The real IRS scandal
We just had five congressional hearings about the Internal Revenue Service, full of sound and fury, but, we now know, signifying nothing.
Despite all the hoopla and headlines about IRS personnel targeting conservative tax-exempt organizations, there is no real scandal here. IRS staffers acted not only legally but, given their impossible task, quite rationally.
They forgot, however, that they not only work in a political fishbowl, they swim in a sea of politics. Faced with internally contradictory regulations laid out in vague terms, and with little guidance from higher-ups, they botched it. Republicans may now finally get the chance to pour unlimited amounts of secret money into elections.
The Internal Revenue Code provides a tax exemption under section 501(c)(4) for nonprofit groups “operated exclusively for the promotion of social welfare” (emphasis added). In classic oxymoronic bureaucratic doublespeak, however, a 1959 regulation decided “exclusively” really meant “primarily.”
Though the courts have ruled that a tax-exempt group’s political activity must be “insubstantial,” lawyers have argued this means it can be as much as 49 percent – and the IRS has gone along. Even that has been flagrantly violated by both Democratic and Republican 501(c)(4)s.
The regulation also states “direct or indirect participation in political campaigns” to support or oppose political candidates “is not considered ‘promotion of social welfare.’” “Participation” in a political campaign is determined, however, by considering “the facts and circumstances.”
This provides no real guidance. Not surprisingly, the Treasury inspector general for tax administration, who investigated the IRS “scandal,” concluded that personnel in the Exempt Organizations Division “lack knowledge” of what 501(c)(4)s are allowed to do.
This division receives about 60,000 applications for nonprofit status each year, largely for 501(c)(3)s that don’t engage in any political campaign activity. With so many applications, the division has a heavy backlog. After the 2010 Citizens United and SpeechNow decisions, the floodgates were further opened to huge amounts of campaign money whose donors wanted secrecy. As one Tea Party leader noted: “It would have a very chilling effect on our donor base if they thought [their names] would be made public.” So 501(c)(4)s became the most-favored campaign vehicle.
To operate as a 501(c)(4), it is not necessary to be officially approved. Nonetheless, the number of these applications, many involving complex questions, almost doubled in less than two years, from 1,741 in 2010 to 3,357 in 2012. All the 2010 applications went to the Cincinnati exempt organization office, which was quickly overwhelmed.
In addition, the IRS budget was cut by 8 percent, or nearly $1 billion. The original EO roster of 946 employees was reduced to 876. Employee training has been especially hard-hit, falling 83 percent since FY 2010.
To deal with the wave of 501(c)(4) applications, IRS personnel looked for ways to quickly spot groups that might warrant further inquiry. A manager at the Cincinnati EO office, John Shafer, a self-described “conservative Republican,” decided to focus on Tea Party cases. Shafer assigned a subordinate to develop the initial search criteria.
This was revealed in a transcript of a private interview with IRS personnel conducted by House Oversight and Government Reform Committee Chairman Darrell Issa (R-Cal.). Yet this information was not public until Sunday, June 9, when Representative Elijah Cummings (D-Md.) released a video and transcript of the interview.
Shafer’s subordinate, according to the testimony, said “no one” from Washington “said to make such a search.” The division focused on organizational names, including “Tea Party,” “patriots” and “9/12” (a Glenn Beck group). This approach using search terms was similar to IRS practice in other investigations.
These groups seeking tax-exempt status had spent most of the previous summer and fall engaged in rough political warfare aimed at Democratic members of Congress. In a well-organized campaign, town hall meetings of Democratic House members were disrupted; the elected official was hanged in effigy; and Democratic programs attacked as “socialistic” and even “Nazi.” All this played out on national television and websites.
The IRS did not only pick on conservative groups. It also flagged liberal groups, using word searches for “progressive” in their names, though fewer. Data just released of 175 approved applications reveals that about 122 were conservative and 48 liberal or simply publicly involved, with six indeterminate. Right-wing or conservative groups, however, were responsible for more than 80 percent of the roughly $260 million spent by 501(c)(4)s on the 2012 election cycle.
Though some of the 300 groups under investigation complained about IRS harassment, tax experts and former IRS officials contacted by the New York Times said the groups’ actions “provide a legitimate basis for flagging them for closer review.”
