The other IRS scandal

Required context for a controversy

The burgeoning “scandal” over how the IRS chose for review 75 applicants for tax-exempt status puts on full display an unfortunate tendency in journalism—to quote people accurately without explaining the underlying context. Yes, it is as wrong for IRS employees to select groups to scrutinize based on their names as it is for police to stop and frisk young people based on the color of their skin. Still, the facts here are not so black-and-white as with racial profiling.

There is a scandal in all of this—several, actually, and some are more significant than the one that is getting all the attention. As the story unfolds, here are some important points to keep in mind:

• Missing from much coverage is the relevant recent history—the role of the Supreme Court’s 2010 Citizens United decision and how it prompted a deluge of requests from new organizations seeking tax-exempt status under tax code Section 501(c)(4) as “social welfare” organizations—despite the fact that many of these are blatantly political operations.

• 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, what the IRS is supposed to do is 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.” It’s kind of mushy. Brad Plumer has a good explainer about this on The Washington Post’s Wonkblog.

• The first scandal here, meanwhile, is that 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, after a weak political piece on Saturday, had a clear and useful explainer about this on Tuesday.

• Also worth pointing out: None of the organizations that the IRS scrutinized as a result of the ill-considered screening-by-name regime was denied tax exempt status.

• The second—and widely ignored—scandal in this unfolding story is that the IRS is drowning. Congress is demanding that the agency do more and more with less and less, as we have reported here and elsewhere. As David Levinthal reported Tuesday at the Center for Public Integrity:

The IRS’ Exempt Organizations Division, which finds itself at the scandal’s epicenter, processed significantly more tax exemption applications in fiscal year 2012 by so-called 501(c)(4) “social welfare” organizations — 2,774 — than it has since at least the late 1990s.

That compares to 1,777 applications in 2011 and 1,741 in 2010, he reported.

Meanwhile, in real terms the IRS budget has been cut 17 percent per capita since 2002, even as Congress has piled on other new duties, such as hunting for offshore accounts, dealing with the complexities of the Affordable Care Act, and other expanded obligations.

To hear the IRS’s bureaucrats tell it, it is this combination of a flood of new work and the challenge of reduced manpower that prompted what an inspector general’s draft report on this problem—a full report is due soon, possibly today—calls “triage” of requests for tax-exempt status. The IRS set aside about 300 applications for a closer look, 75 of which had in their name or explanatory papers, words like Tea Party, patriot, Constitutional education, and similar terms. The Washington Post’s Juliet Eilperin has a good account of how it worked.

Speaking to reporters last Friday, Lois Lerner, IRS exempt organizations director, described the wrongful actions of her Cincinnati subordinates—Cincinnati is where 501(c)(4) applications go—as “short cuts” designed to make their work easier, rather than politically motivated. We’ll see, as the investigations unfold.

Meanwhile, maybe reporters could investigate this: Karl Rove, the Republican strategist, initiated the use of the tax exemption for 501(c)(4) social welfare organizations to promote candidates and causes when he formed American Crossroads in 2010. He in turn inspired a Democratic operative—Bill Burton, former deputy press secretary to President Obama—to do the same, starting Priorities USA in 2011.

Are these organizations primarily political? Here is how Open Secrets described Rove’s 501(c)(4) operation and its political influence and ties:

American Crossroads and Crossroads GPS, both formed in 2010, are the heavy hitters of the multicandidate outside spending groups. They were started and continue to operate in consultation with GOP operatives Karl Rove and Ed Gillespie. American Crossroads, a super PAC, and GPS, a 501(c)(4) that isn’t required to disclose its donors, spent more than $70 million that year, according to one of its officials, though they only reported spending a little more than half that to the Federal Election Commission. Steven Law, former general counsel of the U.S. Chamber of Commerce and chief of staff to Senate Minority Leader Mitch McConnell of Kentucky, is president of both groups. The groups raised $51 million in 2011, and have said they plan to spend much more than that in the 2012 elections.

Consider that in the context of a 1963 federal appeals court, which ruled that to qualify for tax exemption under 501(c)(4), “the organization must be a community movement designed to accomplish community ends.”

A couple of smaller points: Many news organizations also reported that the IRS wanted the names of donors, indicating (or quoting organizations as saying) that this is improper. Actually, disclosing donors to the IRS is required of most tax exempt organizations on Form 990 Schedule B, as Lerner told reporters Friday. However, Schedule B is not made public by the IRS, while Form 990 is. (The IRS did, improperly, release some donor information to ProPublica, as it reported here and here.)

One more: Jonathan Weisman, on the front page of Saturday’s New York Times, wrote:

The Internal Revenue Service apologized to Tea Party groups and other conservative organizations on Friday for what it now says were overzealous audits of their applications for tax-exempt status….

In the context of the IRS, “audit” is a loaded word, and implies something more onerous than filling out a long questionnaire.

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David Cay Johnston covers fiscal and budget matters for CJR’s United States Project. He is a reporter with 46 years of experience, including 13 at The New York Times; a columnist for Tax Analysts; teaches tax and regulatory law at Syracuse University Law School; and is president of Investigative Reporters & Editors (IRE). Follow him on Twitter @DavidCayJ. Tags: , , , ,