IRS Review of Web Rules Worries Nonprofits

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Nonprofits are uneasy as the Internal Revenue Service examines how tax regulations already in use offline should apply to Web sites.

About 1.3 million nonprofits are exempt from taxation under Section 501(c)(3) of the U.S. tax code. Because tax-exempt status can be revoked from nonprofits if "a substantial part of the activities of such organization consists of carrying propaganda, or otherwise attempting, to influence legislation," according to U.S. tax code, some are concerned the IRS could revoke their tax-exempt status because of certain standard Web activities, such as including hyperlinks to other Web sites.

In mid-October, the IRS called for comment on a number of issues, including whether providing information about candidates for public office or a hyperlink to another organization that engages in political campaign intervention or lobbying activities constitutes restricted political activity. Comments are due by Feb. 13.

Lee Harper, who is applying for tax-free status for his privacy Web site,, fears that any one of the more than 1,000 links on his site "could be viewed as advocacy by the IRS, which would mean that we would not be able to get 501(c)(3) status."

Moreover, Harper is concerned the IRS is inappropriately trying to tax nonprofits.

"They're trying to fit the whole Internet into their commercial Internet box," he said. "There's a whole noncommercial Internet out there where people link all the time to whatever site will benefit visitors. The benefit is educational and not monetary."

But the IRS' position always has been "the rules are the rules, and they apply regardless of whether you're talking about the Internet or actual physical activities," said Robert Harper, chief of Technical Branch 3 at the IRS.

Harper said the IRS might take several actions, depending on the nature of the responses received to its call for comment by the Feb. 13 deadline. They include issuing notices; making revenue rulings, perhaps in a question-and-answer format; and formulating regulatory amendments to update regulations in reference to the Internet.

But whatever the IRS does, limiting nonprofits' use of hyperlinks would go against everything the Internet was designed to accomplish, said Emily Hackett, state policy director at the Internet Alliance, a trade association representing the business-to-consumer interests of Internet companies.

"The whole point of the Internet is to have a weblike set of communications that group in a nonlinear way," she said. "What's the Web without webs?"

What's more, she said, it would be impossible for nonprofits to comply with a stricter application of the law.

"A Web site can control whom it links to, but it can't control who links to it," she said.

Hackett does think, however, that the IRS' re-examination is justified.

"The Internet does change everything," she said, "and policymakers have to continually look at current policy from the Internet perspective."

Lee Cassidy, executive director of the DMA Nonprofit Federation, does not entirely agree.

"Our response is, you don't need to do anything differently than you're already doing. All the necessary regulations are already in place as related to mail, phone and special events," he said.

Independent Sector, a coalition of leading nonprofit and philanthropic groups, is "in the process of putting together a document in response to [the IRS] request for comment," said Peter Shiras, senior vice president of programs.

Although Shiras said he thinks there are some specific areas where interpretation of existing law on what is permitted and what is not permitted may "make it easier for nonprofits," he thinks, for the most part, there is no need for further clarification.

"Internet activities are just like any other activities. There is no need for a special set of provisions," he said.

Other issues being addressed by the IRS include:

• If payment for display advertising and hyperlinks is subject to the unrelated business income tax, and, if so, how are the income and expenses related to the activity calculated.

• Whether an e-mail receipt meets the requirements of a written acknowledgment.

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