What the IRS should be scrutinizing

By Robert Kuttner
May 16, 2013

President Barack Obama, making a statement at the White House, announced that the Internal Revenue Service acting commissioner had been ousted, May 15, 2013. REUTERS/Kevin Lamarque

The tempest about the Tea Parties and the Internal Revenue Service is a gift for the Republican Party — and one that obscures the real issues.

Why, for example, has the IRS been so indulgent of far bigger, flagrantly partisan tax-exempt groups like Karl Rove’s Crossroads GPS and Charles and David Koch’s Americans for Prosperity?  Such groups spent hundreds of millions of tax-exempt dollars to influence the last two elections, in clear violation of IRS rules.

If the IRS is supposedly so zealous about tax enforcement, why has it left on the table hundreds of billions of dollars in offshore tax evasion by the wealthiest — money owed to the Treasury that could reduce the budget deficit?

As Republicans mount hearings to pillory the IRS, beginning Friday when the House Ways and Means Committee officially reviews the Treasury Inspector General’s Report on the Tea Party affair, these crucial issues will likely be sidelined. And the Republicans don’t have entirely clean hands.

For decades, dating back at least to former House Speaker Newt Gingrich’s “Contract with America” in 1994, th­­e Republicans have demonized the IRS, cut its enforcement budget and created procedural obstacles to tax collection in the name of taxpayer rights. Under President George W. Bush, the IRS even shifted scarce audit resources from investigations of tax dodges used by the wealthy to alleged fraud on the part of working families relying on the Earned Income Tax Credit.

When agencies are chronically understaffed, they tend to target the small fry and resort to short cuts. It is far easier to go after a taxpayer who depends on EITC than to challenge a complex offshore trust or hedge fund whose artful tax fraud could consume thousands of investigative hours to unearth.

In looking for abuse of tax-exempt status, the IRS evidently concentrated on small, local Tea Party affiliates that had applied for tax-exempt status — and gave the bigger fish a free pass.

Under the law, there are two categories of nonprofit tax-exempt group recognized by the IRS. To qualify for 501 (c) (3) status, an organization must be an educational or charitable group that seeks to influence legislation only incidentally — as when a university president testifies on education policy. It is strictly prohibited from engaging in partisan politics or backing candidates. Not only is the group tax- exempt, donors may take tax deductions for their gifts.

Remarkably, several of the local Tea Party affiliates now being indignantly defended by politicians across the spectrum applied for charitable status as 501 (c) groups. The IRS would have been derelict had it not investigated.

The other tax-exempt category, 501 (c) 4, also requires the group’s primary purpose to be charitable or educational to improve the “social welfare,” but it allows more latitude in influencing legislation. Even so, the group’s main function is not supposed to be political. It is not permitted to endorse or oppose candidates. Given the recent profusion of 501 (c) (4) groups whose entire purpose is political, the law has become a joke. The IRS’s resources and political will were just overwhelmed.

Conservative groups such as the American Future Fund promised in their applications to the IRS that they would not spend money on TV campaign ads supporting or opposing candidates, according to investigations by ProPublica, then promptly did just that.

The Supreme Court’s 2010 Citizens United decision, allowing unlimited corporate political donations, unleashed a torrent of tax-exempt money into politics — mostly on the Republican right. But the Democrats played just enough such games that neither party was a solid constituency for real tax enforcement.

The IRS has declined even to issue clear criteria on what activities are permitted or prohibited. ProPublica reported that from 2001 to 2011, the IRS recognized more than 14,000 groups as 501(c)(4)s — and turned down just 56 applications.

Senator Carl Levin (D-Mich.), chairman of the permanent subcommittee on investigations, has been a lonely voice calling for both tougher and more even-handed tax enforcement. After the Tea Party story broke, Levin said, “My subcommittee has been investigating the IRS’s failure to enforce the law requiring that tax-exempt 501(c)4s be engaged exclusively in social welfare activities, not partisan politics.” He went on to say that the IRS needed to be impartial in its enforcement, but “both issues require investigation.”

