The real IRS scandal
Allowing so many 'social welfare' groups to enjoy tax-exempt status
while participating in politics must stop. The IRS is obligated to
scrutinize applicants, 'tea party' or no.
By Michael Hiltzik
L.A. TIMES / business column / May 14, 2013, 5:28 p.m.
It's strange how "scandal" gets defined these days in Washington. At
the moment, everyone is screaming about the "scandal" of the Internal
Revenue Service scrutinizing conservative nonprofits before granting
them tax-exempt status.
Here are the genuine scandals in this affair: Political organizations
are being allowed to masquerade as charities to avoid taxes and keep
their donors secret, and the IRS has allowed them to do this for
years.
The bottom line first: The IRS hasn't done nearly enough over the
years to rein in the subversion of the tax law by political groups
claiming a tax exemption that is not legally permitted for campaign
activity. Nor has it enforced rules requiring that donors to those
groups pay gift tax on their donations.
The organizations at issue are known as 501(c)4 groups (call them C4s
for short) after the section of the tax code that applies to them.
They're nonprofit "social welfare" organizations that by law must be
devoted primarily to programs broadly serving their communities, not
private groups. IRS forms reveal what the agency considers to be
mainstream C4s: religious groups; cultural, educational and veterans
organizations, homeowners associations, volunteer fire departments. In
recent years, however, overtly political groups have been claiming C4
status, which allows them to keep their donor lists secret and to
avoid paying taxes on certain income.
Our lunatic campaign finance system is what turned the typical C4 from
a volunteer fire department into a conduit of anonymous political
cash. Big donors were given the green light to spend freely on
elections by the Supreme Court's 2010 Citizens United decision. That
wasn't good enough for some; they wanted to distribute their largess
secretly.
C4s were there for the exploitation, and the result has been a
wholesale decline of donor disclosure on the national level: As
recently as 1998, nearly 100% of all donors to federal campaigns were
publicly identified, according to the Center for Responsive Politics,
a campaign finance watchdog group. By the 2012 presidential election,
that was down to 40%.
The beneficiaries of the C4 tax break, understandably, will employ any
subterfuge to keep it. That's what's behind the current firestorm over
disclosures that in 2010 and 2011, IRS personnel screened requests for
C4 status by applicant organizations with "tea party," "patriot" or
"9/12" in their names.
Those weren't the only groups whose applications were selected for
extra scrutiny on the reasoning that they might be devoted to more
than "social welfare." According to an IRS Inspector General report
made public this week, they represented only about a third of the 298
applications selected. That was certainly too coarse a screen, and by
January 2012 the IRS had scrapped those definitions. It had
substituted a screen designed to capture "political action type
organizations involved in limiting/expanding government, educating on
the constitution and bill of rights, [and] social economic
reform/movement."
Conservatives contend that this is still an anti-conservative screen.
It sounds perfectly neutral to me, unless someone knows of a
conservative organization devoted to "expanding government," or unless
right-wing groups are supposed to have a monopoly on "social economic
reform." In any case, the inspector general found that most of the 298
selected applications indeed showed indications of "significant"
political activity that might have made them ineligible for the tax
exemption.
It's about time the IRS subjected all of these outfits to scrutiny.
The agency's inaction has served the purposes of donors and political
organizations on both sides of the aisle, and contributed to the
explosive infection of the electoral process by big money from
individuals and corporations.
Nor is Congress innocent. The lawmakers have dodged their
responsibility to make the rules crystal clear. On the rare occasions
when the IRS has tried gingerly to impose regulatory order, members of
Congress have forced the agency to back off. There should be a rule in
Washington that if you give regulators deliberately vague guidelines,
you're not allowed to protest when they try to figure out where the
lines are.
Thanks to ambiguity about what it means to be "primarily" concerned
with "social welfare," political activists have reaped a bonanza for
years while the IRS ignored their chicanery. And once again, now that
the agency has tried to regulate, the regulated parties have blown its
efforts up into a "scandal." It's amusing to reflect that some
politicians making hay over this are the same people who contend that
we don't need more regulations, we just need to enforce the ones we
have. (Examples: gun control and banking regulation.) Here's a case
where the IRS is trying to enforce regulations that Congress enacted,
and it's still somehow doing the wrong thing.
