In a report issued Tuesday, the U.S. Treasury Inspector General for Tax Administration (TIGTA) determined:
“The IRS used inappropriate criteria that identified for review Tea Party and other organizations applying for tax-exempt status based upon their names or policy positions instead of indications of potential political campaign intervention. Ineffective management: 1) allowed inappropriate criteria to be developed and stay in place for more than 18 months, 2) resulted in substantial delays in processing certain applications, and 3) allowed unnecessary information requests to be issued.â€
That sounds straightforward enough, at least if you’re looking for a scandal. But what’s the context? Starting in 2009, the IRS was inundated with Internal Revenue Code (I.R.C.) § 501(c) applications from not-for-profit organizations, requesting special tax immunity. Within the IRS, the Exempt Organizations Rulings and Agreement office processes all application for tax exemption. The front-line office — the office that directly interfaces with the public — for Rulings and Agreement is the Determinations Unit in Cincinnati, Ohio.
In 2010, the Determinations Unit noticed something peculiar about the I.R.C. § 501(c) applications it was receiving. Many of the applications requesting I.R.C. § 501(c)(4) status as a “social welfare†organization were clearly, on closer review, not social welfare groups. An example of this is Karl Rove’s Crossroads GPS, which sought social welfare organization status. Crossroads GPS’s parent organization, American Crossroads, is a I.R.C. § 527 organization, which are required to publicly disclose their donors.
This raised a red flag with the IRS. First, no group has to file an application with the IRS to call itself a social welfare organization. Social welfare organizations cannot receive tax-deductible charitable contributions and cannot primarily engage in political campaign interventions.
A social welfare organization can engage in unlimited legislative lobbying and can engage in general advocacy — as long as that advocacy does not favor specific legislation or the election of a candidate.
In a 2012 article, investigative journalists at ProPublica pointed out that many “social welfare†organizations actively participated in the elections, donating millions. An example of this is the Republican Jewish Coalition, which had a plan to anonymously funnel $6.5 million into the Mitt Romney campaign.
“Contributions to the RJC are not reported,†said Matt Brooks of the Republican Jewish Coalition, as reported by Propublica. “We don’t make our donors’ names available. We can take corporate money, personal money, cash, shekels, whatever you got.â€
According to estimates from Kantar Media’s Campaign Media Analysis Group (CMAG), social welfare groups spent more than $71 million on campaign ads.
Individual discretion
The IRS interpreted — correctly — the increased influx of 501(c)(4) “social welfare†organization applications as potential tax fraud that would fund mis-labeled organizations, free from transparency.
How the IRS proceeded, however, is where the group blundered. The Determination Unit, at the behest of Congress and the media, set aside the troublesome applications until specialists could make a determination on their tax exempt status.
To facilitate this auditing, the Determination Unit used search terms such as “patriot,†“Tea Party†and “9/12†to flag applications for further review without consideration of the organization’s actual purpose. Some legitimately questionable applications snuck through due to this error, while many innocent organizations’ applications were singled out.
When the director of the Rulings and Agreements office learned of the specific nature of the search criteria, he feared that specific organizations may be actively discriminated against. In June 2011, the director ordered the criteria changed to make them more responsive to the potential “political, lobbying, or [general] advocacy†activities of the organization. However, the specialists reviewing the flagged applications changed the criteria back on their own accord multiple times, according to the TIGTA report.
