Protesters
outside the downtown Cincinnati IRS office (July 2013)
Dear
George,
The
so-called IRS scandal has been front-page news for the last month and a half,
and it’s been particularly conspicuous here in Cincinnati because the
government’s IRS Tax Exempt office (at the heart of the scandal) is located
downtown on Main St. in the Federal Building. To get a better handle on it all, I’ve looked at a bunch of
recent news reports and other accounts.
Here’s a summary. (Note:
numbers in parentheses refer to citations listed at the end.)
What
is the IRS “scandal” about?
U.S.
federal tax law exempts various types of nonprofit organizations from having to
pay federal income tax. These include
things like churches, charities, civic groups, political action committees,
educational institutions, and, of particular interest here, social welfare
groups (i.e., groups devoted to the common good). In May 2013 the Inspector General of the Internal Revenue
Service revealed that the IRS has been using political groups' names or
political themes to target and give special scrutiny to groups applying for
tax-exempt status as social welfare groups. The Inspector General’s report suggested that the IRS had
almost exclusively targeted conservative groups with terms such as “Tea Party”,
"patriots", or "9/12" in their names. (19) The implication was that the IRS was
harassing Tea Party and other conservative groups and treating them
unfairly. The claims generated
immediate uproar in the media and by politicians across the political spectrum,
including Barack Obama who labeled the situation “outrageous”. (13) Faced with accusations of
political malfeasance, the acting IRS commissioner promptly resigned, and other
IRS officials retired or were placed on administrative leave. Republicans charged that conservative
groups receive far rougher treatment from the IRS than liberal groups, and
critics suggested that the White House was using the IRS to crack down on its
political enemies. (11)
What
are social welfare groups?
Section
501(c)(4) of the federal tax code exempts civic organizations which are
"operated exclusively for the promotion of social welfare" from
paying federal income taxes.
This phrasing (i.e., “exclusively”) would seem to exclude organizations
that engage in partisan political activity from being categorized as social
welfare groups. However, Treasury
regulations based on the code have adopted a looser standard, i.e., that the
organization "is operated primarily for the purpose of bringing about civic betterments and social
improvements." As a result,
the IRS has traditionally granted social welfare tax exemptions to groups
engaged in some political activity as long as those are not the groups’ primary
activities. (19) Examples of
501(c)(4) tax-exempt social welfare groups recently approved in Ohio include
fishing groups, bicycling clubs, garden associations, and an ultimate Frisbee
league. (2) The NAACP, Sierra
Club, NRA, and AARP are well-known examples of 501(c)(4) groups that are
classified as promoting social welfare for the common good though also engaging
in lobbying and some political activity in pursuit of their aims. (4) One of the hitches is that it has
never been clear what "primarily" really means, and neither Congress
nor the IRS has clarified the limits of acceptable political activity for
tax-exempt social welfare groups. (19)
What
is the difference between social welfare organizations and political
organizations?
The
federal tax code distinguishes between social welfare groups and political
organizations (as well as other types of nonprofit, tax-exempt groups). According to the tax code, political organizations (Section 527) are
"operated primarily for the purpose of directly or indirectly accepting
contributions or making expenditures" to influence the "selection,
nomination, election or appointment of any individual to any Federal State or
local public office..." (5)
Examples of such activities include: endorsements of a candidate,
publication of statements favoring or opposing candidates, financial donations
to a candidate or party, organizing volunteers for a campaign, devoting staff
time to a campaign, etc. (1) Technically, 527 groups include almost
all political groups, e.g., political parties, candidate committees,
traditional political action committees.
However the category is most often used to refer to organizations that
are not regulated under campaign finance laws because they don't
"expressly advocate" for the election or defeat of a candidate or
party (the best known recent example being Super PACs). There are no upper limits on
contributions to such 527s and no spending limits. However, they do have to register with the IRS, disclose
their donors publicly, and file regular reports of donations and spending. (20) Recent examples of 527 political groups include the Swift
Boat Veterans for Truth, Texans for Truth, America Coming Together, and
MoveOn.org. (20)
Are
527 political groups mostly conservative?
No. They’re common on the right and the
left. Considering the 20 largest
527 political groups active in the 2010 elections, Democratic/liberal groups
spent about $201 million and Republic/conservative groups spent about $215
million. (20)
If
both categories pay no federal income tax, why do groups want to be categorized
by the IRS as 501(c)(4) social welfare organizations rather than as 527
political organizations?
