The Real Problem at the IRS
Everyone can agree it is unacceptable for the IRS to target particular organizations based on political ideology. If that’s what agents at the IRS were up to, they were wrong and there should be consequences. The real problem, however, is not that the IRS is overly aggressive, but that it has sat by idly while an ever-increasing number of groups blatantly violate the laws governing 501(c)(4) organizations. Where is the outrage over that?
My organization, Citizens for Responsibility and Ethics in Washington (CREW), has regularly criticized the IRS for spending the last two elections sitting on its hands while dark money groups, organized under section 501(c)(4) of the tax code, spent millions of dollars contributed by anonymous donors to run vituperative, deceptive political ads. Under the law, 501(c)(4) status is reserved for groups promoting social welfare; it was never intended to apply to political groups.
Nevertheless, largely due to the disastrous 2010 Citizens United decision, the number of applications for 501(c)(4) status more than doubled between 2010 and 2012. The Tea Party became a political force during the same period. As a result, an overwhelming number of the new groups attempting to benefit from 501(c)(4) status supported Republican candidates and causes. While there are some 501(c)(4)s oriented toward Democrats, including Priorities USA, because of liberal opposition to dark money groups, the vast majority are conservative.
Under these circumstances, it is understandable that IRS agents would have been concerned about whether many of these newly minted groups were in fact political parties and therefore, not entitled to 501(c)(4) status. It is noteworthy that IRS officials made no effort to stymie the efforts of clearly conservative groups to register as 501(c)(4)s. One of the largest, the American Action Network (AAN), headed by former Republican Sen. Norm Coleman (MN) sped through the approval process in less than six weeks, and the Commission on Hope, Growth and Opportunity — which had a strong presence in 2010, but is now defunct — had its application approved in less than a month.
The real scandal is not that the IRS made inquiries to ensure political groups were not benefitting improperly from 501(c)(4) status, it is that the agency fails to enforce the law even against the most blatant violators. Federal law states these groups must operate “exclusively for purposes beneficial to the community as a whole,” but IRS regulations allow groups “primarily” engaged in social welfare activities to take advantage of tax-exempt status. Based on this misreading of the law, many 501(c)(4) groups have interpreted this to mean they can spend up to 49 percent of their funds on political activities. Some groups, like AAN, willfully violate even this standard with no apparent consequences.
For example, in its 2010 501(c)(4) application to the IRS, AAN stated it expected to spend less than 20 percent of its resources on political activities. Yet within days of receiving IRS approval, AAN acknowledged it planned far greater political activity than it had represented. The group’s tax returns show that 66.8 percent of AAN’s total spending from July 2009 through June 2011 was used for political activity. By any definition, this is clearly over the percentage permitted by the tax code. CREW filed other complaints against Americans for Tax Reform, the Commission on Hope, Growth and Opportunity, and the American Future Fund, but there is no evidence the IRS acted on any of them.
When confronted about its misinterpretation of the law and its record of inaction, the IRS has said only that it is “aware” of the issue. Finally, in February, CREW filed a lawsuit against the against the IRS for flouting the law barring 501(c)(4) organizations from engaging in political activity. The case is pending in district court.
Sadly, the byproduct of the IRS’s bungling efforts to follow the law likely will result in diminished enforcement. Opportunists will use this imbroglio to bolster arguments that a crackdown on social welfare groups abusing their tax status is political; a weakened IRS will simply fold. We saw this in 2011, as social welfare organizations began raking in secret donations made with the intent of influencing the 2012 elections. Sen. Orrin Hatch (R-UT), one of those leading the charge against the IRS now, railed against the agency for attempting to enforce a law requiring those who contribute to 501(c)(4)s to pay gift taxes. In short order, the IRS retreated, effectively allowing donors to ignore the law.
As Congress holds hearings and demands answers from the IRS, members on both sides of the aisle should consider a solution to this problem: banning political spending by 501(c)(4) groups. The effect of such a change would allow the IRS to get out of the business of attempting to ascertain the goals of these organizations, without impairing groups’ participation in the electoral process.