On Feb. 24, 2006 the Internal Revenue Service (IRS) released its much-anticipated assessment of its 2004 program created to enforce the ban on partisan election activity by charities and religious organizations. This summary outlines the procedures used in the programs and the results of the examinations competed to date. Background Update: Aug. 31, 2006: IRS Drops Case Against NAACP. See our press statement The 2004 program stirred controversy when the National Association for the Advancement of Colored People (NAACP) revealed it was being investigated because its Chairman criticized President Bush’s policies on the war in Iraq and other issues during a speech at its annual convention. The IRS responded to charges that the investigation was politically motivated by revealing a new compliance initiative developed in the summer of 2004 aimed at partisan activities by charities. In early 2005 the Nonprofit Advocacy Coalition, comprised of the Alliance for Justice, the Center for Lobbying in the Public Interest, the National Committee for Responsive Philanthropy, the National Council of Nonprofit Associations and OMB Watch, wrote to the IRS expressing concern about the apparent treatment of criticism of an elected official’s policies as partisan electioneering. In a May 2005 meeting with IRS officials the coalition requested a report on the 2004 enforcement project so that the public could be better informed about the IRS's interpretation of the law and its new compliance efforts. Summary The FINAL REPORT PROJECT 302 Political Activities Compliance Initiative (PACI) describes the purpose of the new approach to enforcement of the prohibition on intervention in elections by charities and religious organizations, the 2004 procedures, the results of the investigations to date and makes recommendations for the 2006 election year enforcement program. The report is online at here Introduction The IRS begins by stating the report’s findings were used to “develop procedures for the 2006 PACI program.” In 2004 they expected an increase in the number of referrals of potential violations, so initiated the project in June of that year. Referrals come from both internal and external sources year round. The 2004 project covered referrals through Nov. 30, 2004. The IRS states the program’s objective “was to promote compliance….on an expedited basis during the 2004election year” and “deter organizations contacted under the program from continuing noncompliance…” The IRS acknowledged that the program presents “unique challenges”, including:

• "concerns regarding freedom of speech and religious expression";
• the fact that there is “no bright line test for evaluating political intervention”
• media reports on a small number of organizations "can create an impression of widespread noncompliance";
• the activities to be investigated are often not recorded and are difficult to document
• the IRS has limited options for sanctions when violations occur and
• privacy laws limits the IRS’ ability to discuss enforcement action.

Methodology Prior to 2004 political intervention cases were not expedited. The regular enforcement process, described in the Internal Revenue Manual, allowed the IRS 60 days to evaluate referrals. There was no deadline for completing a case. The Referral Committee did not meet often enough to meet the new objectives [deterrence]. "Thus, it was necessary to develop a 'fast track' case initiation process to expedite classification of the PACI referrals." (p. 2) PACI referrals were reviewed for potential examination by a special Political Intervention Referral and Claims Classification Unit comprised of three career civil servants knowledgeable in tax law. Each member reviewed the file independently and documented his or her recommendations. The cases were then reviewed jointly, and two of the three committee members had to agree to refer a case for examination before any further action was taken. If one member dissented their view was included in the file. This process occurred weekly rather than the usual monthly review. The standard for determining whether to proceed was whether a "reasonable belief" existed that a violation occurred. The report does not define "reasonable belief." The IRS notes that "selection of a case only signifies examination potential; it does not represent a conclusion." (p. 3) PACI cases were assigned to one of three groups:

• cases already being investigated (44 cases, or 33% of the total)
• referrals pending evaluation as of July 25, 2004 and received through Nov. 30, 2004, (166 referrals regarding 127 organizations). 68 were selected for examination, representing 54% of PACI referrals and 52% of PACI cases, and
• cases pending from the prior year. (20 cases, or 15% of the total)

