The current IRS scandal: through a nonprofit lens

It’s not all about politics. Fox news, and conservatives in general, are complaining ad nauseum about an IRS, ‘targeting’ for special attention, Tea Party applications for 501(c)(4) status. Having been a communications employee and consultant in the nonprofit sector for many years I’m not convinced this was a purposeful politically driven decision. Apparently I’m not alone. Time Swampland writer Alex Altman, in his article The Real IRS Scandal, investigates and editorializes.

Altman wrote, “… the IRS does need to crack down on political groups masquerading as social-welfare organizations. Many of the nonprofit groups who claim 501(c)(4) status either flout tax law or flirt with the murky line between electioneering and issue advocacy, all while using their tax-exempt status to conceal their donors.”

Just for the record, the 501(c)(4) status requires that an organization, “… be “primarily” engaged in social-welfare activities rather than electioneering.” Here are the actual provisions:

IRC 501(c)(4) provides for exemption of:

- Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.

- Local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

The statutory terms disclose that IRC 501(c)(4) embraces two general classifications

a. Social welfare organizations, an

b. Local associations of employees.

I admit that the term ‘social welfare’ is an abstruse term defying precise definition, but ask yourself. Do these provisions match with organizations like Crossroads GPS? I visited their website and couldn’t find a single positive message, nothing even close to the IRS tax status requirements for social welfare or local association of employees. Yet they have 501(c)(4) status. The American Action Network on the other hand defines itself as a center-right organization, is commonly identified with the Tea Party, and fits the profile IRS agents may have investigated. AAN is very careful to identify its political advocacy mission in a philosophical context and as such passed IRS scrutiny.

When I worked for the WK Kellogg Foundation as an employee, and for many years as a consultant, every communication we created was thoroughly scrutinized internally to avoid even the presumption of electioneering, political advocacy, and the like. The foundation was a 501(c)(3) so the rules were slightly different, but still, all nonprofits engaged in the social welfare of our citizenry discriminate between welfare, lobbying, and electioneering.

A flood of political activism against tax law came about in the years 1998 to 2009 when political action groups realized that applying for nonprofit status might be a way to circumvent laws limiting election donations. According to TruthDig.com How the IRS’ Nonprofit Division got so Dysfunctional, “Social welfare nonprofits were only a small part of the [IRS] exempt division’s work, considered minor when compared with charities. When the groups sought IRS recognition, the agency usually rubber-stamped them. Out of 24,196 applications for social welfare status between 1998 and 2009, the exempt organizations division rejected only 77, according to numbers compiled from annual IRS data books.” Political consultants began using this loophole to create social welfare organizations for political purposes. “By 2012, more than $320 million in anonymous money poured into federal elections.”

The earlier Supreme Court’s Citizens United decision (January 2010), arguably a conservative action, didn’t help matters. A rush to hide election donations under nonprofit status tax regulations has beleaguered IRS agents with over 60,000 applications per year. The richest among us have poured capital into every election, very nearly purchasing government. Applications for tax-exempt status are processed in Cincinnati (about 200 low-level employees). Under pressure to be more circumspect, this group failed, a political disaster for the administration but upon inspection, perhaps to be expected

Who put pressure on the IRS?

Again I quote the Time article, “… Beginning in the fall of 2010, Democracy 21 and another nonpartisan group called the Campaign Legal Center have urged the IRS to crack down on groups that have improperly claimed social-welfare status. Among the leading offenders, Wertheimer says, are two right-leaning groups, Crossroads GPS and the American Action Network; PrioritiesUSA, which supported Obama’s re-election; and the short-lived Americans Elect, which tried to raise a third-party presidential candidate to compete in 2012 despite registering as a social-welfare nonprofit.”

Conservatives in congress have long pressured nonprofits that don’t fit their agenda. Congressional hearings against PBS, ACORN, and Planned Parenthood are conducted on a regular basis. The IRS had complied frequently. This article by on how the IRS [is] Upping Investigations of Abusive Charitable Deductions, is just one of many examples.

Did IRS employees go over the top? Probably but even here additional investigations by the department of justice and congress are ongoing. Instead of obstructionist politics, rampant exaggeration, and the obfuscation of facts in a race to impeach, what is needed is an overhaul of the tax laws but in this congress that is unlikely to happen.

Have other groups been targeted? Sure. “The IRS Exempt Organizations division, the watchdog for about 1.5 million nonprofits, has always had to deal with controversial groups.” Ironically, conservatives in Congress continually belittle the division for being too lenient. It’s always been the case that specific groups, at different times in history, have been scrutinized. Again from TruthDig:

“The IRS Exempt Organizations division, the watchdog for about 1.5 million nonprofits, has always had to deal with controversial groups. For decades, the division periodically listed red flags that would merit an application being sent to the IRS’s Washington, D.C., headquarters for review, said Owens, the former division head.

In the 1970s, that meant flagging all applications for primary and secondary schools in the south facing desegregation. In the 1980s, during the wave of consolidation in the health-care industry, all applications from health-care nonprofits needed to be sent to headquarters. The division’s different field offices had to send these applications up the chain.”

Who is ultimately to blame?

There’s plenty of blame to go around, beginning as far back as 1998. Again the TruthDig article reports, ” … by 1998, after hearings in which Republican Senator Trent Lott accused the IRS of “Gestapo-like” tactics, a new law mandated the agency’s restructuring. In the years that followed, the agency aimed to streamline. For most of the ‘90s, the IRS had more than 100,000 employees. That number would drop every year, to slightly less than 90,000 by 2012.”

The agency lost funding and reduced the level of training. The division’s “Continuing Professional Education,” or CPE, technical instruction program was cut back so fewer internal training articles were generated for line agents. Before the restructuring, a scandal of this kind would have been far less likely. Revenue rulings prior to 2000 were issued constantly. More recently, that has not been the case. The resulting ambiguities have turned to political fodder. Shame on political consultants who would inculcate politically motivated grassroots organizations to piggy-back on the nonprofit sector. Shame on Congress for underfunding the IRS and defanging its ability to close corporate loopholes. Shame on the IRS for not providing clear rulings on 501(c)(4) status, and shame on the politicians who would make more of this incident than is warranted.

In Summary

It’s ironic to this writer that organizations on record as being against taxes and the government itself apply for 501(c)(4) status, declaring themselves to be social welfare agencies devoted to the ‘common good’. Many of these organizations have publically positioned themselves as ready to defund public education, eliminate Medicare, eliminate Planned Parenthood and defund Head Start. They would kill Pell Grants, eliminate Social Security, and disembowel environmental and worker safety regulations. Given the chance, they would gladly end federal authority in every state of the union. This is not the purpose or character of the nonprofit sector where I have met individuals who work all their lives, on meager salaries, in the face of endless vexing obstacles, to reduce human suffering. This is not the level-headed and objective consideration we should expect from any of the participants.

 

Read more about the 501(c)(4) law here:

http://www.irs.gov/pub/irs-tege/eotopici03.pdf

 

Other articles of interest:

‘Who’s going to jail’ over IRS scandal? Probably nobody.” (Washington Post)

Republicans Expand I.R.S. Inquiry, With Eye on White House” (New York Times)

Why The IRS Scandal Is Built To Last” (NPR)

Strassel: The IRS Scandal Started at the Top – The bureaucrats at the Internal Revenue “Service did exactly what the president said was the right and honorable thing to do” (Wall Street Journal)

An ‘unthinkable’ IRS scandal? More like unavoidable” (Washington Post)

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