IRS Now Targeted After Stalling Tax-Exempts

May 14, 2013       Mark Hrywna      

The Internal Revenue Service (IRS) targeting conservative 501(c)(4) social welfare organizations will be the focus a hearing Friday morning in Washington, D.C., by the House Ways and Means Committee. The only witnesses are expected to be Acting IRS Commissioner Steven Miller and Treasury Inspector for General Tax Administration J. Russell George.

After reports of an apology from Lois Lerner, director of the IRS Exempt Organizations Division, about IRS employees targeting tax-exempt applications of conservative groups, lawmakers from both sides of the aisle have demanded more information.

Miller at one time was in charge of the Exempt Organizations Division.

The Committee on Ways and Means has been investigating since June 2011 whether the IRS discriminated against taxpayers based on political opinions. “The American public expects the Internal Revenue Service to be apolitical in its enforcement of our tax laws. News that the agency admits its targeted American taxpayers based on politics is both astounding and appalling,” Ways and Means Chairman Dave Camp (R-Mich.) said in announcing the hearing.

Rep. Charles Boustany, Jr. (R-La.), chairman of the Subcommittee on Oversight, fired off a letter to Miller on Friday explaining that the Committee on Ways and Means “has been pursuing an active investigation into the IRS’s targeting of conservative groups seeking tax-exempt status.” He requested all communications containing the words “tea party” “patriot” or “conservative” as well as “all names and titles of all individuals involved in this discrimination,” no later than tomorrow.

Senate Finance Committee Chairman Max Baucus (D-Mont.) issued similar remarks yesterday, also promising a full investigation by the committee. “I want to review the Inspector General’s report first, but the IRS should be prepared for a full investigation into this matter by the Senate Finance Committee,” he said.

President Barack Obama during a press conference on Monday condemned the actions. “If, in fact, IRS personnel engaged in the kind of practices that have been reported on and were intentionally targeting conservative groups, then that is outrageous, and there is no place for it, and they have to be held fully accountable, because the IRS as an independent agency requires absolute integrity and people have to have confidence that they are applying the laws in a non-partisan way. You should feel that way regardless of party,” he said.

Attributing Treasury Inspector General for Tax Administration (TIGTA) briefings given to key committees this week, Senate Finance Committee Ranking Member Orrin Hatch (R-Utah) released a timeline of events. As early as March 2010, an IRS manager in Cincinnati, Ohio, asked employees to begin searching for 501(c) tax exemption applications using the terms Tea Party, Patriot and 9/12 as criteria, and later issues including “government spending,” “government debt” or “taxes,” among others.

The timeline indicates that Lerner was briefed in June 2011 about criteria being used by employees while former IRS Commissioner Douglas Shulman testified in March 2012 that there is no targeting of conservative groups but was briefed in May 2012 by TIGTA about targeting by the IRS of Tea Party applications for 501(c)(4) status. Schulman stepped down in November after his five-year term as IRS commissioner.

“The IRS’s proper role in approving, and subsequently regulating, exempt organizations is not determining the worthiness of their cause, but their compliance with the law,” Diana Aviv, president and CEO of Independent Sector, said.

“We believe that the IRS, due in large part to the post-Watergate reforms that increased the agency’s independence and insulated it from partisan politics, is the most appropriate agency for oversight of the tax-exempt sector. To ensure that the IRS continues doing its work in an independent and nonpartisan fashion, we call on the administration to respond to the inspector general’s report in a timely manner with an action plan to ensure the problems identified are not allowed to take place in the future,” said Aviv.

“The primary concern is that this generates a lot of confusion about nonprofits in general,” Tim Delaney, president and CEO of the National Council of Nonprofits. People are reading media reports about political activity and not distinguishing between 501(c)(3)s (charities), which are not allowed to engage in political activity, and 501(c)(4)s (social welfare organizations), which are allowed. “The bulk of what we understand the concerns are 501(c)(4) organizations,” said Delaney. “The real problem initially and broadly is the mass confusion, lumping in all nonprofits,” he said.

Another concern is that an underfunded and under-resourced IRS will have to divert staff to address hearings and investigations at a time when nonprofits already are dealing with massive backlogs in the application process, said Delaney.

Several years ago, nonprofit news organizations seeking tax-exempt nonprofit status, like San Francisco Press and the Investigative News Network, were seeing their applications taking well over a year to complete. At the time, it appeared the IRS was grappling with whether a regular news organization qualified as an education organization for tax-exempt, 501(c)(3) status. San Francisco Press eventually was awarded its tax-exemption in September 2012 after 32 months.

Nonprofit news organizations raised other issues in which the IRS identified a category of applications for tax-exemption that were not routine in nature, according to Marcus Owens, an attorney with Caplin & Drysdale in Washington, D.C. The issue was “whether they were educational or commercial newspapers in disguise,” he said.

Owens, who ran the IRS’ Exempt Organizations Division from 1990 to 2000, hopes the TIGTA’s report will determine whether it was 501(c)3 or 501(c)4 organizations that were involved in the IRS inquiries.

“It wouldn’t surprise me if there were some 501c3s,” said Owens, who had an application from an organization that was apolitical but perhaps could be perceived as progressive, which received a lengthy questionnaire from the IRS. So the inquiry was broader than just any organizations with tea party in their name, he said.

Owens took issue with the idea that the IRS “targeted” organizations. “It suggests perhaps an intentional reaching out or finding particular groups. What the IRS is dealing with are applications that were voluntarily filed. It wasn’t going out and looking for organizations – that’s a separate conversation,” he said.

“As far as processing applications, it’s appropriate to identify those that require a more sophisticated level of analysis,” Owens said, adding that some 60,000 applications flow through the IRS’ Cincinnati, Ohio, office annually. The vast majority of those will be little leagues or parent-teach associations and the like but about 1,000 or fewer likely do require some more information and examination to ensure tax-exemption would be valid.

For instance, Owens is in the midst of working on the tax-exemption of a new entity, created from the acquisition of a privately owned hospital by a tax-exempt hospital.

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