Scandal at the IRS

I’ve been reading a variety of reports about the allegations that the IRS singled out Tea Party tax exemption applications for extra scrutiny. So here are a few random observations, culled from those reports and accusations:

1) It’s worth noting that condemnation has been utterly bipartisan. Liberal blogs and Democratic commentators have been highly critical of politicization of the IRS. (Why do I think that, if this had happened during a Republican administration, the reaction at Fox “News” would have been considerably more defensive?) And let me be clear: if the IRS singled out any organizations for differential treatment based upon their politics, that was wrong. 

2) That said, what we are seeing is in significant measure yet another unanticipated result of the wrongheaded Citizen’s United decision. Citizens United allowed any organization of any kind to spend money out of its general treasury to run political ads. As Chris Hayes has noted, that decision brought about a pivotal moment for politics and taxes and campaign spending in this country and we’re still dealing with the fallout. Republican Karl Rove and Democrat Bill Burton used the Citizens United ruling in the run-up to the 2012 elections. Both of them used social welfare nonprofits to run overtly political ads; that allowed them to intervene in political campaigns without disclosing their donors. Others soon followed.

“Suddenly, the IRS starts getting a flood of new applications from other political groups and strategists saying, ‘Oh, oh, it turns out I too want to set up a social welfare organization that just so happens to be focused on taking the country back from Barack Hussein Obama. Now, here is the thing the IRS appears to have done unequivocally wrong, that we all agree was absolutely inexcusable. They reacted to all this by targeting one part of the ideological spectrum in looking at whether this flood of new applicants passed the smell test. Being skeptical about a new wave of wolves in sheep’s clothing invading the nonprofit game was entirely appropriate.”

3) As Hayes points out, Congress requires the IRS to review every application for tax-exempt status to weed out organizations that are partisan, political, or that generate private gain. Congress has imposed this requirement on the IRS, and its predecessor agencies, since 1913.  When it comes to 501(c)(4) organizations, the IRS is supposed to draw a distinction between groups that are “primarily engaged” in politics and groups that really are primarily engaged in “social welfare”—somehow “promoting the common good and social welfare of the community.”

4) The social welfare tax exemption is being used by existing 501(c)(4) organizations, including some very large ones, to promote partisan political interests—the very activity Congress has explicitly prohibited for a century. The New York Times ran a useful explanation  about this last Tuesday.

5) It is not an excuse, but it does bear noting that none of the organizations that the IRS subjected to improper levels of scrutiny was denied tax exempt status.

6)  Congress is demanding that the agency do more and more with less and less. As David Levinthal reported at the Center for Public Integrity, the IRS’ Exempt Organization Division–the division charged with the violations–processed significantly more applications in 2012 than it ever had. At the same time, the entire IRS was operating on a much-reduced budget, as a result of several rounds of Congressional cost-cutting.

“Over the last two years, government watchdog groups filed more than a dozen complaints with the Internal Revenue Service seeking inquiries into whether large nonprofit organizations like those founded by the Republican political operative Karl Rove and former Obama administration aides had violated their tax-exempt status by spending tens of millions of dollars on political advertising. The I.R.S. never responded… Because they purport to be engaged primarily in issue advocacy, not election advocacy, tax-exempt groups are not closely regulated by the Federal Election Commission. That task falls, instead, to the I.R.S., which can take years to investigate problems and is required to do so in strict secrecy… The tax code states that 501(c)(4)’s must operate “exclusively” to promote social welfare, a category that excludes political spending. “

The fact that the agency is understaffed does not excuse lawbreaking; what this revelation does, however, is point to systemic fiscal and managerial issues within the IRS that need to be addressed. Unfortunately, given the blood-lust of those in Congress who are intent upon using the IRS misbehavior for entirely partisan purposes, a carefully calibrated and deliberate review of agency operations is unlikely.

What the IRS should be doing is looking closely at every application. The politics of the applicant is irrelevant–but compliance with the rules governing tax-exempt status is anything but. Granted, those rules have been considerably complicated and confused thanks to Citizens United, but that makes competent, even-handed oversight more important than ever.

If Congress wasn’t so broken, this episode might lead to meaningful reform. I’m not holding my breath.


