Politicized Nonprofits and the Real IRS Scandal

The mainstream media have decided that the IRS scandal wasn’t a scandal after all. News outlets are calling the dwindling accusations of Tea Party Republicans empty, and saying that the only disaster is that the IRS is disorganized.

But underneath all the drama lies a real scandal. It’s that many 501(c)(4)s don’t deserve their tax exempt status anymore because they’ve morphed into political entities. The IRS reserves the 501(c)(4) title for non-profit organizations that “operate exclusively for the promotion of social welfare.” But (c)4s on both sides of the political spectrum -- and especially the right -- spend millions pushing partisan agendas and influencing election campaigns, which the IRS should not condone.

This problem has been a half century in the making, dating back to 1959, when the Treasury Department issued a regulation on (c)4s that reinterpreted the word “exclusively” to mean “primarily.” Lawyers then argued that, because of the word choice, these tax-exempt groups could devote as much as 49 percent of their budgets towards influencing politics, even though the courts ruled explicitly that groups’ political activity had to be “insubstantial” and even though IRS code states that “the promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.”

All this complicated the role of the IRS. It now had no concrete handbook on how to scrutinize 501(c)(4)s. Indeed the Treasury inspector general who investigated the scandal two months ago said that the Exempt Organizations Division at the IRS “lack knowledge” in properly overseeing these tax-exempt groups.

The problem was compounded when, in 2010, the Supreme Court ruled in favor of Citizens United. It allowed 501(c)(4)s to accept and spend unlimited amounts of money while keeping donors anonymous.

The IRS was quickly swamped with thousands of new applications for tax-exempt status. The number of 501(c)(4)s doubled in two years – jumping from 1,741 in 2010 to 3,357 in 2012. At the same time the IRS budget has been largely flat or reduced. There was also poor communication between the Cincinnati Office, where all the 2010 applications were sent, and the D.C. Office, which resulted in a 13-month processing delay.

In the chaos, the IRS decided to target groups with political sounding names. These were groups purporting to promote non-partisan social welfare, but when they had titles clearly pointing them towards one political party in particular, it makes sense that the agency that regulates that sort of behavior would conduct a review.

The IRS was half-successful. It found plenty of violations, mostly from conservative groups. Some were dedicated to the “defeat of Barack Obama,” some declared openly, while others like First Coast Tea Party told supporters to “bring your chairs and your signs” to a RomneyRyan campaign rally in Florida. “Make sure they know that the First Coast Tea Party is and has been helping their campaign.”

In the end, none of these groups lost their tax-exempt status. Several liberal groups did however, one of them being the Maine chapter of Emerge America.

So that's what this supposed scandal is all about: The IRS tried, poorly, to do its job of holding 501(c)(4)s accountable, failed and then was drowned in false accusations.

The results will be devastating. Since Congress, the White House, and the media not only fell short of the truth but eviscerated the IRS instead of recognizing that it needs more funding to do its job properly, the agency will approve any group out of fear. We can expect a continuing surge of 501(c)(4)s over the years, many of which will mock the idea of promoting social welfare.