Bloomberg News

How IRS Review of U.S. Nonprofits Erupted Into Scandal

May 14, 2013

How IRS Stumbled Into Scandal by Probing Its Nonprofits

“I think they were trying in their own awkward way to sort through the applications on a nonpartisan basis,” said Paul Streckfus, a former Internal Revenue Service employee who is based in Pasadena, Maryland. “People give the IRS much too much credit for being organized or efficient.” Photographer: Andrew Harrer/Bloomberg

What is known so far about the Internal Revenue Service’s examination of political nonprofit groups doesn’t answer one main question -- whether the U.S. tax agency’s actions were malicious or just inept.

IRS employees, trying to figure out how to sort through a surge in applications for nonprofit status, used shortcut phrases such as “Tea Party” and “patriot” to flag groups for scrutiny, according to an inspector general’s timeline. After IRS officials raised concerns in June 2011, there’s no evidence that the agency started over with a new system.

That scrutiny was elevated to a scandal on May 10, when Lois Lerner, the director of the IRS’s Exempt Organizations Division, acknowledged in remarks to a conference of tax lawyers that applications using those phrases had been singled out for extra examination. The filtering done by IRS employees in Cincinnati now imperils the agency’s ability to enforce the laws on politically active nonprofit groups.

The issue wasn’t so much political motivation as it was poor management, said Paul Streckfus, editor of EO Tax Journal, which covers the world of tax-exempt organizations.

“I think they were trying in their own awkward way to sort through the applications on a nonpartisan basis,” said Streckfus, a former IRS employee who is based in Pasadena, Maryland. “People give the IRS much too much credit for being organized or efficient.”

The IRS’s acknowledgment that it selected groups based in part on ideology has drawn criticism from across the political spectrum. The limited information released so far -- a timeline that is an appendix of the inspector general’s forthcoming report -- leaves many questions.

Unanswered Questions

The timeline doesn’t detail the motives of the Cincinnati employees. It doesn’t explain why the IRS apparently didn’t restart its work after a June 29, 2011, meeting when Lerner raised concerns about the screening process.

And it doesn’t answer why then-Commissioner Douglas Shulman was apparently unaware of two years of work on the issue when he told Congress in March 2012 that the IRS didn’t target groups based on ideology. Shulman was briefed on the matter two months later.

Lerner apologized for the agency’s actions last week; Steven Miller, then a deputy IRS commissioner and now the acting commissioner, knew about the selective scrutiny for months without disclosing it to Congress.

Representative Dave Camp, a Michigan Republican and chairman of the tax-writing Ways and Means Committee, yesterday accused IRS officials of “blatant disregard” for Congress and U.S. taxpayers.

‘No Excuse’

“There is simply no excuse for trampling on the rights of the American people,” Camp said in an e-mailed statement. His panel plans to hold a May 17 hearing with Miller among those called to testify.

According to the timeline, IRS employees began realizing that they had an issue in March 2010. The surge in Tea Party activism had led groups to form across the country, and some applied to the IRS to become 501(c)(4) organizations or social welfare groups.

That’s a status that comes with privileges as the groups aren’t required to disclose their donors and don’t have to pay taxes on contributions.

It also comes with requirements. Social welfare groups aren’t supposed to be primarily political.

The IRS has no clear definition of primarily in this instance. Political means participation in campaigns and elections rather than issue advocacy.

Americans for Tax Reform, the group led by anti-tax advocate Grover Norquist, is a 501(c)(4) group. The Center for American Progress, which has ties to Democrats, has a 501(c)(4) advocacy arm.

Status Benefits

The benefits of 501(c)(4) status mean that the IRS can’t simply look at the organization’s stated purpose, said Donald Tobin, a law professor at Ohio State University.

“You’re trying to get behind what people are saying and make sure what people are saying is really the truth,” he said. “That can seem very invasive but at some point it needs some kind of information about the group to determine whether it’s valid or it’s not.”

The challenge for the IRS, and the “determinations unit” at the center of the debate, was to figure out whether these groups fit the definition. Streckfus said the agency’s employees should have realized the political sensitivity and moved the issue to Washington, where it could be handled by more senior officials.

‘Current Furor’

“Part of the problem is that there’s not bright lines,” said Ellen Aprill, a tax law professor at Loyola Law School in Los Angeles. “My fear is that this current furor is going to make it more difficult, rather than easier, to come up with clear rules.”

To figure out how big the issue was, according to the timeline, IRS employees sorted applications based on criteria including whether “tea party” or “patriot” was part of the name. They used other criteria as well, such as whether the applicant’s issues included government spending and whether it criticized how the country was being run.

“Some of these civil servants had sort of a political tin ear,” Aprill said. “They were trying to get at the organizations most likely to have too much campaign intervention and didn’t stop to think it was important to do it in a neutral, nonpartisan way.”

The groups in question applied for that nonprofit status, which they actually didn’t have to do. They could have started operating and waited for an audit, if that ever happened.

‘Back-and-Forth’

“It’s very important to emphasize that all of these organizations came in voluntarily,” Shulman told a Ways and Means subcommittee in March 2012. “They did not need to engage the IRS in a back-and-forth.” He left the IRS when his term expired in November and didn’t respond to an e-mailed request for comment yesterday.

As the IRS developed and refined its criteria, there was a “miscommunication” about whether the employees in the unit should continue to work their cases, according to the timeline. That resulted in cases proceeding before the agency had figured out how to handle them.

After Lerner complained about the criteria in June 2011, mid-level agency employees went back and forth for months over definitions and wording of the guidelines. The first letters to groups requesting additional information were sent in January 2012 -- almost two years after the issue first emerged, according to the timeline.

“Human nature,” Streckfus said. “What are you going to do with a difficult problem? Let’s put it off ’til tomorrow.”

The letters sparked outrage from the groups and congressional inquiries in early 2012.

Revised Definition

In January 2012, the IRS again revised the definition, looking for “political action type organizations involved in limiting/expanding Government, educating on the Constitution and Bill of Rights, social economic reform/movement.”

The IRS ended up in May 2012 with a definition that Aprill said makes sense: organizations “with indicators of significant amounts of political campaign intervention (raising questions as to exempt purpose and/or excess private benefit).”

By that point, the letters to groups culled through the earlier definitions had already gone out and the congressional inquiries had started.

“It’s pretty easy to look back and see how they should have handled it,” Tobin said. “The problem for the IRS is they have a large number of applications that are coming in and they have a lot of people that are really pushing the envelope with what they’re doing.”

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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