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Trouble at the IRS: What Were They Thinking?

May 16, 2013

(David Jacobs is director of foundation information management at the Foundation Center. In his last post for PhilanTopic, he blogged about an Open Data Master Class presented by the World Bank.)

Irs-auditLike many Americans, I was shocked to learn last week that the Internal Revenue Service had targeted conservative and Tea Party organizations applying for 501(c)(4) tax exempt status for additional review prior to last year's elections. And like many Americans, my shock turned to disgust this week as additional details -- including the alleged leaking of confidential donor information -- emerged, showing the scandal to be more serious than initially disclosed.

Regardless of whether you believe what happened in Cincinnati was an act of political malfeasance or just a case of monumental governmental ineptitude, the fact that it did happen should be sending shockwaves through the nonprofit sector. One of the bedrock principals of organized philanthropy and nonprofit advocacy in America is the idea that such activity should be tax advantaged, regardless of cause or political orientation, and that, when it comes to the nonprofit sector, the IRS should always operate in a fair and impartial manner. The thought that that might not be the case in every instance should bother and disturb all Americans.

Some apologists for the agency have tried to rationalize its actions by placing them in the context of the Citizens United decision:

The danger of this frame is that it will discourage the IRS from fully investigating all nonprofit groups spending money to influence elections. And it will distract from the core problem behind the IRS's mess: the post-Citizens United explosion of undisclosed electoral spending.

Before the Supreme Court's decision in Citizens United, only a limited number of nonprofit 501(c)(4) groups could spend money to influence elections -- those who did not take contributions from corporations or unions. But Citizens United lifted restrictions on corporate spending in elections, setting the stage for individuals and companies to funnel unlimited money through all corporations, including (c)(4)s and super PACs in an effort to help elect the candidates of their choice.

While no one questions the propriety of fairly vetting any organization applying for tax-exempt status, let's not get sidetracked and pretend that the issue here is beleaguered workers at the IRS who, in a presidential election year, found themselves swamped by new applications:

It's not like the IRS needs a way to flag the new groups that were created in the wake of the Citizens United decision. They have all the information they need to do that without any special filter. They can search for the date of the application. If what you're concerned about is that most of the new groups being created are in fact thinly disguised electioneering vehicles, then what you want to do is take a random sample of the new groups, review them, and see what percentage turn out to be self-dealing or otherwise engaged in inappropriate behavior.

Instead, the IRS method for dealing with the volume was to take an unrandom sample. And how did they decide that you deserved extra scrutiny? Because you had "tea party" or "patriot" in your name. Since the Tea Party was a brand-new movement in 2010, they couldn't possibly have had any data indicating that such groups were more likely to be doing something improper. So how exactly did they come up with this filter? There is no answer that does not ultimately resolve to "political bias."

One of the reasons I have chosen to devote myself to nonprofits and the nonprofit sector is because I see philanthropy and nonprofit advocacy to be quintessentially American activities. What could be more American, after all, than people gravitating to an issue or problem that concerns them and choosing to work to solve it by starting a nonprofit organization or making a donation to an organization that already exists for that purpose? Which is why I am deeply troubled by the thought that other people, including civil servants at one of the most powerful agencies in the federal government, value that freedom much less highly than I do.

While I realize the Tea Party isn't the most sympathetic or popular movement around, I hope that leaders of the nonprofit sector will speak out to condemn what happened in Cincinnati as strongly as they surely would if the IRS had decided to subject groups with words such as "progressive," "marriage equality," or "pro-choice reform" in their names to additional scrutiny.

What do you think? Were the actions of the IRS a case of political bias or just government ineptitude? And what shold the nonprofits and the sector do to let the Obama administration know that the agency's actions are unacceptable?

-- David Jacobs


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Clearly a case of monumental government ineptitude. The true blame, in my opinion, lies with the IRS leadership in Washington, DC that did not provide the proper oversight. Even more importantly, they did not provide the proper guidance to lower level employees, leaving them to substitute their (incredibly poor) judgement. Fair, non-partisan guidelines for evaluating c4 activity should have been established years ago. As for our nonprofit sector organizations, the standard statements of condemnation combined with a lack of forward-thinking solutions are also a major disappointment.
I believe this case illustrates the painful need for an independent agency to regulate the nonprofit sector (similar to the SEC). Put simply, the IRS is a revenue collection agency- and the Exempt Organizations office does not collect revenue. Repeated media coverage, even prior to this scandal, has noted that the Exempt Organizations office is a "backwater" that receives little respect or budgetary resources within the IRS.
What are your preferred solutions?


I think your proposal is problematic. Add yet another agency that makes non-profits jump through regulatory hoops, and all you've done is add one more place where this type of corruption (or mismanagement) can take root. So next time something happens we'll find the hacks will be working for this new agency instead of the IRS. Progress of a sort, I suppose.

My point is that nonprofits are already jumping through regulatory hoops; might as well have it be at an agency that actually is actually equipped to deal with these issues. Could Congress actually create such agency is another question. I continue to think the larger problem is the lack of appropriate guidance from higher level IRS officials on what, exactly, is permissible c4 activity (or, more accurately, grounds for recognition of c4 status, which, technically, they didn't even have to apply for- yet another discussion).
And then the even larger issue is the complete lack of direction from Congress on what constitutes a c4. I think the lawsuit filed today by CREW gets to the heart of the problem- c4s just shouldn't engage in partisan activity, period, the law actually says that, but the IRS, for some unknown reason, has decided they can to certain point, but never defined that point.
NY Times room for debate had good section on this. My personal preference for a regulatory solution is to eliminate lobbying restrictions for c3s and eliminate the c4 status entirely.
But really, the ultimate issue moving forward is not that the IRS was incredibly incompetent. There's incompetence everywhere- for profit, nonprofit, government. The question is what you are going to do about it. I think a separate agency will allow for a clearer mission, greater accountability, and a focus that simply doesn't exist within the IRS. None of that is inevitable. What steps do you think the IRS- and Congress- should take to ensure this doesn't happen again?


As events develop, there's really no way anyone can credibly say this was mere incompetence. Because there's still the matter of misleading (or outright failing to inform) Congress, and there's plenty of report of confidential documents having been leaked that haven't even been adequately addressed at this point.

As for what steps need to be taken, it's pretty simple: those who did this or knew about it need to be identified, publicly named, fired, face crippling civil sanctions and stand trial for whatever criminal actions are applicable. And pleading the fifth is not an acceptable excuse either. Houseclean the lot of them, up and down the chain of command.

For a start.

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