WASHINGTON — The Obama administration moved Tuesday to limit the expansive role that nonprofit groups play in politics, proposing a new regulation that would rein in certain tax-exempt organizations that have been able to spend hundreds of millions of dollars in recent elections without revealing their donors.
Under the proposed rule, groups such as Crossroads GPS, co-founded by GOP strategist Karl Rove, and the Democratic-allied League of Conservation Voters would no longer be able to claim some of their routine activities as part of their work as "social welfare" organizations.
Instead, the new Treasury Department regulation would define things such as distributing voter guides, registering people to vote and running ads that mention elected officials close to Election Day as "candidate-related political activities." The rule would substantially roll back the level of political activity open to "social welfare" groups.
Once enacted, the restrictions would represent a major shift for such organizations, set up under Section 501(c)(4) of the federal tax code, which currently have great latitude to engage in elections, a freedom they have increasingly exercised in recent years.
The proposal Tuesday is a preliminary but significant step to clamp down on tax-exempt groups that have altered the political landscape in the past decade, fueled by the unlimited donations that traditional political parties can no longer accept.
Election law attorneys said they anticipate strong resistance to the proposal during an extensive comment period and legal challenges once the rule is enacted. They warned that the rule could push political money into new vehicles such as private partnerships.
"It sounds like a fairly dramatic proposal that would significantly change the ways in which tax-exempt organizations are used for political purposes," said lawyer Robert Kelner, whose clients include nonprofit groups. "The most striking thing is the apparent proposal to treat get-out-the-vote activity and voter registration as political activity, which has not been the IRS's position generally speaking up until now."
Tax experts, reformers and activists offered a range of reactions to the Treasury announcement, with many expressing apprehension and alarm, underscoring the politically delicate terrain the Internal Revenue Service must negotiate in the wake of the scandal over the agency's targeting of politically active groups for extra scrutiny.
"This is a crass political effort by the administration to get what political advantage they can, when they can," said House Oversight and Government Reform Committee Chairman Darrell Issa, R-Calif., who led the inquiry into alleged politicization of the IRS.
"This is very bad and very irritating," said Grover Norquist, the president of Americans for Tax Reform, a nonprofit that has been closely allied with the Republican Party. "This proposal appears to be motivated by politics, as was this administration's earlier war on the tea-party-sponsored nonprofits."
But the initiative was largely cheered by campaign finance reform advocates as an important effort to limit the use of secret money in campaigns. They urged Treasury to also issue a regulation defining how much — if any — political activity social welfare and other nonprofit groups should be able to engage in.
"We are at a point now where we have had wholesale evasion of campaign finance law," said Fred Wertheimer, president of Democracy 21, a group that seeks to reduce the influence of money in politics.
Unlike political committees, 501(c)(4) groups do not have to report their donors or all of their spending to the Federal Election Commission.
But the debate over regulating such groups is potentially politically explosive because the proposed tax code changes collide with constitutional questions about freedom of speech.
"This proposal will quickly turn into a debate about the IRS trying to stifle political expression on the Internet," said Brett Kappel, a campaign finance lawyer.