The time has come for Congress to decide how it will address news that the IRS inappropriately targeted conservative groups for greater scrutiny of their tax-exempt applications.
So far, congressional investigators have focused on whether higher-level IRS staff intentionally misled Congress. Now they must address the underlying problems that led to the scandal.
Following the ruling in the Citizens United case that opened the door for unlimited corporate political spending, the IRS had every reason to expect that political donors would channel money to tax-exempt groups permitted to engage in significant amounts of political activity but not obligated to disclose donors. They were right: Between fiscal 2009 (prior to Citizens United) and fiscal 2012, the number of 501(c)(4) applicants jumped 92 percent and more than $300 million in “dark money” was spent in the last election cycle.
Current tax law says that a group is eligible for 501(c)(4) tax exemption if it is “not organized for profit but operated exclusively for the promotion of social welfare.” Since 1959, IRS regulations indicate that: “[A]n organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the community.” If an organization is primarily political, it cannot be a 501(c)(4) — or a 501(c)(6) trade association — and it is the IRS’ duty to make this judgment.
This is not an easy task. While the Treasury’s inspector general pointed out that “in the majority of [the 298] cases” pulled for further scrutiny the applications “included indications of significant political campaign intervention,” nearly one-third had no such indicators. Perhaps more worrisome, a random sampling of applicants not subjected to additional scrutiny showed the IRS approved, without question, applications that suggested an organization would undertake significant political activity. IRS managers disagreed with this part of the auditor’s assessment.
The IRS problems stem not only from understaffing, poor management and inadequate training but also from the lack of a clear definition of political intervention, which intensified these structural deficiencies. While their conduct is not defensible, IRS determinations staff have been forced to do their jobs with minimal guidance, often relying on their best judgment to interpret a standard based on existing “facts and circumstances.” Considering that upper management and the IG did not even agree on what constitutes “political” activity, we must ask how IRS staff are expected to make such critical determinations.
We recommend that Congress take three steps to address the underlying problems.
First, Congress should develop clear definitions of political intervention with bright lines so everyone understands what is and is not permitted. The Bright Lines Project, now housed at Public Citizen, has been working with tax and nonprofit leaders for more than four years developing such rules. Our approach, developed with bipartisan input and support, is based on long-standing and successful IRS rules that set bright lines for charities engaging in lobbying: If it refers to legislation and reflects a position on it, then it is lobbying.
We applied this model to political intervention. If the communication refers to a candidate and reflects a point of view, then it constitutes political activity. As with lobbying rules, we provide exceptions and concrete examples of how they would apply. The definition would cover all tax-exempt groups and business entities, creating consistency across the tax code.
Bob Bauer, former counsel to President Barack Obama, said our plan “is a thorough, careful consideration of what might make more sense as law than the standard the IRS now applies” even as he raised cautions about technical aspects. Jeff Yablon, of the Pillsbury Winthrop law firm, offered that the plan is “a truly thoughtful piece of work for which everyone in the [Exempt Organization] world should be grateful.”
Second, Congress needs to identify how much political activity is permissible for tax- exempt groups. Because the “less than primary” standard has not been defined, the assumption is that social welfare groups and trade associations can spend up to 49 percent of their annual expenditures on political activity.
We propose setting an upper limit on political spending for all 501(c) groups while keeping the zero tolerance policy in place for 501(c)(3) charities. Keeping the ceiling low, say 10 percent of annual expenditures, would drive most of the political money into 527 political action committees, which require disclosure.
Finally, Congress must provide adequate funding for the IRS to do its job. For the public to have confidence in the impartiality of the IRS, the agency must have the resources to consistently and fairly enforce the law.
So far, Congress has focused on the timeline of events and allegedly culpable individuals. However, Congress must address the underlying problems and use its power to create fair tax law and regulations that limit abuse and encourage civic participation.
Gary D. Bass is executive director of the Bauman Foundation and an affiliated professor at Georgetown University’s Public Policy Institute. Gregory L. Colvin is chairman of the board at Adler & Colvin and former co-chairman of the Subcommittee on Political and Lobbying Organizations and Activities of the Exempt Organizations Committee of the Tax Section of the American Bar Association.