The recent problems at the IRS have been characterized in many ways and criticized across the political spectrum. Some of this criticism has been fair (and necessary), but this situation has also been used to demonize an entire agency for action taken by a small number of employees. These employees acted not out of malice or partisanship, but in an effort to do a job the public should never have asked them to do in the first place. Let me continue to be clear about one thing: Any kind of IRS inquiry, scrutiny or harassment based on political ideology has no place in this nation and some of the IRS employees acted wrongly. Rather than continue a worthless political witch hunt, however, we should be asking why this happened and searching for solutions to prevent it in the future.
This entire situation boils down to an archaic piece of the tax code that has been poorly interpreted and applied. I am, of course, referring to section 501(c)(4), which currently allows an organization to maintain tax-exempt status while openly engaging in political activity and preserving the anonymity of their donors. This is strange since the actual law states that such organizations must be “operated exclusively for the promotion of social welfare” — something that does not include political activity. The confusion comes from a regulation interpreting this law which states that “[a]n organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting” the common good or general welfare of the community. It seems that if an organization is “exclusively” engaged in one activity, then it should not be “primarily” engaged in that activity, it should only be engaged in that activity. When asked why the drafters of this regulation decided to redefine the word “exclusively,” the IRS can only point to the fact that this regulation was put into action in 1959, which was 54 years ago. Perhaps this made sense then; it certainly does not make sense now.
The next problem for the IRS comes when it has to figure out what “primarily” means. In a regulation meant to clarify the law by providing definitions, the drafters neglected to define their own term. When I raised this topic during last week’s House Ways and Means hearing, the response was that there is no precise line used to determine what constitutes a primary activity and instead it is decided on a case-by-case basis. One can start to see how difficult this process must be for an average IRS employee and how easily mistakes could be made.
The 2010 Supreme Court decision in Citizens United v. Federal Election Commission further complicated the matter. Citizens United has allowed corporations, including those classified under 501(c)(4), to spend unlimited funds in support of a political candidate. After this decision, there was an uptick in applications for 501(c)(4) status. Combined with all other forms of tax-exempt status, the 889 employees of the IRS Tax Exempt and Government Entities Division have to review up to 60,000 applications each year. That is quite the workload.