It’s
not a matter of tax breaks or reducing costs. The important distinction is that political organizations
are required to disclose their donors while social welfare organizations can
keep donors anonymous. The
rationale for social welfare groups is that anonymity protects individual and corporate
donors from political retaliation.
Anonymity, of course, can also foster greater donations by corporations
and wealthy individuals. A major
issue is that some organizations consequently masquerade as social welfare
organizations to increase their income when they are in fact political organizations. The IRS has the task of determining
whether an organization is a social welfare organization or a political
organization and screens applications for tax-exempt status accordingly. (5)
Why
has there been such a recent upsurge in groups applying to be considered social
welfare organizations?
The
major reason is the Supreme Court’s January 2010 decision in the Citizens
United case which allowed nearly unlimited spending by corporations and groups
to influence elections. Some Tea
Party tax-exempt groups promptly formed political action committees, and by
September 2010 tax-exempt groups had spent over $100 million on the mid-term
elections. Most of this spending
favored Republicans. Crossroads
GPS, founded by former Bush strategist Karl Rove, was the heaviest spender in
2010 Senate elections, and Americans for Prosperity, a pro-Republican
tax-exempt organization founded by the Koch brothers, was the top spender in
House races. (8, 18) In the 2012 elections,
according to the Center for Responsive Politics, conservative nonprofits spent
over $263 million, and liberal nonprofits spent about $35 million. (18)
Don’t
Super PACs spend much more on elections than social welfare groups?
No. In 2012 social welfare nonprofits (with
anonymous donations) outspent Super PACs (who must disclose their donors) by a
3 to 2 margin. (18)
How
much politicking do social welfare groups do?
Though
supposedly not primarily political, 501(c)(4) social welfare groups spent about
$322 million on the 2012 elections. (13, 15) Both Republicans and Democrats employed so-called “social
welfare” groups. PrioritiesUSA, which supported Barack Obama's re-election in
2012, was granted tax-exempt status, as was Americans Elect which tried to make
viable a third-party presidential candidate. (4, 13) According to the New York Times, "in recent years, many overtly political
organizations have abused that (social welfare) designation, calling themselves
501[c][4]s even as they run ads for an against candidates and raise tens of millions
of dollars." (11)
In
assessing groups’ applications for tax-exempt status, did the IRS exclusively
target "Tea Party" groups?
No. Though the Inspector General’s initial
report in May implied that only conservative groups were targeted, IRS agents had
been also instructed to examine groups with words such as
"progressive", "occupy" or "Israel" in their
names. (19) Other types of groups singled out for
more extensive IRS investigation included medical marijuana suppliers,
organizations formed to carry out Obama's health care law, open source software
developers, and advocates for people in "occupied territories." The IRS lists often focused on
commercial businesses pretending to be nonprofit groups or partisan political
campaign organizations seeking tax-exempt status. (10) Records
from a July 2010 Cincinnati IRS workshop indicated that screeners were
instructed to mark all potential political groups for more investigation. In 2012 the IRS flagged 296
organizations as being from potential political groups. (10) Seventy-two of these groups had
"tea party" in their title, while 13 had "patriot" and 11
had "9/12". (16) While screeners were instructed to put liberal
groups on a watch list, Tea Party groups were to be put in an “emerging issues” category pending
further guidance from the IRS Washington office. (14) Though no Tea party
applications were denied, many remained "on hold" for lengthy
periods. (19) In addition, there
were many more IRS applications from conservative political groups than from
liberal groups. For example, the Cincinnati
Enquirer reports that 359
applications have been approved since 2009 for 501(c)(4) nonprofit status in
Ohio and Kentucky. Twenty-six of
those were considered political: 21 conservative groups and 5 liberal groups.
(2)
How
did the scrutiny of Tea Party groups start?
The
Cincinnati-based IRS official who launched the effort (and who describes
himself as a conservative Republican) said it began when an employee noticed a
surge in applications from organizations associated with the newly emerging Tea
Party". The official stated,
"I do not believe that the screening of these cases had anything to do,
other than consistency and identifying issues that needed to have further
development." (6)
Was
there a political motive behind the IRS's actions?