Keep that in mind when you hear politicians — and they're not
exclusively Republicans — grandstanding about how the IRS actions are
"chilling" or "un-American." It turns out that none of the "targeted"
groups actually was denied C4 status. Nevertheless, says Sheila
Krumholz, director of the Center for Responsive Politics. "There's a
sense of discomfort that the IRS was doing much of anything."
The IRS wasn't actually doing much. The biggest C4s, including one
founded by GOP operative Karl Rove and another run by ex-Obama
campaign staffers, got their C4 status routinely. The little guys got
questionnaires.
C4s are curious creatures in the tax code. They're allowed to engage
in lobbying, but not ("primarily") in campaign activity. Their donors
don't get a tax deduction, but the organizations are tax-exempt. For
example, they don't have to pay taxes on income they earn by investing
donated funds. But what makes C4s especially attractive to people who
want to funnel money into politics is this: They don't have to
identify their donors.
Remember the mysterious $11-million donation to the campaign for
California's anti-union Proposition 32 last November? When the state
Fair Political Practices Commission punctured its anonymity, it found
not one, but two 501(c)4 organizations behind it. The FPPC, which is
still investigating, has already called this a case of "campaign money
laundering."
As of September last year, the center found, some $254 million, or
20%, of all outside spending came through C4s. The biggest C4 in the
electoral arena was Crossroads GPS, an affiliate of American
Crossroads, a campaign organization founded by Rove. The Obama camp's
C4 was known as Priorities USA.
The IRS was swamped by the wave. The number of groups seeking C4
status from the agency rose from 1,500 in 2010 to 3,400 last year.
Meanwhile, the agency was being pulled in two directions. In February
last year, seven Democratic senators complained that the IRS was too
"permissive" with its rules, which judged a C4 not to be engaged
"primarily" in electioneering as long as no more than 49% of its
spending went to such activities. In August, 10 GOP senators warned
the agency to deep-six any efforts to tighten the rules on C4s.
Already in 2011, an IRS disclosure that it was auditing five big
donors to determine whether they owed gift taxes for donations to C4s
had caused a political uproar. (The gift tax can be up to 35% of a
donation in excess of $14,000 per recipient and a $5.25-million
lifetime exemption, paid by the donor.) GOP lawmakers accused the IRS
of "targeting constitutionally protected political speech." As Ellen
Aprill, a tax law expert at Loyola Law School [associated with Loyola
Marymount University of Los Angeles], observed later that year, "at
that point, the IRS threw in the towel" — even though there was little
doubt that the tax levy was proper and plainly constitutional.
The danger inherent in the latest faux controversy is that the IRS
will have its wings clipped before its investigation of C4s is fully
fledged. Politicos and pundits are in a lather over the questions the
agency put to targeted organizations to determine their social welfare
bona fides — things like the identity of their board members and the
amount of time and money spent on "electoral issues," and endorsements
of candidates. These facts would be pretty fundamental to determining
whether an organization is political, wouldn't you say?
The IRS also asked some groups for the identity of their donors. The
inspector general contends that request was inappropriate. Still, if
the IRS discovered that a major donor to a C4 was, say, the
politically active billionaire Sheldon Adelson, wouldn't that suggest
that the group might not be a plain vanilla "homeowners association"?
By the same token, when the pro-Obama C4 Priorities USA disclosed that
it had five anonymous donors, one of whom contributed $1.9 million, or
84% of the total, wouldn't it help an investigator to know who that
person is?
Let's remember that a tax exemption handed over to any group costs all
of us money. It's proper for the IRS to scrutinize applicants. The
biggest laugh line uttered in this affair is that the IRS is somehow
"harassing" these public-spirited organizations by asking them to
justify their status. Here's a good rule of thumb: You don't want to
get harassed by the IRS? Then don't claim a tax exemption you may not
deserve.
Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at
[email protected], read past columns at latimes.com/hiltzik, check
out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.
Copyright © 2013, Los Angeles Times
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your
own way and let people talk.) -- Karl, paraphrasing Dante.
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