IRS and the Targeting of the Tea Party and Other Groups

By :: May 14th, 2013

To help clarify  whether IRS incorrectly, unfairly, or illegally targeted the Tea Party and other conservative groups, here are the  answers to a few basic questions.

  1. Is it improper for IRS to target specific groups? 

    Almost every contact the IRS makes with select taxpayers derives from targeting. Because  its  resources are constrained, the IRS conducts only limited audits, examinations, or requests for information. For instance, if you give more than the average amount to charity, you’re more likely to be audited since there is more money at stake. If you run a small business, you have a greater ability to cheat than someone whose income is reported to IRS on a W-2 form. The only way  the IRS can  enforce compliance at a reasonable administrative cost is by targeting.

    This is especially true for the tax-exempt arena. Because audits yield little or no revenue, the IRS tax-exempt division examines very few organizations. Therefore, the IRS  must use some criteria to “target” which tax-exempt organizations to approach.

  2. Does the IRS discriminate?

    Picking out which organizations or taxpayers to examine meets the definition of statistical discrimination. Firms do this when they consider only college graduates for jobs; political parties do this when they offer selective access to their supporters. Discrimination is wrong when it implies unequal treatment under the law, such as when unequal punishment is meted out for the same crime, or when people of color have less access to the mortgage market.

  3. Why then did IRS say it erred in targeting Tea Party and other organizations?

    We don’t have all the data yet but organizations with a strong political orientation have a higher probability of pushing the borderline for what the law allows. The groups at the center of this controversy  generally applied for exemption under IRS section 501 (c)(4) which requires, among other things, that its primary purpose cannot be election-related and cannot overtly support political candidates.

    However, the IRS could have  identified  election-related activity as a  practice  worthy of extra attention without  specifying  “tea party” or similar labels to identify such organizations. Had it done so, it might not be facing  a problem now.

    IRS apparently initially thought it was just using these labels as a shortcut for such an identification. Had it been engaged early on, the national office might have been quicker to warn against this practice since it would tend to identify more Republican organizations than Democratic groups with similar motives. Who decided what when is still under investigation.

    Remember  IRS was under pressure  to  examine those c(4) organizations after applications grew rapidly in the wake of the  Supreme Court’s 2010 Citizens United decision. If IRS waits until after an election, it’s generally too late to make any difference.

  4. Why did IRS start with the exemption process rather than wait and see how the organizations behaved?

    Because  IRS audits so few tax-exempt organizations,  noncompliance is a major problem.  But often noncompliance is inadvertent. Organizations trying to do “good” fail to understand legal technicalities or why IRS should be worried about them at all. If the IRS can get these organizations to comply with the rules from the start, it has a better chance of minimizing future problems.

  5. Well, then, why the heck is IRS even in this game in the first place?

    A question asked by many. Unlike some other nations with charities’ bureaus or other government regulatory agencies, tax-exempt organizations in the U.S. are monitored mainly by IRS at the national level and the state attorneys general at the state level. The IRS efforts generally derive from the Congressional requirement that charitable dollars (for which there are deductions and exemptions) go mainly for charitable purposes and not others such as electioneering.

  6. But c (4) or social welfare organizations don’t benefit from the charitable deduction, so why don’t those with political orientation just operate without tax exemption or c(4) status?

    They could, but the tax exemption  provides several benefits. The least important may be non-taxation of income from assets since many of these organizations don’t have that much in the way of assets to begin with. However, many contributors interpret (often incorrectly) tax exemption to mean that the organization has satisfied  legal hurdles, thus making it easier to raise money. Some c(4) organizations are closely connected to charities or c(3) organizations that can accept charitable contributions, and sometimes there’s a synergy between the two. My colleague Howard Gleckman reminds us that c(4)s quickly became favored over an alternative “527” tax-exempt political designation because the former does not need to reveal its donors. Finally, tax exemption provides an easy way  to insure that any temporary build-up of donations in excess of payouts is not interpreted as  taxable income to the organization or its  contributors.