IRS
officials testifying before Congress -- including Republicans, Democrats, and
Independents -- have uniformly described no White House involvement and no
political motivation accompanying the IRS's actions. Rather, facing an upsurge in 501(c)(4) applications along
with simultaneous budget and personnel cuts, IRS employees in the Cincinnati
office used keywords as a shortcut to identify political organizations deemed
appropriate for further scrutiny.
Former Acting IRS Commissioner, Steven Miller, testified: "I think
that what happened here was that foolish mistakes were made by people trying to
be more efficient in their workload selection." (9)
What
is the current status of the IRS issue?
As
of this writing, congressional hearings are still in progress but have become
increasingly partisan. Republicans
are pressing to find any evidence of White House involvement, while Democrats
want to know why initial reports didn’t reveal that liberal groups’
applications were also given extra scrutiny. (14) A number of credible commentators have concluded that all of
this is a “non-scandal”, but rather a product of limited resources and faulty
management. (6)
What
conclusions can we tentatively draw from the available evidence?
Contrary
to the initial report that generated the “scandal”, the IRS targeted both
liberal and progressive political groups for extra scrutiny in judging
tax-exempt status. (10, 14)
The
White House never ordered the IRS to target political enemies. (11)
No
Tea Party applications have been ultimately denied. (6)
A
major part of the problem is that some political groups, both on the right and
the left, claim their primary purpose to be common welfare when they are
actively engaged in partisan political activity. (3)
There
is ambiguity in the distinction between “social welfare” and “political”
organizations, as well as ambiguity about what constitutes politics as a
“primary” activity, thus making such judgments more complicated and tenuous.
(19)
The
IRS has been ineffective in stopping organizations run by politicians for their
own political self-interest from gaining tax-exempt status as “social welfare”
groups. (7)
Is
there a solution?
New
York Times editorial writer David
Firestone suggests that the IRS should return to the original language of the
tax code which prohibits social welfare groups from engaging in political
activity altogether, as well as instituting a requirement that such groups
disclose their donors. That would
remove the main incentive for abusing the code and would eliminate the need to
use keywords in assessing applications. (11) Other commentators, however, are pessimistic about the
chances of a dysfunctional Congress implementing such changes.
So
I guess we should tune into our favorite cable news channels to see what
happens next.
Love,
Dave
SOURCES: (1) www.bolderadvocacy.org ("Explainer: 501[c][4]s
and Political Activity"); (2) www.cincinnati.com, “”More conservative groups sought IRS exemptions”,
7/8/13); (3) www.cnn.com ("IRS targeting scandal reshaped by new
details", 6/25/13); (4) www.lega4oom.com ("Social Welfare or
Political Advocacy?", Oct. 2012); (5) www.moritzlaw.osu.edu, "FAQs on
501(c)(4) Social Welfare Organizations"); (6) www.newyorker.com, "The
Vanishing I.R.S. Scandal", 6/25/13); (7) www.nrp.org ("IRS To 'Social
Welfare' Groups: Show Me The Political Ad Money", 3/30/13); (8)
www.nytimes.com ("Donor names remain secret as rules shift,"
9/20/10); (9) www.nytimes.com (“IRS
office at heart of scandal was understaffed backwater”, 5/19/13); (10)
www.nytimes.com, ("I.R.S. Scrutiny went Beyond the Political",
7/4/13); (11) www.nytimes.com ("Revisiting the I.R.S. 'Scandal'",
6/25/13); (12) www.propublica.org, "How nonprofits spend millions on
elections and call it public welfare", 8/18/12); (13)
www.swampland.tome.com ("The Real IRS Scandal", 5/14/13); (14) www.usatoday.com
(“IRS scandal becoming increasingly partisan”, 7/14/13); (15)
www.washingtonpost.com ("Did tax-exempt groups mislead the IRS on
political spending?", 1/17/13); (16) www.washingtonpost.com
("Lingering questions about the IRS targeting of conservative groups",
5/13/13); (17) www.washingtonpost.com ("The real reason outside groups
want tax-exempt status", 5/14/13); (18) www.washingtonpost.com,
(“What is a 501[c][4] anyway?”, 5-13-13); (19) www.wikipedia.org ("2013
IRS scandal"); (20) www.wikipedia.org ("527 organization")
G-mail Comments
-Linda C
(7-18): This was very helpful, can I stop paying taxes if IRS is this messed
up?
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