Opening Remarks

The IRS Scandal: Tempest and the Tea Party


The IRS Scandal: Tempest and the Tea Party

Photograph by Trey Wright for Bloomberg Businessweek

By historical standards, President Barack Obama ran a remarkably taint-free administration for four and a half years. That’s the judgment of Brendan Nyhan, a political scientist at Dartmouth College who quantifies scandal—and who believes Obama’s run has come to an end. On May 10 the Internal Revenue Service apologized for its selective scrutiny of nonprofit groups affiliated with the Tea Party. Writing three days later on his blog, Nyhan observed: “Obama appears likely to spend a lot more time mired in the politics of scandal after last week’s Benghazi hearings and Friday’s revelation of alleged political targeting at the IRS.”

Unencumbered by scholarly understatement, let’s stipulate that we’re looking at months, if not years, of unmitigated Washington frenzy. IRS-gate has all the ingredients for a political bloodbath: abuse of power by the most despised of federal bureaucracies, accusations of lies to Congress, and suggestions of executive branch coverups. Potential legislative casualties include proposals for immigration reform, implementation of Obama’s health overhaul (in which the IRS plays a major role), and any hope Democrats had to revisit gun control.

Republican Senators James Inhofe of Oklahoma and Lindsey Graham of South Carolina are talking impeachment, an idea immediately amplified by conservative pundits. “This president will not fill out his full term,” predicted Mike Huckabee, the former Arkansas governor and Republican presidential candidate, on his syndicated radio show. That may be idle bloviation. But it’s reasonable to expect, as Dartmouth’s Nyhan notes, that for the White House “things are likely to get worse before they get better.”

On May 14 the IRS released the inspector general’s report on the alleged targeting of Tea Party groups. It blamed ineffective management, not a political vendetta, and concluded that no one outside the IRS had ordered the improper actions. Obviously, that’s not going to be the last word. Having crudely overreached, the IRS deserves an unsparing investigation, followed by systemic changes. On May 15, Obama announced that Acting IRS Commissioner Steven Miller had been asked to resign. On the Hill, the House Ways and Means Committee will hold the first round of hearings, commencing on May 17, and Attorney General Eric Holder has ordered a criminal probe by the FBI.

Lost amid the inevitable leaks, innuendo, and grandstanding is the bigger scandal—one in which both parties are complicit. While it was politically profiling local antitax groups, the IRS seems to have been largely inert in response to complaints that organizations founded by former top aides of both Obama and George W. Bush have violated their tax-exempt status. In 2012 large tax-exempt groups, including Republican operative Karl Rove’s Crossroads GPS and the Obama-affiliated Priorities USA Action, spent hundreds of millions of political-advertising dollars, much of it harvested from secret donors.

“The irony here is that the IRS is going to get punished, justifiably, for its heavy-handed tactics with the Tea Party committees,” says Melanie Sloan, the executive director of Citizens for Responsibility and Ethics in Washington (CREW). “But the larger problem is that the IRS does nothing to enforce the law against the groups that are abusing a broken system on a much bigger scale.”

For several years, CREW and other watchdogs have filed administrative complaints and lawsuits against the IRS, demanding that it oversee politically active nonprofits more aggressively. The agency’s response was the equivalent of throwing a net at one school of minnows, while letting the sharks of both major parties swim free. “It’s a bad joke,” Sloan says.

The problem stems in part from muddled regulatory language. The groups in question are organized under Section 501(c)(4) of the tax code, which permits them to avoid paying taxes on contributions and doesn’t require them to disclose donors. Beginning with a statute enacted in 1913, Congress extended these privileges to nonprofit “civic leagues or organizations … operated exclusively for the promotion of social welfare.”

For decades, the IRS interpreted the mandate literally to mean social welfare groups had to be “operated exclusively for purposes beneficial to the community as a whole” and could not get involved in election activities. In recent years, though, the agency significantly loosened its definition to include politically active groups, as long they don’t endorse particular candidates and are not “primarily engaged” in electioneering activities. The IRS invited mischief by failing to define what “primarily engaged” means.

