Tag Archives: wrongdoing

Penny Wise, Pound Foolish…Again

Here’s a great example of what happens when a fixation on keeping taxes low no matter what (yes, Governor Pence, I’m looking at you) ends up preventing authorities from engaging in oversight that would actually save taxpayers money.

The IBJ has reported that 

Local governments will see fewer audits due to a recent change in Indiana state law.

The State Board of Accounts used to audit cities and counties every year, and audit school corporations every two years. Now those audits will be conducted every four years unless there are red flags.

And why is the frequency of audits declining? Budget constraints.

But budget limitations and the sheer number of entities that require auditing means there’s too much work and not enough people to do it, Caldwell told The Muncie Star Press….

Local officials confirmed this week that Delaware County and the city of Muncie haven’t been audited for three years.

State audits are important because they can uncover costly financial mistakes, wrongdoing by officials and other issues that local governments can correct–ideally, before the error or wrongdoing has cost significant amounts of money.

In the not-so-distant past, audits by the State Board of Accounts have found problems with the Muncie Sanitary District’s finances and then-Delaware County Treasurer John Dorer, who resigned in February 2015 after pleading guilty to a charge over the mishandling of funds. It would seem prudent to continue supervision of Delaware County to insure that these problems are not continuing, rather than taking a three-year hiatus.

There’s an axiom from the criminal law literature that is relevant here; it is the certainty of punishment, rather than the severity, that deters criminal behavior. (In other words, if you are considering a burglary, and the punishment is 20 years, but the likelihood of getting caught is 5%, the deterrent effect is negligible. If, however, the punishment is 5 years, but the likelihood of getting caught is 95%, the deterrent effect is considerable.)

Most reasonable people would not reduce police patrols in a previously lawless neighborhood and expect crime to go down. Same principle.

The Pence Administration is “saving” us money by keeping taxes (and revenues) low. In the process, it is issuing an unintended invitation to embezzlement and mismanagement. I’d be willing to wager that taxpayers will end up losing much more money than the administration is saving by reducing the mechanics of oversight.

But then, as a former student of mine who was working for the administration until he quit in disgust puts it, this Governor’s office has zero interest in actually governing.

That’s becoming more obvious with every passing day.

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.