All individuals and groups should be treated equally under the law. In this case, that includes how their Form 1024 applications for tax-exempt recognition as 501(c)4 “social welfare” organizations are processed by the IRS. The integrity of the civil sector, including nonprofits of all kinds, depends on the IRS for even-handedness in approving applications for tax exemption. Lacking that, democracy and our sense of fair play are severely compromised, and even legitimately achieved social change will be scrutinized endlessly for its administrative backing or lack thereof. Given that, the admission on Friday by Lois Lerner, the Director of the Exempt Organizations Division of the Internal Revenue Service (IRS) at the American Bar Association’s Tax Section meeting was shocking.
In response to a question from the audience, Lerner admitted that the IRS had targeted applications for tax-exempt recognition for additional attention based in part on whether the organizations’ names included such words as “tea party” and “patriot.” She told the audience that inappropriate targeting was done by lower-level employees at the IRS’s Cincinnati office, which handles much of the IRS’s work related to nonprofit organizations. She apologized on behalf of the IRS for the activity, which, she assured the audience, had stopped.
That afternoon, in a hastily-called telephone news conference, Lerner said that the IRS noted a doubling in 501(c)4 applications between 2010 and 2012. Processing was centralized in the Cincinnati IRS office, Lerner said, to leverage knowledge and expertise. About 300 applications were selected for special scrutiny, and about one-quarter of those were selected using keywords indicating conservative political activity. (At one point during the conference call, she stumbled over the numbers associated with the story. In a very unfortunate quote for a senior IRS official, Lerner said, “I’m not good at math.”)
Lerner said the targeting was done by revenue agents, without managerial involvement. About half the cases singled out have been “closed,” and no group has “lost” tax-exempt recognition (no mention on how many were denied). About 20 groups out of the 300 withdrew their applications. According to CNN, Lerner initially said that no employee had been disciplined, but later corrected herself to say that she couldn’t say whether anyone had been disciplined.
Why the Admission and Why Now?
An investigation report by the Treasury Department’s Inspector General is expected as soon as this week, which may have been the reason that Lerner chose to address the issue on Friday. Investigations by the Treasury and the IRS were requested by a variety of Congressional committees, individual senators, and conservative interest groups after hearing in 2011 that Tea Party affiliates and other conservative groups seeking 501(c)4 recognition were being sent detailed questionnaires by the IRS. The questionnaires asked about political activity by individual members of the groups, sources of gifts and other financing, and even requested printouts of entire web sites and Facebook accounts.
The IRS had steadfastly denied that any targeting had occurred. Then-Commissioner Dennis Schulman testified at a March 22, 2012 hearing that, “There’s absolutely no targeting. This is the kind of back and forth that happens to people.” However, the Associated Press (AP) reports that a draft of the Treasury Inspector General’s report tells a different story. It asserts that Lerner knew in June 2011 that certain 501(c)4 applications were being targeted for additional inquiry based on “conservative-sounding” keywords, including “9/12 Project,” a term associated with talk radio host Glenn Beck.
Even before Lerner finished her session at the ABA conference, the media had picked it up and political responses to it have continued through the weekend. Republican politicians have called for investigations and hearings. Senate Minority Leader Mitch McConnell (R-KY) called for the White House to conduct “a transparent, government-wide review aimed at assuring the American people that these thuggish practices are not underway at the IRS or elsewhere in the administration against anyone, regardless of their political views.” U.S. House Ways and Means Chairman Dave Camp (R-MI) will convene hearings to investigate and said, “The admission by the agency that it targeted American taxpayers based on politics is both shocking and disappointing.” U.S. Rep. Charles Boustany (R-LA), chair of the Oversight Subcommittee, sent a letter insisting the IRS provide copies to the House Ways and Means Committee of all correspondence containing the words “tea party,” “patriot,” or “conservative,” as well as the names and titles of any agency employees involved in delaying the approval of the applications in question. While fierce and immediate reaction from Republicans is to be expected, it is unfortunate that Democratic Congressional leaders have been almost silent to date on this affront to civil liberties.
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White House spokesman Jay Carney said Friday that the activities were “inappropriate,” noted that the IRS is an independent agency, and that the President expects that the IRS will take action to correct any problems.
