In my column each week, I typically discuss tax issues that have to do with tax advice. This week, I am going to tackle the IRS scandal that has to do with the targeting of conservative groups. Particularly so called “Tea Party” organizations that came to light in the last few years.
In 2013, the United States Internal Revenue Service (IRS) revealed that it had selected certain political groups applying for tax-exempt status for intensive scrutiny based on their names or political themes. When an application for tax exemption is filed, the Internal Revenue Service is supposed to review each application objectively, and not single out a particular group. They are supposed to accept or reject applications for exemption based on facts, not their personal feelings.
This extra scrutiny led to wide condemnation of the agency and triggered several investigations, including a Federal Bureau of Investigation criminal probe ordered by United States Attorney General Eric Holder. Initial reports described the selections as nearly exclusively of conservative groups with terms such as "Tea Party" in their names. Further investigation by media outlets revealed that some liberal-leaning groups and the Occupy movement had also triggered additional scrutiny, but not at nearly the same rate as conservative groups. Congressional Republicans have argued that no liberal groups were targeted. According to Salon, the only tax-exempt status denial by the IRS related to the targeting involved the revocation of a previously granted tax-exempt status for a progressive group. The use of target lists continued through May 2013.
United States federal tax law, specifically Section 501(c)(4) of the Internal Revenue Code (26 U.S.C. § 501(c)), exempts certain types of nonprofit organizations from having to pay federal income tax. The statutory language of IRC 501(c)(4) generally requires civic organizations described in that section to be "operated exclusively for the promotion of social welfare". Treasury regulations interpreting this statutory language apply a more relaxed standard, namely, that the organization "is operated primarily for the purpose of bringing about civic betterments and social improvements". Donations to 501(c)(4) organizations are not tax deductible, so the IRS doesn’t scrutinize these organizations as much as they would 501(c)(3) organizations. Donations to 501(c)(3) organizations allow for a taxpayer to deduct the donation on their Federal Tax Return. When it comes to most tax exempt organizations, the IRS does not allow for political involvement such as lobbying activities. However these rules are typically relaxed with 501(c)(4) organizations. The IRS traditionally has permitted organizations described in IRC 501(c)(4) to engage in lobbying and political campaign activities if those activities are not the organization's primary activity.
A lawsuit was filed against the IRS to stop the tradition of allowing groups engaged in politics to be registered under 501(c)(4).
Internal Revenue Service rules also protect groups organized under Section 501(c)(4) as nonprofit organizations dedicated to social welfare from having to reveal the names of their donors or the amount of funds the individual donors have contributed. This is not the case with the stricter 501(c)(3) organizations. This protection dates back to the United States Supreme Court's 1958 ruling in NAACP v. Alabama, when the Court held that disclosure of names could render private donors vulnerable to retaliation.
On January 21, 2010, the U.S. Supreme Court decided Citizens United v. Federal Election Commission, which overturned many previous restrictions on political campaign spending and allowed nearly unlimited and often anonymous spending by corporations and other groups to influence elections. Some Tea Party leaders began forming political action committees as offshoots of their 501(c)-tax-exempt organizations. By late September 2010, tax-exempt non-profit groups had spent in excess of $100 million on the mid-term elections, more than double the expenditure from a similar point in the election cycle four years earlier.
Public-interest advocacy groups such as Public Citizen and Democracy 21 complained that the IRS and Federal Election Commission were failing to provide adequate oversight for 501(c) nonprofit organizations that were pouring money into political campaigns. At this time the New York Times reported:
Almost all of the biggest players among third-party groups, in terms of buying television time in House and Senate races since August, have been 501(c) organizations, and their purchases have heavily favored Republicans....
They include 501(c)(4) "social welfare" organizations, like Crossroads, which has been the top spender on Senate races, and Americans for Prosperity, another pro-Republican group that has been the leader on the House side; 501(c)(5) labor unions, which have been supporting Democrats; and 501(c)(6) trade associations, like the United States Chamber of Commerce, which has been spending heavily in support of Republicans.
Shortly thereafter, Senator Max Baucus, Democratic chair of the Senate Finance Committee, referring to The New York Times' and other media reports, asked the IRS to investigate to ensure that nonprofit organizations engaged in political activity were complying with IRS rules and not abusing their tax-exempt status. Republican senators on the finance committee Orrin Hatch and John Kyl responded to Baucus' request by writing to the IRS that they were worried this kind of investigation would violate First Amendment rights, and they asked that a Treasury Department inspector general conduct a review of any such investigation to ensure its impartiality.
Both the Senate and the House Democrats in early 2012 continued to press the IRS to investigate abuses of 501(c)(4) tax-exempt status by organizations engaged in political activity. In a February 2012 letter to then-IRS Commissioner Douglas Shulman, several Democratic senators led by Senator Chuck Schumer wrote, "We urge you to protect legitimate section 501(c)(4) entities by preventing non-conforming organizations that are focused on federal election activities from abusing the tax code." The senators also urged the IRS to issue new rules to prevent this type of abuse. In a follow-up letter sent in March 2012, the senators asked the IRS to clearly define the amount of political activity that is permissible for "social welfare" groups under 501(c)(4) rules, to require the groups to document in their IRS filings the exact percentage of their activity that is dedicated to "social welfare", and to require the groups to notify their donors of what percentage of donations could be claimed for tax deductions. The senators promised to introduce legislation to accomplish these aims if the IRS did not do so itself by promptly issuing new administrative rules. None of these letters called for the targeting of groups on the basis of political ideology.
