The IRS Hubbub

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?