In the media, the Washington Post’s editorial board said, “At this point, the IRS has lost any standing to determine and report on what exactly happened. Certainly, Congress will investigate, as House Majority Leader Eric Cantor (R-VA) promised. Mr. Obama also should guarantee an unimpeachably independent inquiry.” The Wall Street Journal’s editorial board said, “Just because you’re paranoid, doesn’t mean the IRS isn’t out to get you.” New York Times columnist Maureen Dowd agreed with this assessment. In a column about Benghazi, Dowd mentioned the IRS when she wrote: “(Though now that the IRS has confessed to targeting Tea Party groups, maybe some of the paranoia is justified.)” Mother Jones posted an article titled, “Finally, a Real Scandal for Conservatives to Chew On.”
Lerner indicates that 300 applications were selected, of which about 75 were selected for presumed conservative content in their names. Who were the other 225? Jewish Press asserts that pro-Israel groups may also have been targeted. The Jewish Press reporter was a leader of a pro-Israel group that filed a lawsuit against the IRS over its application, but the accusation is gaining credibility in some press reports simply because it becomes more credible in light of the IRS apology. Expect other groups with pending applications to come forward, many claiming discrimination based on political allegiances.
Finally, USA Today examined whether this issue will distract from other investigations of the IRS. There have been efforts in Congress to have the IRS expand its scrutiny of political activity by 501(c)4 groups, citing the more than $250 million spent by these groups in the 2012 election cycle. These efforts have not been successful yet, and the current IRS issues with approving 501(c)4 applications will likely make it even less likely that the IRS will be trusted with additional power to regulate these organizations.
What It May Do to The IRS
It is way too early to speculate on the totality of effects that this admission might have on the IRS and the Exempt Organization Division, specifically. Scrutiny may further accelerate the “brain drain” at the IRS that Nonprofit Quarterly reported on earlier this year. One can only speculate on how this story, and the investigations likely to occur over the next months or longer, will affect the career decisions of IRS agents and managers in the EO Division who are eligible for retirement now or in the foreseeable future.
Also, given limited IRS resources and the likely investigation-related stresses on the EO Division, IRS and Congressional initiatives on issues such as regulation of nonprofit entities’ unrelated business income and executive compensation practices, hospital-specific Form 990 implementation issues, and other concerns may be slowed down for the time being.
As if this weren’t enough, the IRS has significant responsibility in administration of the Affordable Care Act (ACA), also referred to as Obamacare. Boustany’s U.S. House Ways and Means Subcommittee on Oversight has held hearings on the IRS’s capacity to fulfill its role, the additional budget and staff required, and how the ramp-up for oversight will be paid for. Doubts about the IRS’s ability to enforce the tax code impartially will be used, no doubt, when discussing the IRS’s implementation of regulations for a law that’s still controversial, especially in Republican and conservative circles.
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Is it possible that revenue agents in Ohio were able to engage in this activity without the knowledge or approval of managerial IRS officials? If Lerner knew in 2011 that this activity was occurring, what did she do, or could she have done, to stop it and assure that the affected groups’ applications were processed appropriately? The timeline doesn’t quite work, either. The reviews were engaged in during 2010 and 2011, but Lerner said they were done as a response to increased numbers of applications between 2010 and 2012. Then-Commissioner Schulman’s denial to Congress in March 2012 happened nine months after the reported date Lerner knew of the Cincinnati revenue agents’ activities. Is it possible that Lerner did not communicate information central to answering pending Congressional requests and a Treasury investigation to her boss? The White House was quick to point out Friday that Schulman was appointed as Commissioner by George W. Bush, not President Obama; could Lerner have been protecting Schulman, or could she have been concealing information necessary to his role in representing the IRS to Congress and the public?
Releasing bad news on a Friday in the hope that its sting will soften over the weekend is an old Washington tradition that has become something of an outdated joke, but the odd venue of this announcement—in response to a question at a pre-scheduled conference—has made the whole scenario look, well, odd and unprofessional, and almost disrespectful or manipulative. The civil sector must depend upon the IRS to act with some semblance of integrity in terms of non-partisanship; that is a vital component of our scaffolding as a sector. Nonprofits and the sector, no matter their political leanings, should be clear and loud about our outrage at this “Friday Surprise.”