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The IRS Dilemma on Nonprofits

David Callahan

The facts of the IRS case are complicated, but seem to boil down to a bunch of tone deaf civil servants doing a dumb thing, according to the findings of an internal probe by the Treasury Department. Regardless, though, it truly is alarming to imagine an IRS that targets some nonprofits for scrutiny based on their ideology. No matter where you are on the political spectrum, you should be able to agree that the IRS needs to be rigorously neutral in its oversight of the nonprofit sector. 

And so even though the speed with which Obama sacked the acting IRS director smacks of symbolism and expediency, it also sends a powerful message of zero tolerance to future IRS chiefs and other top officials. 

All that said, the IRS role on nonprofits has become increasingly untenable as more and more political money and activity -- much of it tax deductible -- is channeled through the nonprofit sector. More and more nonprofit entities of one kind or another are skirting or breaking the law, and the IRS has no choice but to be ever more vigilant and intrusive, which may or may not explain the agency's actions on Tea Party groups. 

Citizens United has made this situation worse in the past few years, but there is a longer back story here about the increasing politicization of philanthropy and civil society.

Back before the 1960s, highly ideological nonprofit organizations were not that common. There weren't that many advocacy organizations and the few think tanks, like Brookings, tended to be very research oriented. The foundation sector was far smaller and major foundations, like Carnegie and Rockefeller, tended to embrace a social science-based approach to changing public policy. Also, business was far less politically mobilized and, for the most part, didn't yet think of the nonprofit sector as a way to advance its interests. The left, in turn, relied mainly on a powerful labor movement to press it causes.

Over the past few decades, though, we've seen an escalating ideological arms race in which nonprofit organizations are central players. The Ford Foundation helped usher in a new era of ideological philanthropy starting in the late 1960s -- helping build much of the left's advocacy infrastructure -- and, by the 1980s, a determined cabal of conservative foundations like Olin and Bradley were funding an expanding right-wing policy infrastructure featuring hardline groups like Heritage and CATO. Legions of individual donors on both sides also poured into the fight, contributing millions in tax-deductible dollars to fund essentially political organizations with 501(c)3 status. 

That was phase one of the perversion of what was once called the "charitable sector." 

In phase two, which we've seen more recently, previously arcane nonprofit forms -- like 501(c)4 and 527s -- became direct conduits for very large amounts of political money designed to shape electoral outcomes. First it was wealthy individuals like George Soros and Bob Perry (of Swift Boat fame) who exploited these entities. But, thanks to Citizens United, corporations were able to get into the act, pumping huge amounts of cash for political purposes through the U.S. Chamber of Commerce. Moving political money through nonprofits is attractive because, under current law, such organizations don't have to disclose their donors. 

This escalating ideological arms race conducted through nonprofit organs has put growing strains on the IRS, which was never designed to oversee a central battlefield in American political life. Can it be any wonder that something eventually went wrong as the agency tried to fulfill this mission?

Serious work needs to be done to reform the laws governing nonprofits and political activity. This is a complex and sensitive task. But at least one reform seems obvious: compel nonprofits to disclose their donors, which would instantly make them less attractive vehicles for political combat.