Tax-exempt groups known as 501(c)(4)’s have become a potent force in the 2012 election, eclipsing Super PACs as the vehicle of choice for many corporations and individuals because 501(c)(4)’s do not have to disclose their donors. Amid growing controversy about whether some 501(c)(4)’s are engaged in more extensive election-related activity than the law allows or should be subject to stricter disclosure rules, IRS officials have been characteristically tight-lipped. 

This week the IRS has shown signs of stirring. A letter released earlier this week from the Director of the IRS’s Exempt Organizations Division responded to complaints filed by watchdog groups by saying that the IRS will consider whether it needs to update agency rules adopted over fifty years ago or publish new guidance. Yesterday, as reported by the Bloomberg BNA Money & Politics Report (subscription required) a senior IRS official testified that the agency has approved 501(c)(4) applications for many small, local organizations, including some tea party groups. The official warned, however, that the IRS will examine a group’s activities over an entire year to determine whether it is operating consistently with its tax-exempt purpose.

What do these latest developments mean? It would be unsurprising if the IRS decides to tackle the 501(c)(4) controversy, but any action is likely to come well after the November election with a view toward 2014. Apart from the backlash it would provoke if the agency took aggressive steps during the heat of an election season, the legal issues are complex and not easily resolved. The law allows a 501(c)(4) to engage in political activity so long as such activity is not the group’s primary purpose. But the IRS has done little to define what political activity is. Published guidance lists multiple characteristics of issue ads, on the one hand, and election ads, on the other, but real ads tend to have attributes from both lists. 

The FEC has struggled over the years to define when an ad calls on voters to elect or defeat candidates, and when an ad is about issues. Courts and legislatures have struggled over the same. The IRS is unlikely to find the job any easier.