Beginning in March 2010, the IRS more closely scrutinized certain organizations applying for tax-exempt status under sections 501(c)(3) and 501(c)(4) of the Internal Revenue Code by focusing on groups with certain words in their names. Effectively the IRS was singling out organizations. In May 2010, some employees of the "Determinations Unit" of the Cincinnati office of the IRS, which is tasked with reviewing applications pertaining to tax-exempt status, began developing a spreadsheet that became known as the "Be On the Look Out" list.
The list, first distributed in August 2010, suggested intensive scrutiny of applicants with names related to a number of political causes, including names related to the Tea Party movement and other conservative causes. Eventually, IRS employees in at least Cincinnati, Ohio; El Monte, California; Laguna Niguel, California; and Washington, D.C. applied closer scrutiny to applications from organizations that:
- referenced words such as "Tea Party", "Patriots", or "9/12 Project", "progressive," "occupy," "Israel," "open source software," "medical marijuana" and "occupied territory advocacy" in the case file;
- outlined issues in the application that included government spending, government debt, or taxes;
- involved advocating or lobbying to "make America a better place to live";
- had statements in the case file that criticized how the country is being run;
- advocated education about the Constitution and the Bill of Rights;
- were focused on challenging the Patient Protection and Affordable Care Act — known by many as Obamacare;
- questioned the integrity of federal elections.
Over the two years between April 2010 and April 2012, the IRS essentially placed on hold the processing of applications for 501(c)(4) tax-exemption status received from organizations with "Tea Party", "patriots", or "9/12" in their names. While apparently none of these organizations' applications were denied during this period, only 4 were approved. During the same general period, the agency approved applications from several dozen presumably liberal-leaning organizations whose names included terms such as "progressive", "progress", "liberal", or "equality". However, the IRS also selected several progressive- or Democratic-leaning organizations for increased scrutiny. An affiliate of the liberal group Emerge America had its request for tax-exempt status denied, leading to a review (and the eventual revocation) of the larger Emerge America organization's tax-exempt status. Nevertheless, the conservative National Review claims that a November 2010 version of the IRS's BOLO list indicates that liberal and conservative groups were in fact treated differently because liberal groups could be approved for tax-exempt status by line agents, while tea party groups could not.
Between 2010 and 2012, the number of applications the IRS received each year seeking 501(c)(4) certification doubled. During this period, budget cuts and personnel cuts reduced the IRS's ability to adequately perform its core duties. When the Obama administration requested in 2011 that Congress increase the IRS's $12.1 billion budget by $1 billion to allow the agency to hire 5,100 additional agents, Congress instead reduced the IRS budget to $11.8 billion, and the IRS offered buyouts to 5,400 of its 95,000 employees. The U.S. National Taxpayer Advocate, Nina E. Olson, told The New York Times in January 2012, "The overriding challenge facing the I.R.S. is that its workload has grown significantly in recent years, while its funding is being cut.... This is causing the I.R.S. to resort to shortcuts that undermine fundamental taxpayer rights and harm taxpayers — and at the same time reduces the I.R.S.'s ability to deliver on its core mission of raising revenue."
The Internal Revenue Service is supposed to act on the merits of the Internal Revenue Code, and nothing else. When all of these unlawful things that the IRS was doing came to light, the IRS’s answer was dubious at best. Before Congressional Hearings, Congress set their sights on Lois Lerner, the former director of Exempt Organizations. Her emails mysteriously disappeared. Not only that, but the IRS uses an internal instant messaging program where employees can talk to other employees that are either in the same office, or in other offices. My company utilizes the same service. If I am traveling or not in my office, I can instantly communicate with my employees at any time. The service we use is Microsoft’s Lync. Lync stores every conversation that I have with my employees so that I can go over them as I need to. When the Congressional Hearing asked for Lois Lerner to turn over these messages, they had simply disappeared. This scandal is beginning to sound more and more like Watergate from the early 1970’s.
Here is where I have the problem. I own a tax resolution company called Tax Crisis Center®, LLC. Tax Crisis Center® represents taxpayers before the IRS in audits, collections, and the United States Tax Court. As taxpayers we are OBLIGATED to keep records for every single transaction that we put on our tax return. We have to prove every entry with receipts, credit card statements, mileage logs, bank statements, and other things. When a tax return is examined, if a taxpayer does not have the required proof of the deduction, then it is not allowed. The recordkeeping requirements are ridiculous. Now there is evidence that the IRS doesn’t adhere to their own recordkeeping requirements.
Congress should not let up on the petal here, and should hold the IRS to the mat on this. The Internal Revenue Service is supposed to be IMPARTIAL. They are not supposed to insert their personal feelings, and certain members of Congress shouldn’t be allowed to use the organization to carry out personal vendettas. The whole thing stinks, and I hope that there are consequences for the IRS’s actions.
Craig Smalley is the managing partner of CWSEAPA®, LLP, which is an accounting and financial firm located in Delaware, Florida, and Nevada. Craig has been Admitted to Practice Before the Internal Revenue Service, is a Certified Estate Planner™, and is a Certified Tax Resolution Specialist™. Craig specializes in taxation and IRS representation all the way through the United States Tax Court. Form more information visit www.cwseapa.com, call 1-844-CWSEAPA, or email him at email@example.com
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