By Eliza Newlin Carney, Roll Call Staff Writer

Democrats and Republicans fighting over the issue of undisclosed money in the 2012 election have bombarded the Internal Revenue Service with nasty letters, but for opposite reasons.

Democrats fault the IRS for failing to rein in 501(c)(4) social welfare groups that they maintain are manipulating the tax code to deliberately hide the donors who pay for their political ads.

Republicans counter that the tax agency has mounted a secretive, politically motivated campaign to silence conservative advocacy groups. GOP senators were outraged last year by news reports that the IRS had sent lengthy questionnaires to dozens of tea party organizations seeking tax-exempt status, asking for, among other things, donor names.

The fight goes back decades but has intensified in the wake of the Supreme Court’s 2010 Citizens United v. Federal Election Commission ruling. That decision freed tax-exempt groups (as well as corporations and unions) to spend any sum on campaigns, fueling a surge in anonymously financed ads that target candidates.

At issue is where the agency should draw the line between political organizations focused principally on campaigns and social welfare or trade groups whose main purpose must be education, advocacy or legislative issues. The former must publicly report their activities to the Federal Election Commission; the latter fall largely outside of the disclosure rules.

Drawing that line can be harder than it looks. The IRS has relied on a multi-part “facts and circumstances” test that looks at the nature and timing of the ads and is inevitably subjective. For 501(c)(3) charities, at least, the rules are relatively clear: They may not engage in partisan political activity. But for 501(c)(4) social welfare groups and 501(c)(6) trade associations, the guidelines are hazy.

Social welfare groups, for example, must “primarily” promote “the common good and general welfare of the people of the community,” according to IRS regulations. But it’s anyone’s guess what that means. Does “primarily” mean 5 percent, 25 percent or 49.9 percent, as many politically active groups seem to assume? Trade groups face a similar question.

“It’s a huge gray area, and it shouldn’t be,” says Republican election lawyer Dan Backer, a principal attorney with DB Capitol Strategies. “There should be clear, bright-line rules.”

But the IRS is ill-equipped to respond forcefully. The agency has scant authority to punish such groups, and, besides, it collects tax forms and data according to fiscal year deadlines, not the election calendar. Even the Form 990 that the agency collects from tax-exempt groups contains minimal information. And the IRS has little stomach for political fights.

“The problem is that the IRS works slowly,” says Trevor Potter, president and general counsel of the Campaign Legal Center and a former FEC chairman. “I think the IRS is being very sensitive to the political environment, and they don’t want to themselves be seen as intervening in the election.”

IRS officials did not respond to requests for comment and have sent mixed signals about how they will handle politically active tax-exempt groups. Last year, the agency moved to impose gift taxes on some donors to social welfare groups but abruptly backed off after congressional Republicans complained.

The agency had planned more than a year ago to examine 501(c)(4) activity, and in July agency officials informed the Campaign Legal Center and Democracy 21 — both of which have called for action on the subject — that the IRS “will consider proposed changes in this area” as it identifies tax and regulatory issues.

Still, few expect a sudden crackdown. As it simmers along unresolved, the controversy over political spending by tax-exempt groups could hurt not just aggressively political organizations but also mainstream social welfare groups that have no interest in campaigns.