The controversy surrounding the IRS singling-out Tea Party-inspired groups seeking tax exempt status -- while inexcusable -- might be attributable, in part, to the agency's failure to create clearer rules for political activity in the post-Citizens United electoral landscape, and it being inappropriately tasked with enforcing campaign finance law, tax law experts say.
After the U.S. Supreme Court's 2010 decision in Citizens United opened the door for corporations -- both for-profit and non-profit -- to spend on elections, 501(c)(4) "social welfare" nonprofits became the vehicle of choice for wealthy donors seeking to keep their political spending secret.
Faced with a surge in new 501(c)(4) applications, an IRS office in Cincinnatti charged with the initial review of nonprofit applications "developed and used inappropriate criteria to identify applications [for tax-exempt status] from organizations with the words Tea Party in their names," according to a new report from the U.S. Inspector General, and flagged those applications for additional scrutiny. IRS management failed to adequately stop employees from using the improper criteria, the report found.
The report, initiated after some in Congress highlighted complaints from the Tea Party groups, also found that employees at the Cincinnatti office "lacked knowledge of what activities are allowed" for nonprofit groups, in large part because of ambiguity in the rules governing a nonprofit's political activity. That same ambiguity was exploited by groups like Crossroads GPS to influence elections while keeping donors secret.
Ambiguity May Have Given Too Much Discretion to Low-Level Staffers
For publicity-shy donors, giving to a politically-active nonprofit offers a clear advantage over contributing to a Super PAC: the former can keep donors secret, whereas the latter cannot.
In exchange for this donor secrecy, 501(c)(4)s are supposed to have "social welfare," but not "political intervention," as their primary purpose. But many nonprofits in the 2010 and 2012 elections -- mostly groups like Rove's Crossroads GPS that supported Republicans, but also some groups like Patriot Majority USA on the Democratic side -- did little else besides spend on election-related ads, and asserted that their obviously political messages or organizing drives did not constitute electoral advocacy. Some even told the IRS they would not spend a dollar on political intervention.
This exploitation of the 501(c)(4) social welfare section of the tax code was made possible by ambiguity in IRS rules: what constitutes "political intervention" is unclear, and how much is too much is ill-defined. And that may have led to confusion even on the part of IRS staff.
Attorney Greg Colvin, an expert on nonprofit law, told the Center for Media and Democracy that some of the problems with the IRS review process are "absolutely" attributable to the IRS failing to provide clearer guidance about what constitutes an unacceptable level of political activity.
"Qualitatively, the IRS' approach to identifying political intervention is to examine 'all the facts and circumstances,'" he said, which includes enough wiggle room for nonprofits to argue that their ads or organizing drives should count as "education" or "lobbying" rather than electoral advocacy. "Quantitatively," Colvin said, "a 501(c)(4) can be exempt so long as political activity is 'less than primary,'" which could be anywhere from 10 to 49 percent of a group's overall activities.
This ambiguity, he says, "amounts to an invitation to lower level staff to just make it up as they go along." The staff charged with reviewing nonprofit applications "had no written standards to apply and even with supervision, there were no clear rules to be taught."
Similarly, in 2011, Loyola Law School Professor Ellen Aprill wrote that the IRS’ facts and circumstances test “reaches broadly, gives discretion to the administrators, and leaves many organizations and their advisors with little certainty on how to conduct their activity day to day.”
The vague rules -- and the corresponding discretion that it gave to low-level staff -- may have contributed to the IRS singling-out Tea Party groups for review. Confronted with a surge in applications for 501(c)(4) tax-exempt status between 2010 and 2012, the Cincinnatti office relied on proxy terms like "Tea Party" or "Patriot" rather than more specific evidence that a particular group was engaged in excessive political intervention. The rising number of applications also coincided with a falling number of staff.
Inspector General: IRS Employees "Lacked Knowledge"
The Inspector General's report bears out these claims. IRS employees in Cincinnatti -- as well as 501(c)(4) applicants -- had "lacked knowledge of what activities are allowed" by nonprofit organizations, the report found. Coupled with a rising number in applications and poor management, the Cincinnatti employees apparently took politically-loaded shortcuts.
The report continued:
"We believe this could be due to the lack of specific guidance on how to determine the 'primary activity' of an I.R.C. § 501(c)(4) organization. Treasury Regulations state that I.R.C. § 501(c)(4) organizations should have social welfare as their 'primary activity'; however, the regulations do not define how to measure whether social welfare is an organization’s 'primary activity.'"
For years, Colvin, Aprill, and many others have urged the IRS and the Treasury Department to better define electoral advocacy beyond the ambiguous "facts and circumstances" test, and to set limits for how much political advocacy is too much. But the agencies have failed to respond.
IRS Inappropriately Tasked With Enforcing Election Law
Exacerbating the problem is that the IRS in many cases has been forced to punch above its weight class.
The weakening of existing campaign finance laws by the Supreme Court, coupled with a largely ineffective Federal Elections Commission and an increase in the number of 501(c)(4) groups influencing elections, meant that election law oversight in recent years has fallen largely to the IRS.
"The IRS is not the best agency to make or enforce campaign finance law," Aprill told the Center for Media and Democracy.
After Citizens United, a growing number of newly-incorporated 501(c)(4) social welfare nonprofits began running election-related ads. These nonprofits -- called "dark money" groups since they do not disclose their donors -- reported spending $315 million in the 2012 elections, and $133 million in 2010, although the total spent is certainly much higher because of gaps in Federal Election Commission (FEC) reporting requirements (an issue CMD outlined in the report Elections Confidential, released jointly with the USPIRG Education Fund).
Because these groups are organized as 501(c)(4) nonprofits, they largely do not fall under the purview of the FEC unless they run ads or engage in other activities explicitly calling for the election or defeat of a candidate. Most of the ads run by these groups were so-called "issue ads," which name a candidate and might criticize him or her based on an issue like taxes, but don't go so far as to urge viewers to vote for or against the candidate. Spending on these ads must be reported to the FEC only when they run just before an election. But even then, their donors remain secret.
Disclosure has long been supported by both parties as a key element of campaign finance law: a way to not only hold donors accountable for the messages they fund, but also to hold elected officials accountable if their policy decisions are improperly attuned to those donors' interests. Even the Court in Citizens United voiced support for disclosure.
But the rise of politically-active 501(c)(4)s in the post-Citizens United world provided donors a way to bypass disclosure laws enforced by the FEC. And Congress failed to pass new transparency laws to close those loopholes -- such as the proposed DISCLOSE Act -- which put the IRS in the unfortunate position of being a campaign finance watchdog. And because its own rules for campaign and political intervention are unclear, the agency has failed at it.
IRS Mess Shouldn't Stop Reform
None of this is to justify the way the Cincinnatti IRS office subjected applicants to extra scrutiny based on their political views. This is not the first time the IRS has been accused of politically-motivated enforcement, and Congressional hearings on the issue are justified.
But the fiasco should strengthen calls for effective disclosure laws. And, according to Colvin, "it shouldn't slow the momentum to force the IRS to do a better job of law enforcement. If anything, it points up the need for clear standards recognizable to all concerned, [including] nonprofit tax lawyers, political practitioners, public officials, and IRS employees."