The real IRS scandal

June 17, 2013

The office for the Internal Revenue Service near Times Square in New York May 16, 2011.  REUTERS/Chip East

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





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It is republicans who should go to jail for underfunding agencies and not providing for the appointments of commissioners, secretaries and judges.

At the IRS their is a lack of leadership because there is only an Acting Commisioner, and the IRS is also underfunded, the work load is burdensome.

These controversies will continue from the ATF to the VA as long as republicans continue to underfund and not provide leadership to thesse agencies.

It is diappointing the Democratic legislatures fail to rightly place the blame on republicans.

Posted by Flash1022 | Report as abusive

If the IRS cannot vet the applications for non-profit status and simply approves EVERY one, the entire process has utterly failed. Do any Congresspersons get it?

Posted by bcrawf | Report as abusive

501(c)(4)s should be eliminated.

The teaparty has already won on this issue though. Their constituents can’t focus for more than a few sentences, and thus the time for rebuttal is very short, and has passed by us. Our discussions of the salient components of the issue are beyond their interest. They are already on to some other thing they hate about the democrats that the GOP actually created. Like spying on US citizens, the drones, the bank bail outs or the car company bail outs. That crazy Obama is gonna ruin us. Of course, they don’t add, “if he keeps acting like a republican”.

Posted by brotherkenny4 | Report as abusive

the IRS is a bloated bureaucracy that has become politicized and has no need for existence. simplify the Tax Code now….!

Posted by rikfre | Report as abusive

Mr. Schwartz has written an excellent op-ed that should be considered by everyone jumping to conclusions about this IRS issue that Republicans and the news media keep insisting on calling a scandal.

There are actually two scandalous aspects to this, and neither have anything to do with a political plot on the part of the Obama Administration and a nefarious use of the IRS: The tax exempt status of the many 501(c)(4) groups operating as political fundraising organizations and Darrell Issa’s abuse of his position as Chairman of the House Oversight and Government Reform Committee. Both of these problems contribute to the continuous undermining of the US government’s credibility. It’s gotten to the point where an alarming number of Americans are turning against their own government, as if bringing down the US government would benefit US society. It would be like curing cancer with a gun shot to the head.

The problem is complicated because there are serious abuses of power taking place in our government, but it has become impossible to clearly separate the real corruption that’s occurring from the politically motivated charges of “tyranny” of centralized power, and that the solution is to shrink government until it’s small enough to drown in a bathtub. Some of the worst abusers of our government would like nothing better.

The primary source of government corruption is coming from the way special interests are able to bribe politicians with large campaign donations or offers of lucrative jobs after the politicians leave government. We need to adopt an election system where either all campaigns are publicly funded or to develop a means of restricting the donation of small amounts of money from individuals so that the rich don’t have any more influence on our government than the average citizen. We also need strict, tough guidelines on granting tax exempt status to organizations that are contributing to the public good through means that can not be interpreted as political.

The Supreme Court must understand that given enough money a majority of the population can be made to believe a lot that’s not true and is detrimental to society. Money does not equal free speech because there’s such an imbalance of wealth in America and the wealthiest can easily drown out the voices of the majority. We stand a much better chance of adopting logical and beneficial positions if the various sides make their cases on relatively equal grounds with relatively equal amounts of capital. For example, I would have liked to have heard more from Presidential candidates Gary Johnson and Buddy Roemer, both candidates who recognized that our government has a serious corruption problem.

The problem is that sources with the most money to donate to our government do so in order to get legislation (or block legislation) that benefits their industry’s profits. This usually isn’t what is best for American society or there wouldn’t be the need for the costly bribe. Consider the widespread public support that universal background checks on gun sales had and yet the gun industry was able to exert their influence to prevent the American people from getting a policy they believe would be beneficial for our nation. Gun industry profits trumped the good of society. Whether you’re for universal background checks or not, that’s no way to run a country.

That’s just one example. We see the same thing with healthcare, energy policy, tax policy, foreign policy, etc. And it’s only getting worse. This is the cancer that poses the biggest threat to our Republic and just weakening the federal government is not going to fix it. In fact, that would probably make it worse. I’m not saying there aren’t areas where we should do a better job of keeping our government in check (both federal and local). I believe there are. But just making the federal government out to be the bad guy and responding by throwing our destiny into the hands of the Tea Party and corporate America would be a classic case of jumping out of the frying pan and into the fire. We need to focus on ways to return representation to the American people, and not just the wealthy.

Posted by flashrooster | Report as abusive

The real scandal is that our nation appears to be textbook example of bad government and conflict of interest, the greatest of which is the shameful ownership makeup of our news media.
Show me a nation that once had fair media, that conscience of nations, early warning system and reminder of past mistakes, and I’ll show you a nation that once had better government and better society.

Posted by donee | Report as abusive

” 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.” ”

If people are too “chilled” to donate to something except anonymously, they know they are doing something wrong or something that most of the people they know or do business with would think is wrong.

Posted by emm305 | Report as abusive

As Americans, I think we can beat the PUERTO RICO STATUS RESOLUTION ACT H.R 2000. They’re bill is in first place based on co-sponsors at 1205 sponsors. The FAIRTAX HR25 is in second place with 900 co-sponsors (up from 728 this morning.

I need your help… at 1210 co-sponsors, we will be in FIRST place. Pleas click on

Lets make a real “change” like we voted for.

Posted by MRFAIRTAX | Report as abusive

Organized religions are tax-exempt, but shove their noses into politics regularly. NOTHING is done by the IRS in these cases.

Posted by AZreb | Report as abusive

Right, this was the Republicans fault, and by that same reasoning, Watergate was the Democrats fault.

Posted by BenMcLean | Report as abusive