Politics and the IRS Scandal

Between 2010 and 2012, applications to the US Internal Revenue Service (IRS) from nonprofit organizations seeking tax-exempt status increased dramatically. Tax-exempt status allows certain nonprofit organizations such as charities to not pay federal taxes. Before the IRS can grant this status to an organization, it must determine whether the organization’s stated purpose falls into one of the permitted exemption categories defined by US law. As a result of this surge in applications, the IRS conducted many audits, requiring applicants to submit additional supporting information such as detailed financial records, logs of activities, and donor lists. Conservative political groups—especially those associated with the Tea Party wing of the Republican Party—accused the IRS and the Democratic administration under President Barack Obama of unfairly targeting their applications for audit. They also accused the IRS of targeting individual taxpayers whose names appeared on the donor list of Tea Party–affiliated organizations for personal income tax audits. These actions sparked debate about whether the IRS was abusing its power to audit groups and individuals whose political viewpoints differed from the current administration or whether the IRS had increased its application scrutiny uniformly across all organizations, regardless of political ideology.

Understanding the Discussion

Audit: A process by which the IRS requests detailed financial information from an individual or an organization to determine whether the person or company is in compliance with federal tax law.

Internal Revenue Service (IRS): The US government body that oversees the collection of federal taxes, enforcement of federal tax law, and granting of tax-exempt status to nonprofit organizations.

Political action committee (PAC): A type of organization established to raise money and finance political campaigns and lobbying activities. PACs do not qualify for federal tax exemption and must disclose the names of their donors and funding sources.

Tax exemption: A special status granted by the IRS to organizations such as charities and social welfare groups that allows these organizations to not pay federal taxes.

Tea Party: A conservative subgroup of the Republican Party.

History

In order to provide financial assistance to nonprofit organizations whose primary purpose is to “further the common good and general welfare of the people of the community,” Congress established section 501(c)(4) of the US Internal Revenue Code, which allows the IRS to grant tax-exempt status to social welfare organizations. The intention of this section is to reduce the federal tax burden on nonprofits, so they can spend more of their operating budgets on the social programs they were established to promote. Qualifying organizations include civic leagues and local associations of employees; however, organizations engaging in “substantial lobbying activities” can also claim exemption under 501(c)(4), as the IRS determined that influencing legislation is “a permissible means of attaining social welfare purposes.”

Thus a social welfare organization that raises money to influence legislation to further its goals could qualify for tax-exempt status under this section. Unfortunately, campaign finance watchdog groups such as Public Citizen’s Congress Watch division allege that nonprofits across the political spectrum often abuse that exemption. They accuse organizations such as the conservative Crossroads GPS and the liberal Priorities USA of existing primarily to influence elections and funnel campaign money to political candidates tax-free in violation of campaign finance laws. While tax-exempt social welfare organizations are permitted to participate in political campaigns and lobby to influence elections and legislation in the interest of the common good, that is not supposed to be their primary purpose.

However, nonprofits, particularly those holding conservative politic viewpoints, spend an increasingly large amount of money on campaigns. In 2010, 501(c)(4) conservative nonprofits spent about $78 million on campaign activities, while liberal nonprofits spent about $16 million. During the 2012 campaign, conservative nonprofits spent more than $263 million, while liberal nonprofits spent nearly $35 million; in the 2014 midterm election campaign, conservative nonprofits spent $122.82 million, liberals $35.21 million. According to a 2012 report by the Center for Responsive Politics and the Center for Public Integrity, social welfare nonprofits outspent candidate- or party-affiliated super political action committees (super PACs) by a three-to-two margin in 2010. This is significant because PACs have more transparent reporting requirements than tax-exempt nonprofits; for example, PACs must make their donor lists public, so the general public can be made aware of any conflicts of interest. Nonprofits have no such requirement, and the same report suggests that about 90 percent of nonprofit spending originated from donor groups that did not publically disclose their funders. This makes many watchdog groups skeptical about the new flurry of “nonprofits,” as they suspect these are simply PACs disguised as “social welfare” organizations in order to keep donor lists private.

Even though an organization‘s primary purpose must be social welfare to qualify for tax exemption under section 501(c)(4), the 2010 Supreme Court ruling in Citizens United v. Federal Election Commission effectively abolished that requirement. The ruling held that 501(c)(4) organizations can accept unlimited contributions from corporations, labor unions, and nonprofit groups supporting or opposing a political candidate, a ballot initiative, or other legislation without disclosing their donor sources. So while a nonprofit must claim that its primary purpose is “social welfare” in order to qualify for tax-exempt status, in practice there can be no limitations imposed on its political spending. As a result of this ruling, the IRS saw a dramatic increase in the number of applications for 501(c)(4) exemptions for alleged nonprofit social welfare organizations between 2010 and 2012, mostly from politically conservative groups. They received more than 2,400 applications—nearly twice the usual number, according to then director Lois Lerner.

When the IRS receives an application for tax-exempt status from a nonprofit group, it can either approve the exemption based on the information provided in the application or flag the application for an audit. When an application is audited, it receives more careful scrutiny from the agency, which often requests additional information from the applicant, such as financial statements, donor lists, activities logs, and more detailed statements of purpose. The intention behind the audit is to ensure that the organization‘s genuine purpose is to promote social welfare and that it is not just a PAC disguised as a nonprofit intended to finance political campaigns tax free.

