IRS report shows why tea party scandal was almost inevitable

When all the shouting about the IRS targeting of tea party groups dies down, Congress or the IRS will realize that the relevant tax law is devilishly hard to enforce fairly.

Lawmakers are sputtering with rage at revelations the IRS gave extra scrutiny to conservative organizations seeking nonprofit status during the last political campaign.

But when Congress and President Obama stop howling and start trying to fix the problem, there appear to be two ways forward: Either rely on the IRS to listen to the recommendations of the Treasury Department inspector general’s report released Tuesday and make do with a muddled piece of campaign-finance law or move to sharpen and shape the law so IRS can enforce it with more consistency.

“What has been missed in the outrage is the recognition that this problem arose from much deeper sources than the poor judgment or possible partisan bias of a handful of IRS employees,” says Lloyd Mayer, a law professor at the University of Notre Dame, in an e-mail. “Congress has given the IRS the difficult task of applying an incredibly vague definition of political activity and an uncertain standard for how much political activity tax-exempt social welfare organizations may engage in.”

The Treasury Department’s inspector general report touches on the IRS’s targeting of conservative groups from local tea party organizations to massive national conservative outfits run by leading party strategists in 2011 and 2012. It outlines ways the agency could better police itself from the inside moving forward.

The report says IRS reviewers tasked with deciphering applications had little clue how to apply the relevant piece of tax law.

In short, IRS agents are required to determine whether so-called social welfare organizations (otherwise known as 501(c)4 groups, after the relevant piece of tax code) are, in fact, engaged in promoting social welfare and don’t spend a majority of their time engaged in partisan political activity.

Why do groups seek such a designation? While the operations of such groups are tax-free, an equally-important benefit for many is the ability to shield their donors from public disclosure, campaign-finance experts say.

Several thousand groups sought designations similar to the 501(c)4 each year from 2009 to 2012, according to the IG report. When the inspector general inspected the IRS in May 2012, some 300 of these groups were being investigated for political reasons.

Murkiness in the rule

The problem in 2011 and 2012, the inspector general’s report found, was “there appeared to be some confusion” by IRS agents evaluating the applications because of “the lack of specific guidance on how to determine the ‘primary activity’ ” of 501(c)4 groups. While the groups should have “social welfare” – not politics – as their primary activity, the regulations don’t have any hard and fast rules about how to make that determination, the report continues.

The litmus test used by rank-and-file regulators under investigation was to look for “tea party,” among other keywords, and to scour organizational descriptions for those that complained about the government or were concerned about debt and deficits, according to the report.

To remedy this flaw, the IG’s report asks the IRS to provide ongoing training and guidelines on how to make such determinations. The guidelines should be posted online, so that organizations can understand how they will be judged, the report recommends.

But the fact that IRS agents charged with carrying out the law had little idea how to apply it is evidence that the statute needs more than just education – it needs to be clarified by Congress or the IRS, some campaign finance experts say.

On one level, the specific issue raised by the IRS’s admitted bad behavior is simple to solve. Sen. Jeff Flake (R) of Arizona has offered a bill to prevent the IRS from using a group’s name or ideology as a basis for screening its application for nonprofit status.

Moreover, employees of government agencies don’t typically enforce laws in partisan ways, despite the fact that government rules and regulations are subject to extensive interpretation.

“You would expect that they would apply their standards and their rules universally, fairly and in an unbiased way,” says Sen. John Barrasso (R) of Wyoming.

However, figuring out just what constitutes “fair” in a situation as murky as the one currently facing the IRS is difficult, campaign-finance experts say.

“There’s not a bright line” for IRS investigators to follow in determining where “social welfare” activity ends and partisan political behavior begins, says Melanie Sloan, executive director of government watchdog group CREW.

In addition, the slimly-staffed IRS is hard-pressed to evaluate whether the groups are actually doing what they say they will do on their applications, Ms. Sloan says.

Asking several hundred employees to handle thousands of applications and monitor the “hundreds of thousands” of existing tax-exempt groups is a recipe for disaster, says Professor Mayer of Notre Dame. “Is it any surprise that mistakes, whether intentional or not, were made?” he wonders.

What Congress could do

Specifically, Congress could decide to allow 501(c)4 groups to engage in no political activity or unlimited political activity, proposes Michael Macleod-Ball, chief of staff for the Washington legislative office of the American Civil Liberties Union.

“How do you avoid the opportunity for abuse going down the road?” Mr. Macleod-Ball asks. “You have to take away this kind of subjective judgment.”

Macleod-Bell points out that because it is an IRS rule, not an act of Congress, either Congress could pass a bill changing the underlying statute or the IRS could offer a clarification of the rule on its own.

Democrats contend that the law was never supposed to allow for political groups to hide their donors in the first place – and that the IRS created the problem for itself by allowing political groups to file for the 501(c)4 designation at all.

“I ask, 'What has Karl Rove ever done to improve the social welfare of the United States?' ” Senate majority leader Harry Reid (D) of Nevada told reporters on Tuesday, referring in his acerbic style to the influential Republican strategist who helmed one massive conservative group during the 2012 campaign.

“Preventing overtly political groups like the ones run by Karl Rove from masquerading as social welfare organizations is really a critically important task, whether these groups are on the left or on the right,” Senator Reid said.

But Republicans see any attempt to push political donors into the open as a first step toward political intimidation – a tactic those like Senate minority leader Mitch McConnell (R) of Kentucky believes the Obama administration has proven it is willing and able to use.

Just look at the IRS’s targeting of conservative groups, Senator McConnell says.

“Our Democrat friends should also acknowledge their role in inculcating this culture of intimidation, due to repeated calls for increased IRS scrutiny of groups like the very ones that were targeted,” he said on the Senate floor Tuesday.