Outlawed Soft Money Likely to Flow to Shadowy “527 Groups” That Skirt Flawed Disclosure System

April 9, 2002

Outlawed Soft Money Likely to Flow to Shadowy “527 Groups” That Skirt Flawed Disclosure System

Lawmakers, Consumer Group Urge House Not to Weaken Disclosure System in Vote on Wednesday, April 10

WASHINGTON, D.C. ? Shadowy “527” political organizations, which can accept unlimited contributions from unions, corporations and wealthy individuals, are likely to become conduits for soft money that political parties are now prohibited from collecting under a new campaign reform law, according to a new report released today by Public Citizen.

Public Citizen found that 527 groups ? products of an exemption carved in Section 527 of the Internal Revenue Code ? are already big and important players in federal politics. The top 25 of these private groups not connected to politician PACs raised $67.3 million in 18 months. This amount could increase dramatically when the ban on soft money contributions takes effect in November.

At the same time, the activities of 527 groups are difficult to track under the current disclosure law. Today, the 527 disclosure system is so flawed that you can?t search for a contributor such as Enron (without opening the IRS folders for more than 14,800 different 527 groups). Because of lax enforcement by the IRS, 527 groups also evade disclosure with regularity and often provide the IRS with vague or misleading information about their finances.

Yet the U.S. House is expected on Wednesday, April 10, to consider legislation ? H.R. 3991, sponsored by Rep. Bill Thomas (R-Calif.) ? that would actually further weaken disclosure requirements for 527 groups. Public Citizen urges House members to insist on a procedure that allows a fair vote on amendments that would prevent the opening of a huge loophole in the new campaign finance law.

Sens. Joseph Lieberman (D-Conn.), John McCain (R-Ariz.) and Russell Feingold (D-Wisc.) and Rep. Lloyd Doggett (D-Texas) praised the findings of Public Citizen?s report and joined Public Citizen at a news conference today in opposing a provision of H.R. 3991 that would unnecessarily undercut disclosure requirements for 527 groups.

“There is a clear and present danger that 527 groups will become surrogates for outlawed soft money,” said Joan Claybrook, Public Citizen president. “As long as 527s face limited disclosure and lax enforcement, they will continue to skirt the law with impunity and could become front groups for politicians and party officials who see little consequence for illegally steering their former soft money donors to these highly partisan vehicles. This is the next campaign finance scandal waiting to happen.”

Senator McCain criticized a provision of H.R. 3991 that would let 527 groups that claim to operate at the state, but not the federal level, to report their financial activities only at the state level. McCain stressed that there was no compelling reason to exempt these 527 groups from disclosing their activities to the IRS, which is more accessible than many state disclosure systems. “It doesn?t seem too difficult to photocopy a report, slap a stamp on it, and mail it to the IRS,” McCain said.

“The Thomas bill threatens to open loopholes in the disclosure law just at the time when that law is about to become even more important,” added Senator Feingold.

Rep. Doggett noted significant shortcomings of H.R. 3991 “It would be a step backward,” Doggett said. “It would permit state group not to report some soft money. It would not require disclosure even if soft money were solicited by a federal candidate or officeholder. And it would eliminate the requirement for some groups to file ?990? forms with the IRS [which detail some of the financial operations of non-profit groups].”

Public Citizen?s new study, Deja Vu Soft Money: Outlawed Contributions Likely to Flow to Shadowy 527 Groups that Skirt Flawed Disclosure System, focuses on the 25 largest known “non-politician” 527 groups ? or groups formally divorced from federal politicians. (On Feb. 26, 2002, Public Citizen released a report on “politician 527s,” or those controlled by members of Congress.)

Other findings of the latest report include:

  • Among the top 25 non-politician 527s the single biggest expenditure was for pre-election “issue ads” that focused on specific candidates and their positions on subjects such as abortion, the environment and taxes. The top 527 groups also paid for direct mail, phone banking and staff who trained campaign workers.
  • The IRS Web-based disclosure system for 527s is vastly inferior to the Federal Election Commission (FEC) system governing federal candidates and party committees. The current IRS system is equivalent to an electronic file cabinet with 14,800 different, unlinked folders in it. You can only find a 527 group if you know its name and then you must type in the name in the same, sometimes quirky way as the IRS entered it into the system.
  • 527 groups evade full disclosure in a number of ways. They fail to file entire reports. (The American Federation of State, County and Municipal Employees hasn?t filed a disclosure report since March 31, 2001.) They fail to disclose the occupation and employer of donors. (The Republican Leadership Coalition did not provide the occupation and employer for any of its 2,019 itemized individual contributions.) They fail to reveal their relationships to politicians and national party committees.
  • The IRS has not yet taken a single enforcement action against a 527 group. In fact, the IRS still does not have a program in place to police 527s and compel them to comply with the law.
  • Non-politician 527s are highly partisan, making them potential vehicles for soft money that federal party committees and officeholders can no longer receive under the McCain-Feingold/Shays-Meehan campaign reform law.
  • Public Citizen made several policy recommendations for strengthening the weak IRS 527 disclosure and enforcement: Congress should require the IRS, by a date certain, to create a fully searchable database for 527 groups and mandate that 527 groups file electronic disclosure reports. Congress should require that the date of each contribution and expenditure be revealed and the purpose of each expenditure be stated. Also, the FEC should develop criteria for investigating 527s that may be surrogates for illegal soft money fundraising, or may be coordinating with the fundraising activities of federal politicians.

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