During the 2010 to 2012 period, the IRS flagged about 300 of the 2,400 applications for audit. However, word quickly spread among conservative groups that IRS reviewers were using keywords such as “Tea Party,” “patriot,” and “9/12” to select applications for audit. Some applicant groups received requests for donor lists; others said their applications were delayed far longer than warranted, even given the increased number of applications. Some conservative groups further alleged that the IRS singled out individual Tea Party donors for personal and business audits and suspected that information about these individuals‘ identities came in part from donor lists submitted to the IRS as part of the nonprofit application audit process.

In March 2012, former IRS commissioner Doug H. Shulman testified before the House Ways and Means Subcommittee on Oversight that the IRS had not targeted conservative nonprofits for audit. Regardless, the Treasury Inspector General for Tax Administration (TIGTA), which provides independent oversight of the IRS, opened an inquiry into the situation, and Shulman stepped down from his position as commissioner at the end of his term in November 2012.

Politics and the IRS Scandal Today

In 2013, the IRS acting director of the Exempt Organizations Unit, Lois Lerner, spoke at a meeting of the American Bar Association, where she explained that the agency consolidated the unusually large number of applications into a single office in Cincinnati for processing. She said some employees used the terms “Tea Party,” “patriot,” “9/12,” or other political-sounding terms to group the applications but claimed this was done out of convenience rather than political bias. However, she admitted that this type of “shortcut” was unacceptable regardless of the reason and was inappropriate.

However, as of 2015, Lerner’s role in the scandal remained under investigation. Inquiries revealed that targeted lists of organizations and keywords existed as early as April 2010, but Lerner alleged that she was unaware of the practice until early 2011, when she told the Cincinnati office to alter its guidelines for flagging applications for audit. A TIGTA investigation revealed that tens of thousands of Lerner’s e-mail records from prior to April 2011 were missing due to an alleged hard-drive crash—a significant loss, given the timing of the discriminatory audit allegations. Subsequent forensic analysis of the subpoenaed e-mails recovered more than 54,000. The House Ways and Means Committee further uncovered evidence that Lerner became interested in whether instant messages were automatically saved and searchable, suggesting that she and her department might have had something to hide.

Aggrieved nonprofits and politicians believe these missing e-mails would show that Lerner herself played a significant role in the decision to specifically target conservative groups for audits; some groups even allege the directive came straight from President Obama himself. In October 2013, watchdog group Judicial Watch filed a lawsuit against the IRS under the Freedom of Information Act (FOIA) to obtain the missing records; however, the IRS maintains that Lerner’s computer crashed in 2011, and the e-mails are not retrievable.

Regarding audits of individual Tea Party donors, the IRS claimed that donor lists submitted by nonprofits during their application audit process were never shared between departments and were destroyed. However, evidence surfaced suggesting at least three of the lists survived and that about 10 percent of the donors on those lists were personally audited—notably higher than the usual 1 percent of American taxpayers who are audited overall each year.

As of early 2015, the TIGTA’s investigation remained ongoing, as did investigations by several other congressional committees and the Department of Justice. However, Lerner retired from the IRS in late 2013 and invoked her Fifth Amendment right to avoid testifying before Congress, which led to her being held in contempt in May 2014. She was found to have waived her right against self-incrimination by having made a 2013 statement in which she asserted her innocence. In December 2014, the House Oversight Committee reported that conservative groups were “systematically targeted” and that eight IRS officials, including Lerner, were involved, but the White House was not. As of mid-2015, no charges had been filed, however.

These essays and any opinions, information or representations contained therein are the creation of the particular author and do not necessarily reflect the opinion of EBSCO Information Services.

Bibliography

Periodicals

Cusack, Bob. “Feds Won’t Release IRS Targeting Documents.” Hill 10 Feb. 2015: 1. Points of View Reference Center. Web. 12 Jan. 2016.

Erb, Kelly Phillips. “Timeline of IRS Tax Exempt Organization Scandal.” Forbes. Forbes.com, 7 May 2014. Web. 23 Sept. 2014.

“IRS Scandal Fast Facts.” CNN Wire 11 Jan. 2015: n. pag. Points of View Reference Center. Web. 12 Jan. 2016.

Kiefer, Francine. “IRS Scandal 101: Why House Doesn’t Have All Lois Lerner E-mails Yet.” Christian Science Monitor 27 Mar. 2014: n.pag. Points of View Reference Center. Web. 12 Jan. 2016.

Ohlemacher, Stephen. “Lawmakers: IRS Lost More Emails in Tea Party Probe.” Associated Press. Associated Press, 17 June 2014. Web. 23 Sept. 2014.

Weisman, Jonathan. “I.R.S. Apologizes to Tea Party Groups over Audits of Applications for Tax Exemption.” New York Times. New York Times, 10 May 2013. Web. 23 Sept. 2013.

Websites and Digital Files

“Action Organizations.” IRS.gov. IRS, 15 May 2014. Web. 23 Sept. 2014.

“Types of Organizations Exempt under Section 501(c)(4).” IRS.gov. IRS, 14 Mar. 2014. Web. 23 Sept. 2014.

United States. Cong. House. Committee on Oversight and Government Reform. Lois Lerner’s Involvement in the IRS Targeting of Tax-Exempt Organizations. 113th Cong., 2nd Sess., 11 Mar. 2014. PDF file.