)s. As we examined yesterday, some of those C4s—which allow for unlimited, anonymous donations—are playing pivotal roles in the 2012 campaign. This puts the IRS tax-exempt division in a position to enforce certain rules of the campaign finance system—for instance, the regulation that says C4s can only spend 50 percent of their budget on direct political activity.

But is the IRS capable of doing this effectively? The agency’s tax-exempt division has about 900 employees—of those, only about 400 to 500 conduct audits. Last year, they conducted about 2,500 audits, but the number of C4 organizations audited is much lower. Depending on the year, the IRS generally audits 100 of the 97,000 C4s annually, meaning there is a roughly 0.1 percent chance that any organization will be audited.

“In any given year, the vast majority of organizations aren’t going to hear from the IRS,” says Marcus Owens, a Washington lawyer and the former head of the tax-exempt division. “Many organizations will never hear from the IRS over their institutional lives.” Normally, the lack of institutional intrusion into a legitimate non-profit would be welcome—but in the case of dark money-spreading 501(c)(4)s, which are pushing the boundaries of the 50-percent rule in order to maximize their impact on elections, there is a need for greater scrutiny.

“There will be a test case soon,” says Republican strategist Rick Wilson.

Even if a C4 does get audited, the audit likely won’t be completed for nearly two years after the calendar year of the election. And even if the group is found to have broken the law, there are rarely criminal penalties. Instead, there are usually only civil penalties: A C4 group can be stripped of its tax-exempt status and may have to pay back taxes for all of its activities during an election. That might be a lot of money, but for an already wealthy group, that’s a small price to pay for a year long offensive to get its favorite candidate elected. And, of course, it’s not like the IRS could reverse the election results.

Owens says his former division simply doesn’t have the resources to oversee political groups participating in elections. Bill Allison, editorial director of the Sunlight Foundation, puts it this way: “The IRS simply does not want to be in the same business as the FEC.”

Top IRS officials declined to answer questions from The Daily Beast about the agency’s role in election oversight. But a source familiar with IRS internal operations told us that earlier this summer, Lois Lerner, who currently heads the tax-exempt division, held a full staff meeting to discuss the problem on the agency’s hands. At the meeting, she said that she and top officials were working on some way to more effectively enforce the law.

In June, after receiving formal complaints about the abuse of 501(c)(4)s co-signed by the liberal organization Democracy 21 and the conservative Campaign Legal Center, the IRS announced that it would send out a questionnaire to “social welfare organizations, labor unions and trade associations” that have attracted unprecedented donations in the past two election cycles in order to collect information about tax compliance and anticipate future audit trends. In July, the IRS issued a letter (PDF) publicly affirming its interest in updating these regulations, saying that they “are aware of current public interest in this issue. These regulations have been in place since 1959. We will consider proposed changes in this area.”

Besides the IRS, what other avenues are available for bringing some clarity and transparency to the world of campaign finance? One such attempt was a suit brought by Representative Chris Van Hollen (D-MD). That suit resulted in a district court ruling that 501(c)(4)s had to disclose the names of donors whose money paid for electioneering ads within 60 days of a general election and 30 days of a primary election or nominating convention. But this week, that ruling was struck down by a federal appeals court. The FEC has been entrusted with devising new rules—but for now at least, the disclosure requirement is no longer operative.

There are no shortage of other pragmatic proposals to fix the campaign finance system. Trevor Potter, the president of the Campaign Legal Center and former FEC chairman, suggests that Congress take the simple step of requiring C4s to disclose their donors when their money goes toward political advertising. Another proposal—pushed by Senator Maria Cantwell (D-WA)—would apply a gift tax to contributions to 501(c)(4)s. The idea is that the prospect of paying 35 percent on these donations (over a proposed $5 million limit) might dissuade the mega-rich from making outsized, anonymous gifts going forward. For his part, tax-exempt lawyer Gregory Colvin suggests lowering the amount that 501(c)(4)s can spend on politics from 49 percent to 10 percent.

Then there is the DISCLOSE Act, which would have required tax-exempt organizations that are involved in political advertising to disclose the names of donors who gave more than $10,000 to that effort. But Senate Republicans blocked the legislation by threatening a filibuster in July. And, despite rhetoric from Mitch McConnell about the importance of transparency in the past, the DISCLOSE Act seems dead in the water going forward.

Finally, of course, there is the hope of a more aggressive FEC. Given the FEC’s partisan stalemate, it seems unlikely to take strong action in the near future. But it would not be unprecedented. After the 2004 election, action was taken against three 527s—Swiftboat Veterans for Truth, MoveOn.org, and the League of Conservation Voters—on charges that they failed to file disclosure reports as federal political committees and accepted contributions in violation of federal limits. The $600,000 levied in penalties was small in comparison to the money spent during the election, but the fines still served as a powerful brush-back pitch to 527s, effectively changing their behavior in the 2006 and 2008 elections.

This precedent of post-election scrutiny has some lawyers advising clients not to play too fast and loose with the current law. “There are always going to be groups who push the envelope of what’s legal on both sides of the partisan divide,” says Larry Levy, an election and white-collar defense lawyer in New York. “And that’s why I wouldn’t be surprised if there are people after this election who find themselves spending a lot of time with the FEC, the IRS, and possibly the DOJ—trying to explain what they did and why.”

The Supreme Court has spoken on Citizens United. Barring a constitutional amendment, it is the law of the land. But the rise of 501(c)(4)s that rarely disclose donors while funding an avalanche of negative ads clearly undercuts the original intention of the ruling. And because of too often toothless regulations, what is not explicitly forbidden is now essentially allowed.

Instead of seeing a new era of transparency in political donations, our system is awash in both money and secrecy: the worst of both worlds from a citizen’s perspective. This is further polarizing our politics because the super-PAC economy is designed to financially reward hyper-partisanship.

For the consultant class, of course, this is the best of times—as like-minded billionaires and special-interest groups pay them handsomely. But at some point, after this election, the music may well stop. “There will be a test case soon,” says Republican strategist Rick Wilson. “It’s why I pay two separate election lawyers to keep me out of jail. Because there will be some eager little bureaucrat who decides that he will end all this horrible negative communication.”

Disclosure: John Avlon’s wife, Margaret Hoover, is treasurer of American Unity PAC, which supports Republican candidates in favor of LGBT rights.