  1. I understand that IRS got some 70,000 applications with a staff of 150 to deal with them. I have had occasion to deal with application forms for both 501(c)(3) and 501(c)(4) organizations, and read through just a fraction of myriads of instructions that try to effectively square the circle: figuring out exactly where “social welfare”, “political activity”, and “primarily” intersect (or don’t). Congress created that monster……only Congress can effectively deal with it.

  2. The biggest scam in the nonprofit world are the so-called nonprofit hospitals, which have become mega corporations with tons of high-paid executives and paltry charitable care that consists of those patients they failed to collect from after pursuing multiple avenues of collection and destroying their credit ratings. What the IRS should be focusing on is revoking the tax-exempt status of these so-called charitable nonprofits which seem to have forgotten the meaning of charity. There are also way too many 501(c)(3) groups of all political persuasions which blatantly violate the prohibition on political activity. The IRS simply doesn’t enforce the law period. Look at all the nonprofits operating here as CDCs in Marion County that are joined at the hip with real estate developers, engineering firms and corrupt politicians. It’s a total scam. Complaining about any of the abuses to the IRS is a waste of time. This scandal primarily involved new applications of a certain ilk that someone didn’t want to see gain the prized nonprofit status.

  3. I agree with Gary, but he’s too limiting. The biggest scams are so-called non-profit organizations. Period. Many of them exist just to make their employees and directors’ money and allow them to buy cars, clothes, computers, etc. with untaxed income.

  4. I should have said “many” non profit organizations. Many are legitimate. Many are not.

  5. Perhaps we could do away with ALL non profits. It certainly would simplify things. I personally do not base my donations on the tax status of the recipient. Do you? Among the worst are the religious groups. If they are working properly, they will NOT generate a taxable profit anyway so why not just do away with the status? Tax all individuals equally. Tax all organizations (Corporations) equally. Seems fair.

  6. Ask yourself this: when you are asked to describe what the words “Tea Party” mean to you, do you think of the words “social welfare organization”? No? Well that is what the Republicans who self-described themselves as a “Tea Party” want you to think.

    To be tax exempt under 501(c)(4) of the Internal Revenue Code, an organization must be “operated exclusively for the promotion of social welfare”.

    Suppose an organization being reviewed had the title “The Indiana Chapter of the American Jihad, a Social Welfare Organization, Inc.”? Would you want the IRS to take a closer look? Maybe ask “Who is providing your money”?

    I realize that the IRS may not have looked as carefully at applicants with the word “progressive” in their titles and they should have. But just because it didn’t, doesn’t mean that the extra scrutiny given “Tea Party” was unwarranted. In recent years the words “Tea Party” practically scream that the organization is intensely political. The problem isn’t that the IRS did too much; if anything, it did too little.
    Most Americans agree that the IRS should never be used to pervert the political process. But the IRS is charged with the duty to see that the Internal Revenue Code is not perverted either; and that, as any informed person knows, is precisely what the Tea Party adherents, and some liberal groups as well, disguised as “social welfare organizations”, have been up to since early 2010.

    The particular problem of discrimination between conservative and liberal organizations, which I acknowledge is a problem, can be cured quite simply; follow the law as written by Congress during the Eisenhower administration. “Exclusively” means “exclusively and Carl Rove is not in the “social welfare business”. Is that too hard to understand?

    Jim Beatty

  7. To those folks who are “outraged” about the IRS selecting right wing organizations, if they want an even-handed and aggressive IRS, they need to vote more money to the IRS so it can do its job the way it is supposed to do it. Otherwise, just how is the IRS supposed to enforce the law? Assign a lottery number to the applicants?

  8. The jury’s still out on whether the IRS is under-funded based upon a recently released FOIA request from a news source, the Washington Examiner. This FOIA request revealed that the IRS awarded $92M in employee bonuses from 2009 through 2012. Any way a person views this dollar amount in taxpayer-funded employee bonuses, it’s clearly a massive IRS budget line item for public employee bonuses. I spent 28 years in the public sector and never received nor expected to receive a bonus because I knew from the get go that I was a public servant. On the other hand, my spouse spent an equivalent time period in the private sector where bonuses were awarded based upon performance that increased profits for the company and generally for a job well done, as measured by the owner and his/her belief that the employee was proactive in making decisions that ultimately would please him/her. Attached is a link to the news source and the accompanying article which includes the names and the bonus amounts received by 16,000+ IRS employees between 2009 and 2012.

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