By Patrick Temple-West and Alina Selyukh
WASHINGTON (Reuters) - The Internal Revenue Service is signaling that it will increase its scrutiny of tax-exempt political organizations, which are becoming a force in elections by raising tens of millions of dollars from undisclosed donors.
The IRS has been corresponding with such groups and is preparing questions to ask them as part of effort to determine whether their fundraising or advertising work runs afoul of tax law. IRS spokesman Terry Lemons said on Thursday the scrutiny will affect a range of tax-exempt groups.
The move comes as such tax-exempt groups - many of which have better-known sister organizations known as "Super PACs," or political action committees - are under criticism from Democrats and some Republicans for using money from anonymous sources to try to influence elections.
Like Super PACs, tax-exempt political groups can raise and spend unlimited funds - in contrast to political campaigns, which may receive only $2,500 per donor each election cycle.
Super PACs, which must disclose their donors, operate independently from campaigns but may release ads that boost or attack specific candidates.
Tax-exempt groups, meanwhile, can qualify under the U.S. tax code as social welfare groups, which allows them to keep their donors private as long as most of their money is spent on so-called "issue ads." Unlike regular political ads, such ads cannot use a candidate's name or likeness and are supposed to be used to educate the public on broad issues or positions.
But some ads released by tax-exempt groups have pushed those boundaries, raising questions about the groups' legal status and calls for them to be forced to disclose their donors, as Super PACs do.
This month, Democratic President Barack Obama's re-election campaign asked the Federal Election Commission (FEC) to force Crossroads GPS, a tax-exempt group founded by former George W. Bush adviser Karl Rove, to register as a PAC and disclose its donors.
Crossroads - which alongside its Super PAC sister plans to spend up to $300 million on the November elections - has drawn criticism for releasing video ads that Democrats say are more political than educational. One recent Crossroads ad featured an image of Obama and said, "Obama says spend more. We need jobs, not more Washington insider deals."
Such ads seek to avoid being deemed political by the FEC by ending with a call for viewers to take action - such as to write to Obama - rather than call directly for Obama to be ousted from office.
FOLLOWING THE RULES?
A Wall Street Journal report on Wednesday indicated that an IRS probe was under way for large conservative tax-exempt groups such as Crossroads and Americans for Prosperity, which is funded in part by the oil and gas tycoons David and Charles Koch.
"Press reports (Wednesday) are completely misleading and inaccurate," the IRS's Lemons said, adding that the agency's examination of tax-exempt groups is likely to include nonprofits, trade groups and labor unions.
The IRS has the power to revoke the tax-exempt status of such groups, which could trigger a tax bill for them. If the IRS gets its questionnaires to the groups soon, it still would be unlikely to complete any probes until well after the November 6 election.
The IRS declined to comment on specific groups, but some analysts said Crossroads and other Republican-affiliated groups that have been particularly aggressive in fundraising this election season seem likely to be examined.
"Crossroads was formed by people with a long association to the Republican Party. It doesn't seem to advocate for an issue for any other reason other than it has an impact on a political campaign," said Marcus Owens, a former director of the IRS exempt organization division. He estimated that roughly 100 tax-exempt groups could draw scrutiny from the IRS.
Tim Phillips, who runs Americans for Prosperity, said his group has had regular contact with the IRS for several years.
"They occasionally will contact us with a routine question about a disbursement we make," he said. "On occasion there will be a question and we provide an answer to them."
Phillips and leaders of Crossroads and Priorities USA, a Democrat-led nonprofit that supports Obama, have said that they strictly comply with tax laws.
Run by longtime political operatives, the groups are represented by experienced tax lawyers, promising a fire storm of litigation if the IRS decides to investigate any of them.
"Crossroads GPS takes great care to follow all laws governing nonprofit entities," spokesman Jonathan Collegio said. "The IRS has made clear that groups like Crossroads are in the same boat with thousands of nonprofits, labor unions and trade associations across the country."
Earlier this year, some smaller, local advocacy groups, many of them affiliated with the conservative Tea Party movement, received IRS questionnaires asking about their qualifications for tax-exempt status.
At the time, some conservatives accused the IRS of playing into liberals' hands by trying to intimidate and silence conservative groups.
Democrats have been increasing pressure on the IRS to step up its oversight.
"(The) IRS has a responsibility to make sure that these groups are not defrauding taxpayers, that they are not abusing the ... charitable organization status pursuing political purposes," U.S. Representative Chris Van Hollen, a Maryland Democrat who is leading an effort to overhaul campaign finance rules, said at the Reuters Washington Summit this week.
The fuzzy lines surrounding political donations were clear on Wednesday, when New York Attorney General Eric Schneiderman said his office is investigating whether the U.S. Chamber of Commerce is complying with rules for tax-exempt groups.
(Editing by David Lindsey and Christopher Wilson)