IRS drops probe of gifts to political advocacy groups

The Internal Revenue Service has abruptly dropped an investigation into whether donors to non-profit advocacy groups that have spent millions of dollars to influence political campaigns should pay gift taxes on their contributions.

"This is a difficult area with significant legal, administrative, and policy implications with respect to which we have little enforcement history," Steven T. Miller, deputy commissioner for services and enforcement, wrote in a memo posted on the IRS's website Thursday. "Until further notice, examination resources should not be expended on this issue."

The memo marked an abrupt reversal for the agency, which confirmed in May it had notified several individuals who had made large contributions to political groups registered as 501c4 non-profits that they may owe gift taxes on those donations.

The probe came after outside groups, including Crossroads GPS and other so-called "shadow GOP" organizations, spent tens of millions of dollars to influence the 2010 election. Now, dozens of similar groups, including many on the Democratic side, have announced plans to spend big cash to impact the 2012 campaign. Unlike regular political action committees, the groups are allowed to raise and spend unlimited amounts of cash without publicly disclosing their donors. But under tax law, the 501c4 groups are limited in how much politicking they can do.

Last fall, watchdog groups urged the IRS to investigate Crossroads GPS for violating its tax-exempt status by implicitly intervening in the 2010 campaign. It's unclear if the IRS pursued that investigation. But it apparently did begin to scrutinize donors to such groups by pursuing the gift tax probe in spite of the fact the agency had rarely enforced the issue.

Per the Wall Street Journal, the IRS apparently dropped its probe after GOP members of Congress began questioning the agency on what had prompted its investigation.

Notably, the IRS did not rule out enforcing the gift tax in the future—though Miller, in his memo, wrote it will come "only after notice to the public."