Amen. The mistake of the IRS unit in Cincinnati was to resort to overly broad search terms like “Tea Party” that seemed to target conservative ideology.

That was really dumb. But the IRS had every reason to investigate whether Tea Party affiliates qualified for tax exemptions as either (c) (3) or (c) (4) groups.

It was no secret that the Tea Parties were intensely focused on the 2010 and 2012 elections and that their prime objective was to defeat Democrats and to stymie President Barack Obama. Citizens have a perfect right to pursue such partisan political goals, or other ones — but not with tax-exempt money.

But because of the blundering of both the Cincinnati IRS unit in charge of nonprofits and higher-ranking officials who permitted its clumsy tactics to operate for more than a year even after they became known, it will now be harder than ever for the IRS to crack down on abuses.

A new round of IRS-bashing is likely to spill over and raise new obstacles to the proper enforcement of rules for tax-exempt organizations, as well as a crackdown on offshore tax evasion and other schemes used by very wealthy investors and corporations. Levin’s subcommittee has documented that we lose upwards of $100 billion every year from illegal maneuvers that could be tracked using existing laws and tax treaties.

In addition, the tolerance of accounting maneuvers of dubious legality, such as arranging a multinational corporation’s books so that they record profits and pay taxes in the jurisdiction with the lowest tax rate, costs the Treasury at least an additional $50 billion a year.

If we collect tax money stashed offshore by the very wealthiest, it has no depressive effect on the economy, since that money is not circulating in the U.S. economy. But just about everything else on the budget chopping block, such as cutting Social Security, Medicare, Pell grants and food stamps, would be depressive.

Shouldn’t we go after this low-hanging fruit first? Collect enough unpaid taxes and we don’t have to cut the budget at all.

Alas, the right’s strategy of starving and demonizing the IRS has done its work, and clumsy bureaucrats have fallen into the trap. Yes, these abuses need to be corrected. But the idea that the Tea Parties were ever bona fide tax-exempt charities never passed the smell test.

Instead of pursing political damage control and throwing the IRS under the bus, Obama should be working to rebuild the agency’s performance and credibility. For the IRS must be held accountable — not only for occasional excess zeal but also for stunning laxity when overwhelmed by concentrated wealth.

 

PHOTO (Insert A): David (L) and Charles Koch in a combination image.  REUTERS/Courtesy Koch Industries

PHOTO (Insert B): Karl Rove, in Beverly Hills, California July 14,2008. REUTERS/Fred Prouser

PHOTO (Insert C): Senator Carl Levin (D-Mich.), chairman of the Senate Permanent Subcommittee on Investigations, in Washington, February 8, 2008. REUTERS/Mike Theiler

PHOTO (Insert D): Ugland House (R), office of Cayman Islands’ largest law firm, is also the registered office of some 18,000 companies, on Grand Cayman Island, handout September 25, 2009. REUTERS/Alan Markoff 


4 comments

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Both parties have many large organizations that do little more than fundraise and advocate for partisan issues. Go after one and you need to go after them all. To much money is at stake and in the political game as in much of life, money talks. Politics is a filthy business. That should be your guiding principle.

Posted by gordo53 | Report as abusive

I would like to see an investigation into all organizations who currently have tax exempt status. If they don’t meet the criteria, or have engaged in any political activity, strip their status immediately and require back taxes to be paid.

That would be fair to the American tax payer.

Posted by JL4 | Report as abusive

You can’t make the politicians go after their masters, and the american people will never elect anyone who isn’t already on the list of approved candidates that the corporations give to the media outlets. Show me one politician who doesn’t side with the puplicly traded corps over everyone else? That person does not exist.

Posted by brotherkenny4 | Report as abusive

If Wall Street Banks got away with it, why shouldn’t others. There may have been a small monetary penalty, but no jail time.
Besides isn’t CONGRESS supposed to “overhaul” the tax laws and didn’t congress put them in to begin with. If I can hide money overseas in my company, it’s because there is a law that ALLOWS me to.

Posted by allgees | Report as abusive

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