  7. What will be the end result of this flap?    

    Success at agencies like IRS is often measured by their ability to stay out of the news rather than on how well they  do their job.  I’m guessing this episode will only will increase the bunker-like incentives within the organization. It would be good if Congress used this as an opportunity to  figure out how better to monitor tax-exempt organizations, or whether IRS has the capability under existing laws, but that isn’t likely to happen.

8Comments

  1. cynthia adcock  ::  6:47 pm on May 14th, 2013:

    Thanks for this very thorough unbiased explanation of this unfolding issue.

  2. AMTbuff  ::  8:55 pm on May 14th, 2013:

    “If IRS waits until after an election, it’s generally too late to make any difference.”

    Please explain. Why couldn’t an audit of an organization which was previously granted exemption be productive?

  3. Tax Roundup Extra! Today in the IRS political abuse scandal « Roth & Company, P.C  ::  9:12 pm on May 14th, 2013:

    […] Gene Steurle, IRS and the Targeting of the Tea Party and Other Groups (TaxVox) […]

  4. AMTbuff  ::  9:12 pm on May 14th, 2013:

    Hmmm. Was “election” referring to a 501(c)(4) election, or an election in which people vote?

    I was under the impression that Tea Party and similar organizations proliferated after 2008, while progressive organizations were mostly created earlier. Was there a tax reason to scrutinize only new organizations and not the old ones?

  5. Rich  ::  9:59 pm on May 14th, 2013:

    I think the point is that if an organization’s aim is to effect an election, it really doesn’t matter whether the IRS withdraws its exemption after the election is over. The results of the election will not be overturned because a nonexempt org did a lot of media buying.

    Unless the initial determination process becomes more accurate, donations will be directed to a brand-new 501(c)(4) for the next election, so the disqualification of the old one might not help with the future, either.

  6. AMTbuff  ::  12:00 pm on May 15th, 2013:

    “If IRS waits until after an election, it’s generally too late to make any difference.”

    That motivation doesn’t explain why the IRS failed to decide on applications for 2 years or more. Such a delay clearly makes a difference in at least one election. It’s a policy of interference rather than non-interference. Here’s what the Washington Post says:

    The campaign targeting conservative organizations seeking tax-exempt status lasted 18 months, during which “no work was completed on the majority of these applications for 13 months.”

    None of the 298 applications the IG reviewed were actually rejected: As of Dec. 17, 2012, 108 had won approval and 28 were withdrawn. But many of these applications experienced long waits: “160 were open from 206 to 1,138 calendar days (some for more than three years and crossing two election cycles).”

  7. Vivian Darkbloom  ::  3:20 pm on May 16th, 2013:

    This discussion misses an important point.

    If one is a potential donor to a section 501(c)(4) organization, there are two things at stake if a donation is made and the exempt status is denied (prospectively or retroactively):

    1. As noted, the donor’s identity will not be shielded from public view;

    2. As *not* noted, the donation to that organization is (subject to annual limits on total gifts), subject to gift tax ( or a reduction of the lifetime exclusion).

    If 1 is not a consideration, potentially subjecting a donation to gift tax certainly might be in many cases. The denial or indeed the mere delay in obtaining IRS certification of status has an undeniable chilling effect on potential donors. The political operatives know this and that is one of the concerns regarding what the motivation was for singling out groups on one side of the political divide (the side not in control of the Treasury Department).

  8. Michael Bindner  ::  8:50 pm on June 26th, 2013:

    The Tea Party was originally started to oppose changes to immigration to benefit those currently here and to block any relief to underwater home borrowers. When the Administration punted on these issues, the Tea Party shifted to health care reform. This is all permissible issue advertising and activism. When the election came around, most of the Tea Party morphed back into Republican Party activists with utter seamlessness. They came back to life with this scandal and will likely redouble their efforts over marriage or immigration (with little success). Regardless, they are mostly a dying breed. I suspect more of them die each day than they can recruit among the College Republicans. CR’s tend to fall away with time.