The rise of 501(c)(4) groups as political-advertising engines dates to 2004, when Democrats took the lead in exploiting them. To understand the phenomenon requires a little more campaign-finance history. Post-Watergate legislative reforms and a Supreme Court ruling in 1976 produced a confusing system that curbed contributions to candidates in the interest of reducing corruption but encouraged open-ended expenditures in the name of free speech. By the 1990s labor unions and companies were funneling hundreds of millions of dollars of “soft money” to the political parties rather than particular candidates. In 2002, Congress tried to stamp out soft money. In doing so, lawmakers inadvertently redirected the cash to outside groups—both super PACs, which are organized under Section 527 and have to disclose their donors, and more secretive 501(c)(4) “social welfare” groups.

With this outside-spending technology in place, Democratic donors raised about $200 million in 2004 to try to unseat George W. Bush. John Kerry, a phlegmatic candidate, lost anyway. Republicans didn’t move to catch up until after Obama thumped John McCain in 2008. In 2009, Rove laid the groundwork for American Crossroads, a 527 super PAC, and Crossroads GPS, its sister 501(c)(4), which would share office space, staff, and leadership. The following year, the Supreme Court issued its landmark Citizens United ruling, which invalidated legislative restrictions on corporate and union political dollars.

Outside spending increased dramatically, much to the advantage of Republicans, who rushed to set up 527s and 501(c)(4)s devoted to defeating Obama and regaining seats in Congress. Nonprofit groups spent $1 billion in 2012 on campaigns—triple the $300 million they spent in 2008—with more than two-thirds of that benefiting Republican candidates, reports the Center for Responsive Politics, a Washington-based research group.

Alarmed by the outside-spending arms race, election-transparency advocates such as CREW urged the IRS to take a closer look at whether political operatives were improperly taking advantage of 501(c)(4) social welfare status to shield wealthy individuals and corporations from having to disclose political contributions. The IRS, as we’ve learned in recent days, focused mostly on groups with “Tea Party” and “Patriot” in their names. So far it appears the IRS didn’t actually revoke any of the right-leaning groups’ tax-exempt status. In one anomalous instance, the agency did cancel the privileges of an obscure nonprofit called Emerge America, a San Francisco-based group that trained Democratic women candidates. Bloomberg News reported in June 2012 that after the IRS took action, Emerge America reorganized as a 527 super PAC, meaning it had to disclose its donors.

If the 800-pound gorillas of campaign finance lose their 501(c)(4) privileges, they’d probably follow Emerge America’s example and simply retreat to 527 status. That would be a modest step in the right direction, CREW’s Sloan says. At least their contributors would have to stand publicly behind their donations. In addition to punishing the IRS for its excesses, Congress should order the agency to deny political-advertising factories the advantage of contributor anonymity. The fix wouldn’t be terribly complicated: Just kill the vague IRS regulation about social welfare groups not having a “primary” purpose related to politics. The statute says they should be “operated exclusively” for the common good. Lawmakers should tell the IRS that “exclusively” means what it says and excludes secretly funded political attack ads.

Sadly, in the radioactive environment in Washington, it’s difficult to envision a remedy even this elementary emerging from Congress. Instead, Republicans will scramble to link the scandal to someone—anyone!—with White House credentials. Democrats will try to protect the president by competing to devise the most draconian possible penalties for low-level, tin-eared IRS bureaucrats. The truth? Both parties exploit and profit from the farcical campaign-finance system as it now exists, and no one has the political will to change it.

Barrett_190
Barrett is an assistant managing editor and senior writer at Bloomberg Businessweek. His new book, Law of the Jungle, which tells the story of the Chevron oil pollution case in Ecuador, will be published by Crown in September 2014.

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