September 20, 2013
CREW frequently has criticized the IRS for doing nothing while tax-exempt groups violate the Tax Code by spending hundreds of millions of dollars on political activity. On Wednesday, we learned this is now literally true. In another misguided response to the supposed IRS scandal of targeting groups applying for tax-exempt status based on their political ideology, the IRS in June suspended all examinations of non-profits that may have improperly engaged in political activity, Acting Commissioner Danny Werfel told the House Ways and Means Committee.
Putting on hold the examinations of groups that may have violated tax law through political spending is an unnecessary and counterproductive overreaction to the congressional hearings and investigations into the IRS scandal.
The issues with targeting have focused on the IRS’s Cincinnati office that reviewed applications for tax-exempt status, not the entirely separate Dallas office that conducts examinations. Mr. Werfel said the suspension is part of a broad evaluation of examinations of tax-exempt groups, but for many groups accused of improperly engaging in politics, their violations are so obvious there is no reason the IRS would want or need to stop them.
The American Action Network (AAN), for example, spent nearly 67 percent of its money on political activity in its first two years of existence. CREW has filed two complaints against the group, but because the IRS does not disclose information about examinations, it is not known if the agency is investigating the group. If it is, though, there should be no question AAN violated tax law.
Suspending examinations also further delays the IRS’s already-glacial pace in conducting investigations, giving groups even more of a chance to evade the consequences of their actions.
CREW filed a complaint against the Commission on Hope, Growth and Opportunity in May 2011, for spending more than half of its money on political activity in the 2010 election. By the end of 2011, the group had gone out of business, leaving the IRS, which failed to take prompt action, and the public with no one to hold accountable. Similarly, a group that funneled millions of dollars during the 2012 elections to groups linked to the Koch Brothers called TC 4 Trust went out of business in May 2013.
The IRS’s move suggests it is again being intimidated by Republicans in Congress trying to deter the agency from enforcing tax law. A similar cowering happened in 2011, after the IRS began investigating whether contributors to several section 501(c)(4) groups had paid gift taxes on their donations. House and Senate Republicans sent threatening letters to then- Commissioner Douglas Shulman, and the IRS quickly caved, announcing it was suspending those examinations indefinitely.
Another comment by Mr. Werfel suggests the IRS may be squandering this opportunity to address the real scandal — the agency’s misinterpretation of section 501(c)(4) that allows tax-exempt groups to spend hundreds of millions on political activity without disclosing their donors. The statute requires these organizations be “operated exclusively for the promotion of social welfare,” which does not include political activity, but in 1959 the IRS created a loophole by allowing groups only “primarily” engaged in such activities the benefits of tax-exempt status.
In his testimony, Mr. Werfel noted the Treasury Department’s 2013-14 Priority Guidance Plan calls for issuing guidance “under section 501(c)(4) relating to measurement of an organization’s primary activity and whether it is operated primarily for the promotion of social welfare,” and said the Treasury Department and the IRS are working on proposed regulations for public comment on the issue. Putting the proposed rules in the context of “primary activity” and “operated primarily” raises the serious concern that the IRS is clinging to its misinterpretation of the statute. While it is not known what the proposed rules will say, the worst mistake Treasury and the IRS could make would be to continue ignoring the law as Congress wrote it.