THE REAL SCANDAL BEHIND THE IRS “SCANDAL”

ABSTRACT: Overwhelmed IRS employees, trying to sort through hundreds of applications for tax exempt status to identify ones that should be rejected because they were political rather than true social welfare organizations, used search terms that may have been tilted toward identifying conservative groups, although there were terms used that are neutral or tilted toward liberal or progressive politics. (Perhaps there was such a tilt because the number and spending of such groups on the conservative side has far outweighed those on the liberal or progressive side.)

As Republicans in Congress try to blow this up into a major scandal, it should be noted that the IRS Commissioner when this activity occurred was Douglas Shulman, who was appointed by President Bush in 2008 and served until November 2012.

Three factors have led to the growth of 501(c)(4) social welfare organizations that engage in political activity: 1) They do not have to disclose their donors; 2) Political committees have had to disclose their donors since 2001; and 3) The Supreme Court’s 2010 Citizens United decision allowed unlimited spending on political activity by wealthy individuals, corporations, and other organizations. Corporations and wealthy individuals who would like to keep their political activities secret have flocked to using these social welfare organizations.

The real scandals hiding behind the front page news are that the IRS: 1) Has not clarified the limits on political activity by tax exempt social welfare groups; 2) Has not taken enforcement actions against any politically active social welfare group; and 3) Has had the capacity of its staff to engage in appropriate oversight and enforcement activities cut.

The current “scandal” at the IRS should be the springboard for reform. Unfortunately, the Republicans in Congress seem far more intent on using the situation to score political points and to undermine the important work of the IRS.

FULL POST: If you were an overwhelmed IRS employee trying to sort through hundreds of applications for tax exempt status to identify ones that should be rejected because they were political rather than true social welfare organizations, how would you do it? Searching for political terms would make a lot of sense. The terms used should be balanced, so they look for any group with a political focus, not just ones with a certain perspective.

It appears that the search terms that were used may have been tilted toward identifying conservative groups, although there were terms used that are neutral or tilted toward liberal or progressive politics. (Perhaps there was such a tilt because the number and spending of such groups on the conservative side has far outweighed those on the liberal or progressive side.) And there were liberal or progressive organizations that were scrutinized and had their applications delayed, as some conservative ones did. Although the search terms used may have been efficient and rational, they may not have been appropriate from a political or public perception stand point. [1]

The Cincinnati office, where this work was concentrated, had fewer than 200 people working to process 70,000 applications for tax exempt status each year. Moreover, despite the complex legalities of these determinations, this group had few lawyers and only vague guidelines. The unit has been reorganized and its procedures revised multiple times over the past three years.

As Republicans in Congress try to blow this up into a major scandal, it should be noted that the IRS Commissioner when this activity occurred was Douglas Shulman, who was appointed by President Bush in 2008 and served until November 2012.

The issue of non-profit groups and their political activity has burst into the spotlight in recent years. Traditional non-profit groups are organized under section 501(c)(3) of the IRS code and are prohibited from engaging in political activity. Organizations under IRS section 501(c)(4), although originally exclusively for the promotion of social welfare, in 1960 were allowed to engage in political activity as long as their primary purpose was social welfare. The IRS has not established what “primary” or “political activity” means. Three factors have led to the growth of 501(c)(4) social welfare organizations that engage in political activity:

• They do not have to disclose their donors.
• Political committees have had to disclose their donors since 2001.
• The Supreme Court’s 2010 Citizens United decision allowed unlimited spending on political activity by wealthy individuals, corporations, and other organizations. [2]

As a result, corporations and wealthy individuals who would like to keep their political activities secret have flocked to using these social welfare organizations. Crossroads GPS (the conservative group Karl Rove helped found in 2010) spent $88 million in the last two national election cycles, massively outspending all other 501(c)(4)s’ political expenditures. It has a tiny staff and no discernible social welfare purpose, and its application for tax exempt status is still pending. [3] (501(c)(4)s are allowed to operate as non-profits without IRS approval.) For the 2012 elections, based on reports to the Federal Election Commission, of the more than $256 million spent by social welfare non-profits on ads, at least 80% came from conservative groups. [4]

The real scandals hiding behind the front page news are that the IRS:

• Has not clarified the limits on political activity by tax exempt social welfare groups (i.e., 501(c)(4)s) or even defined what is considered political activity.
• Has not taken enforcement actions against any politically active social welfare group, despite their spending, combined, at least $500 million on political advertising during the last four years. [5] This includes groups that told the IRS in their tax exemption applications that they were not going to engage in political activity and then did so. [6]
• Has had the capacity of its staff to engage in appropriate oversight and enforcement activities cut. (Its budget has been cut the last three years, including by the sequester, and staff levels are down from 117,000 in 1992 to 90,000 today while dollars collected have more than doubled.) This has led to overwhelmed workers as occurred in the tax exempt review group in Cincinnati.

The current “scandal” at the IRS should be the springboard for reform – for clarifying and enforcing rules on political activity by tax exempt organization, as well as for assessing and meeting the needs at the IRS for staffing and professionalization of personnel and procedures. Unfortunately, the Republicans in Congress seem far more intent on using the situation to score political points and to undermine the important work of the IRS.