For example, the Wetumpka Tea Party in Alabama sponsored training for a get-out-the-vote initiative dedicated to the “defeat of President Barack Obama”; the Ohio Liberty Coalition organized members to distribute Mitt Romney’s presidential campaign literature; and the CVFC, a conservative veterans group, bought radio ads in San Diego supporting Republican Michael Crimmins for the House of Representatives. Yet all still checked the “No” box when asked about any political activity.
The actions of CVFC were not unique. Five other 501(c)(4)s assured the IRS that they would not spend any money on elections, but then contributed more than $5 million as a group, largely to support Mitt Romney, according to two recent ProPublica reports. In 2010, many conservative tax-exempt groups spent much more than that for GOP candidates. Some of these groups disbanded soon after the election.
Many conservative big spenders also lied to the IRS. The Koch brothers’ Americans for Prosperity spent $39.4 million on political ads and organizing in 2010, helping Republicans to sweep the midterm elections that year. But before those elections, when the organization applied to the IRS for 501(c)(4) status, it said it would spend nothing on electoral campaigns.
These false statements are probably the only real criminality in this IRS scandal. Yet House Speaker John Boehner (R-Ohio) is still insisting that someone must go to jail. He may get his wish – but it may not be to his liking.
To date, no conservative group, flagged or otherwise, has been turned down. This is almost certainly a mistake – and probably an overreaction to the protests from angry Republican members of Congress, who were responsive to the Tea Party complaints. By contrast, several liberal applications were rejected.
Some GOP complaints were justified – though not as many as these organizations claimed. There were indeed some lengthy delays. These resulted from a failure of communication and misunderstandings between Washington and Cincinnati – which led the division to stop processing applications from October 2010 through November 2011. That lengthy a delay was inexcusable and shows an appalling lack of supervision.
The EO staff was justified, however, in asking for more information than was disclosed in the applications. The groups may have deeply resented the repeated requests for donor names, but the Tax Court had already approved this request – not once but several times. But after the outcry, the agency withdrew all its requests.
Liberal groups also faced delays and many follow-up questions. Progress Texas was asked 21 additional questions and had to wait 479 days for approval.
On the other hand, a few agents clearly overstepped the bounds. One agent advised a group not to protest against abortion at a Planned Parenthood clinic, and there were other excesses. These seem to have been isolated incidents, however, for the IRS-targeted groups who complained at one congressional hearing had virtually all engaged extensively in electoral campaigns.
So far there is no evidence that the IRS division has done anything criminal or otherwise unlawful. Nor did the inspector general find any such wrongdoing, only ignorance and mismanagement. He specifically found that the IRS “was not politically biased.” He also found no evidence tying the administration to what happened, despite the almost desperate efforts by Republicans to find such a tie.
Ultimately, the IRS is guilty of not having trained its EO personnel to be politically sensitive, and of a management failure to closely supervise so sensitive a matter.
As rewritten and interpreted by the IRS, the tax-exempt statute cannot be applied in any clear and consistent way – particularly by a shell-shocked, under-staffed and under-trained agency. The agency’s primary purpose is to collect money, yet it was mandated to evaluate partisan political activity.
The only way the IRS can properly apply the law is as Congress wrote it: 501(c)(4)s must limit themselves exclusively to public welfare activity, and not engage in any political activity at all.
Odds are, this won’t happen. Because the IRS has now been condemned so harshly on all sides, it may approve just about anything. Big money will likely be able to continue spending billions of secret dollars – and making a mockery of democracy.
That’s the real scandal.
PHOTO (Insert A): Representative Darrell Issa (R-Calif.) (R), chairman of the House Oversight and Government Reform Committee, confers with ranking member Representative Elijah Cummings (D-Md.) (L) during a hearing on targeting of political groups seeking IRS tax-exempt status, on Capitol Hill in Washington, May 22, 2013. REUTERS/Jonathan Ernst
PHOTO (Insert B): J. Russell George, Treasury inspector general for tax administration of the U.S. Treasury, testifies before the Senate Finance Committee in Washington May 21, 2013. REUTERS/Gary Cameron
PHOTO (Insert C): Director of Exempt Organizations for the Internal Revenue Service Lois Lerner (L) is shielded by Capitol police officers as she boards an elevator after being excused from a House Oversight and Government Reform Committee hearing on targeting of political groups seeking tax-exempt status from by the IRS, on Capitol Hill in Washington, May 22, 2013. REUTERS/Jonathan Ernst
PHOTO (Insert D): David (L) and Charles Koch in a combination image. REUTERS/Courtesy Koch Industries