September 18, 2013; Hudson Institute

The Hudson Institute in Washington, D.C., hosted a luncheon panel to discuss the IRS and nonprofit regulation. Despite its title, the panel called “IRS + 501(c)(4) = SOS?” spent almost no time during the 90-minute event discussing social welfare organizations or their regulation. Instead, the panel gave a scathing review of current IRS nonprofit oversight and proposed varying levels of change.

Panelists included John Pomeranz of Harmon, Curran, Spielberg & Eisenberg and a key participant in the Bright Lines project; Cleta Mitchell, partner at Foley & Lardner, who has filed a lawsuit in federal court challenging the IRS actions; and Marcus Owens of Caplin & Drysdale and former director of the IRS Exempt Organizations Division. Moderator William Schambra guided the three panelists through the issues.

All the panelists agreed that the IRS’s oversight and regulation of nonprofits of all types is seriously flawed. Pomeranz may be the most optimistic of the three, as he merely suggests a rewriting of IRS regulations and training of IRS personnel is needed. The Bright Lines Project he has been involved with for several years advocates defining terms such as “social welfare,” with a goal of giving nonprofits and their advisors clear guidance on allowed and disallowed activities. Mitchell believes the EO Division needs to be abolished and a new structure designed. Owens advocates moving nonprofit oversight outside the IRS, proposing an industry-supported regulatory model similar to the former National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA).

Despite the differences in the background and political ideology of the three panelists, there was surprising agreement and willingness to consider alternate viewpoints. All agreed that Congress should have done a better job of defining terms, rather than leaving it to regulators. While Pomeranz has not advocated for abolishing the ED Division or outsourcing it, he was open to the possibilities offered by those approaches. Mitchell recounted the difficulties she had explaining IRS regulations to IRS staffers, ending up giving them a copy of their own training manual for education. Owens replied that the written manuals were discontinued in 2003, when webinars and online training replaced in-person three-day seminars with printed manuals. He said that the loss of the IRS-produced manuals was a problem for both IRS staff and taxpayers, as the manuals often provided synthesized key guidance not available elsewhere. Mitchell’s teeth were on edge, she said, watching former IRS Commissioner Douglas Schulman using terms like “political activity” and “advocacy” without caution as to their specific meanings in tax law. This observation reinforced Pomeranz’s viewpoint that a comprehensive glossary overhaul is needed. Mitchell was especially incensed that the term “advocacy” would acquire negative connotations in IRS oversight, because, she said, every nonprofit organization advocates for something. Even if the advocacy is restricted to articulating its stated mission, it is, nonetheless, advocating for its mission and seeking support from others to help achieve its mission.

Based on the presentations made, as well as the lack of challenging questions from the audience, it appears there is a common recognition that the IRS’s oversight of nonprofits is in serious need of overhaul. Whether that results in new IRS regulations and training, a new IRS EO Division, or a third-party industry-funded group taking over nonprofit regulation is yet to be seen.—Michael Wyland