Expedited Procedures Senior IRS officials met in June and July 2004 to develop procedures for expedited processing of referrals alleging political intervention by charities and religious organizations. The first notice of an examination was sent on Sept. 21, 2004. PACI cases were given priority and processed as a group. Once a case was selected for further investigation the classifications were to be made within 7-10 days instead of the normal 30-90 days. The procedures and timetable for processing cases depended on their level of seriousness and complexity. Type A cases were "non-complex, usually single issues cases" and Type B cases were "more complex, multiple-issue cases". The method used to contact the organizations and process the cases varied depending on the type of 501(c)(3) organization and facts of the case. Section 7611 of the tax code requires a closer examination of religious organizations prior to making contact than non-religious groups. Draft letters to religious organizations must ultimately be approved by the Director of the Exempt Organizations Division. Therefore, the initial inquiry letter and questions for religious organizations were forwarded to Mandatory Review within 15 days of receipt of the case, regardless of whether they were Type A or B. Non-religious Type A cases were sent a letter within 5 days of receipt of the case, and Type B case letters were sent within 2 days. The purpose of the letters was to "alert the exempt organization about the IRS" concerns, and invite a response that might address them. A standard follow-up letter was to be sent to the organization within 10 days detailing the specific conduct/activity. The IRS devoted two full time agents to Type A cases. Type B cases were sent to field offices, since these cases were likely to require visits to the organizations. In all 43 agents, one full-time reviewer and one full-time classifier worked on Type B cases. Types of Examinations Included in the Project IRS agents determined that 22 of the 132 cases forwarded to the field did not merit further examination, resulting in 110 total examinations for the PACI program. These included 40 Type A cases (33% of total) and 34 Type B (31% of total). 36 pre-existing cases accounted for 33% of the total. Church v. Non-Church Examinations Total = 110 Examinations Number Church of Exams Number of Non-Church Exams Total Examinations 47 63 Type A Examinations 29 11 Type B Examinations 5 29 Pre-existing Examinations 13 23 As if Feb. 16, 2006 the IRS had completed 74% of the examinations in the PACI program (82 of the 110). The results are: Closed Cases Number Church of Exams Number of Non-Church Exams Total Examinations 40 42 Type A Examinations 26 7 Type B Examinations 3 22 Pre-existing Examinations 11 16 Types of Political Campaign Intervention in 2004 Election Cycle Cases The common fact situations, noted in the report, that led to findings that groups had crossed the line into partisan activity were:

• Distribution of printed materials that encourage members to vote for a candidate (24 alleged, 9 determined)
• Endorsements from the pulpit (19 alleged, 12 determined)
• Support for a candidate on the organization's website (15 alleged, 7 determined)
• Distribution of partisan voter guides or candidate ratings (14 alleged, 4 determined)
• Campaign signs displayed (12 alleged, 9 determined)
• Preferential treatment given some candidates to speak at events (11 alleged, 9 determined) and
• Cash contributions to a political campaign (7 alleged, 5 determined)

Closed Case Results The IRS has completed 82 of the remaining 110 examinations, finding partisan activity occurred in 58 of reviewed cases. Of these only three warranted revocation of tax-exempt status. In the remaining 55 cases the IRS issued written advisories and, for one organization, an excise tax. Appeals are pending in four of the 82 closed cases. According to the IRS advisories were issued when the intervention was "of a one-time, non-recurring nature, or was taken in good faith on advice of counsel or was otherwise shown to be an anomaly", and corrective measures were taken, including "steps to prevent any future political intervention." In most cases excise tax was not an available sanction (no expenditures involved). Lessons Learned The report listed the following lessons learned in the 2004 PACI project:

• Limited scope examinations were a better use of resources than"soft contacts";
• The PACI process provides additional safeguards against bias or improper motives
• Confusion about the law lead some groups, particularly religious organizations, to mistakenly believe that only express endorsements or statements in opposition to candidates are prohibited
• The findings of no intervention (no-change in exempt status) did not mean the Classification Units incorrectly referred the groups for examination. In these cases further investigation showed that no intervention had occurred.
• News coverage of the PACI program promoted awareness of the IRS compliance efforts
• Use of sample questions for agents to ask organizations under examination promoted consistent treatment.

Going Forward The IRS recommends that:

The PACI project be up and running by March of each election year

Publicity for the program

Sufficient resources be allocated to the PACI program

Technical training on political activities be provided for agents and all staff in the PACI project

Internal operating procedures be fine tuned. Conclusions The fact that 72% of the cases examined by PACI found some level of prohibited intervention in electoral campaigns shows that "PACI addresses a significant compliance issue." PACI Team Recommendations The PACI team recommended improvements in the process. The IRS believes the general approach in cases resolved through written advisories (warnings) should be re-evaluated in the future, saying "Additional measures may be needed if a significant number of these organizations are found to engage in political intervention in future years." While the team believes more guidance for both IRS agents and the public would be helpful, it said "legislative modifications may be necessary to ensure our ability to effectively regulate in this area." In the future, they strongly recommend stricter enforcement, suggesting that "the IRS increase its use of revocation in cases that warrant this sanction."