Whatever Happened to the IRS Tax Exemption Scandal?

On Friday, May 10, 2013, IRS Exempt Organizations Director Lois Lerner told a stunned audience of tax attorneys in Washington that the IRS had delayed and obstructed the tax exemption applications from conservative-sounding organizations.  Later that month, the U.S. Treasury Inspector General made public a report confirming and detailing the nature of the targeting. What began as a governmental investigation had become a legal battle between nonprofits seeking what they believed to be information and resolution on the one hand and the federal government asserting claims of protecting taxpayer and employee confidentiality on the other.

As NPQ has chronicled in dozens of articles, the ensuing four years and counting since May 2013 have included several Congressional and other investigations but no criminal indictments or known personnel actions against anyone involved in the targeting. However, due to resignations and retirements, no IRS employee in the reporting structure in 2013, from the Exempt Organizations Division director to the IRS Commissioner, is still working at the agency. When NPQ reported in February 2013 on the identified brain drain at the IRS, the personnel moves involving the oversight of tax exempt organizations since that time had not emerged as a specific area of concern affecting charities and nonprofits.

The U.S. Justice Department launched an investigation, but in the midst of that investigation, they announced there would be no indictments. Various Congressional committees attempted to ferret out what happened and who did it but were stymied by the IRS’s slow responses to records requests and, in some cases, destruction of computer media which might have contained important information.

The Congressional investigations rapidly became partisan, with Republicans insistent that crimes had been committed and that senior officials had to be held accountable for actions which affected hundreds of organizations and may have even affected the conduct of the 2012 elections. Democrats saw the GOP-led investigations as a partisan witch hunt targeting career IRS employees and used as a political talking point to harass President Obama specifically. Democrats also objected to the continued use of the IRS budget as a coercive tool to force IRS officials to cooperate in the investigations, and justifying decreasing funding for IRS operations by pointing to what Republicans said was obstruction.

The investigations didn’t so much end as they petered out as politicians moved on to other topics. Rep. Darrell Issa (R-CA), chair of the House Oversight and Government Reform Committee, had the GOP staff produce a 226-page report in late 2014 as he left the committee, believing that the new committee chair or others could use it to continue the investigation. The committee chose not to do so.

Meanwhile, nonprofit organizations like Judicial Watch, Cause for Action, the American Center for Law and Justice (ACLJ), and others have used Freedom of Information Act (FOIA) requests and legal challenges to aggressively pursue the facts and circumstances surrounding the actions of IRS personnel. In addition, many of the targeted nonprofit organizations (most were eventually approved for tax exemption after awaiting a decision for up to seven years) have pursued their own legal cases in federal court.

Bloomberg BNA recently published a status report on the litigation. The text of the article has since been removed in favor of an audio report, but Paul Caron’s TaxProf Blog includes snapshots of the key cases:

  • NorCal Tea Party Patriots. The IRS Aug. 2 defended its actions in the class action, saying it was within its rights to review exemption applications carefully, but it also acknowledged that it delayed some applications inappropriately (NorCal Tea Party Patriots v. IRS, S.D. Ohio, No.1:13-cv-00341, 8/2/17). … A trial is set for Feb. 5, 2018.
  • True the Vote.True the Vote in April withdrew two discovery requests: evidence of the IRS using viewpoint-based criteria in tax administration and evidence of the political positions of IRS employees (True the Vote, Inc. v. IRS, D.D.C., No. 1:13-cv-00734, 4/5/17).
  • Linchpins of Liberty.An August 15th hearing is scheduled on a motion requiring the government to release documents the Linchpins groups requested (Linchpins of Liberty v. United States, D.D.C., No. 1:13-cv-00777, 7/26/17). …
  • Freedom Path. The Freedom Path case is set for a June 18, 2018, trial (Freedom Path, Inc. v. IRS, N.D. Tex., No. 3:14-cv-01537, 8/9/17). … The IRS initially said Freedom Path didn’t qualify as a social welfare group, exempt under Section 501(c)(4) because it didn’t operate just to promote social welfare. The group applied for its exemption in 2011 and sued the IRS in 2014.

Last week, federal judge Reggie B. Walton ordered the IRS to disclose to plaintiffs by October 16, 2017, which IRS employees were involved in the targeting of some nonprofit groups for special scrutiny. The judge also ordered the IRS to substantiate claims that it is no longer targeting selected applications for tax exemption. The federal government objected to plaintiffs’ initial requests, claiming that “the United States should not be held to respond to far-reaching inquiries.”

The Wall Street Journal has recently run multiple opinion pieces indicating that working to bring closure to the IRS scandal would be a worthy use of the department’s resources, and that the federal government’s lawyers should stop delaying resolution of the associated lawsuits.

Changing Tactics

As NPQ has reported, the Republican-controlled U.S. House has introduced or passed several bills prohibiting the IRS from using its budget to regulate the activities of 501(c)(4) organizations, target groups for scrutiny based on ideological beliefs, for “exercising their First Amendment rights,” or for determining the tax exemption of churches “unless the IRS Commissioner has consented and Congress has been notified.” Separately, yet related to conservative angst over the IRS and its treatment of some tax-exempt organizations, is the effort by President Trump and some Republicans in Congress to “totally destroy” the Johnson Amendment, a 1954 change to the tax code which prohibits 501(c)(3) nonprofits, including churches, from supporting or opposing the election of political candidates.

Détente in this intergovernmental cold war will likely come only when change and accommodation comes from the IRS or when Congressional control switches parties.  In the meantime, the continuing lawsuits and the long memories (not to mention political interests) of some elected officials portend more budgetary and regulatory stress at the IRS for the indefinite future.