Karl Rove’s “Dark Money” Machine Is Now Tax-Exempt. Here’s Why That Matters

Karl Rove’s “Dark Money” Machine Is Now Tax-Exempt. Here’s Why That Matters

(Photo: AP/Rich Pedroncelli)


If it wasn’t clear that the Internal Revenue Service has no intention of regulating politically active tax-exempt groups, it should be now.

On Tuesday, news broke that the IRS awarded tax-exempt status to Crossroads GPS, a purported “social welfare” group that constitutes one-half of the big-spending political network masterminded by GOP operative Karl Rove. The agency’s ruling came in November of last year, according to documents reviewed by the nonpartisan Center for Responsive Politics.

The ruling drew fire from such watchdog groups as the Campaign Legal Center and Democracy 21, which have lodged multiple complaints against Crossroads GPS with the IRS, the Federal Election Commission, and even the Department of Justice’s Tax Division. The complaints allege that Crossroads GPS is spending millions on direct campaign activities while masquerading as a benign nonprofit.  

“It is a dangerous victory for those in Congress who have relentlessly bullied the IRS into refusing to enforce the laws limiting the political advocacy of tax exempt organizations,” Larry Noble, general counsel for the Campaign Legal Center, said in a statement.  

The IRS became the target of GOP outrage and of multiple congressional investigations after a federal inspector general concluded that the tax agency had improperly targeted Tea Party and other groups seeking tax exemption. But critics of Crossroads GPS say the group exemplifies the problem of undisclosed political spending, which has mushroomed as tax-exempt social-welfare groups have thrown themselves more aggressively into politics.

“By allowing an organization like Crossroads GPS to spend in our elections secretly and with impunity, the IRS has all but guaranteed that similar ‘dark money’ groups will proliferate,” warned Noble.

In the six years since its launch, Rove’s Crossroads operation, which also includes the super PAC American Crossroads, has become a conservative heavyweight, spending more than a quarter of a billion dollars on elections—mostly in the form of attack ads. Crossroads GPS alone has spent well over $100 million during that time.

Crossroads GPS has already been functioning as a 501(c)4 “social welfare” organization since its inception, though until now the IRS hadn’t officially recognized its tax status. Under tax regulations, social welfare groups may engage in political activity so long as it’s not their “primary purpose.” These groups are not required to disclose donor information. In the past, the sphere of politically active social-welfare groups was dominated by such single-issue players as the National Rifle Association and the Sierra Club.

But Crossroads GPS exemplifies a new generation of social welfare groups that act blatantly as thinly veiled political organizations, campaign-finance watchdogs say. They argue that the group is exploiting the lack of enforcement from the IRS and the Federal Election Commission to give cover to high-dollar donors who want to remain anonymous. Such loopholes have given rise to unprecedented levels of undisclosed “dark money” spending in recent election cycles.

“Karl Rove is not known for engaging in social-welfare activities,” Democracy 21 President Fred Wertheimer told the Prospect. “We don’t believe that it’s anything but a political organization.”

However, Rove’s elite team of campaign-finance lawyers has successful navigated campaign-finance loopholes and stymied legal threats, and has now convinced the IRS to give the group the tax status that it has long sought. Little wonder that reform advocates are fuming.

“This becomes a license for anyone to use or create 501(c)4s for the purpose of laundering secret money into elections,” Wertheimer says. “The IRS has joined with the FEC in creating a lawless political system in which candidates, campaigns, political operatives, and nonprofit groups are basically being told, ‘You do not have to worry about complying with the laws because there will be no enforcement of the laws.’”

Wertheimer called it “a national scandal that none of the enforcement agencies are willing to carry out their statutory responsibilities.”

The IRS has been under steady attack from the GOP ever since conservatives lambasted the agency for what they said was a political witch-hunt aimed at Tea Party organizations. And Republicans have kept the tax agency in their crosshairs ever since. A GOP rider to last year’s budget deal forbids the IRS from releasing a clearer definition of “political activity” anytime in the near future.

At the same time, the Campaign Legal Center and Public Citizen are suing the FEC for dismissing the two groups’ complaint alleging that Crossroads GPS should be defined as a political committee. The FEC’s general counsel concluded that Rove’s group was likely in violation of campaign-finance laws, but the commission deadlocked along party lines and took no enforcement action on those findings. That lawsuit is still working its way through the courts.

In the meantime, the IRS ruling sends a clear signal to politically active tax-exempt groups in the mold of Crossroads GPS that it is safe for them to stay the course. That suggests that the unaccountable and undisclosed political money already dominating this election cycle will only continue to surge.