IRS Tea Party Scandal Could Deter Advocacy and Limit Charity Oversight

The whirlwind of controversy surrounding the disclosure that the Internal Revenue Service had singled out applications from conservative groups seeking tax-exempt status for extra scrutiny could damage the agency’s ability to regulate charities, hinder needed efforts to update IRS rules, and deter nonprofits from expanding their advocacy efforts, say nonprofit experts.

It also highlights the pressing need for Congress and the IRS to clarify exactly what constitutes “political activities” for both charities and advocacy groups, they say.

The IRS was screening the applications to ensure that groups were not improperly engaged in such activities, but legal experts have said for years that the tax agency has done too little to make clear what kind of politicking, and how much, is acceptable.

“Without those standards, you’re far more likely to get haphazard attempts to identify activity that is either thought to be political or over the line or too much activity of one kind or another,” said Holly Schadler, a lawyer who represents nonprofits. “If you don’t have clear standards for people to evaluate either organizations applying for tax-exempt status or people attempting to evaluate these applications, it’s very difficult to avoid situations like this.”

Denying Political Bias

An audit released last week by the Treasury Department found that the tax agency had improperly flagged applications bearing words like “Tea Party” or “Patriots” or from groups that worked on issues like government spending and taxes.

Lois Lerner, director of the IRS division that oversees tax-exempt groups, told an American Bar Association conference this month that the Cincinnati office that handles applications was trying to streamline its examinations of groups seeking status as “social welfare” groups under Section 501(c)(4) of the Internal Revenue Code after noticing that the number of such groups had started to spike after 2010.

She said the agency was wrong to single out certain types of groups, but did not do so out of political bias.

However, both Republicans and Democrats including President Obama condemned the activities and called for investigations.

‘Indefensible Mess’

Nonprofit experts fear that the fallout, including Congressional hearings, a Justice Department criminal investigation, and the firing of acting IRS Commissioner Steven Miller, will delay even further some of the issues that nonprofits have long wanted lawmakers and the IRS to tackle.

“I am horrified and really almost angry that a government agency would operate in this way,” said Frances Hill, a law professor at the University of Miami who has argued for many years that the rules governing 501(c)(4) groups are an “incoherent, indefensible mess” and need to be rewritten.

She said she doesn’t expect Washington to examine nonprofit issues like that anytime soon.

“Who in Congress wants to look at this when it’s vitally important to figure out how the current outrage happened and who bore what kind of responsibility over time?” she said.

Effort to Streamline

The Treasury Department’s audit, conducted by the inspector general for tax administration, found that the IRS’s tax-exempt division is riddled with mismanagement, poor communication, and lack of training.

It said that led to significant delays in determining whether organizations that might be involved in political activities were qualified to become a 501(c)(4) organization or a 501(c)(3) charity.

In fact, it said that at least 32 groups seeking 501(c)(3) status could have sued to force the IRS to make a decision last year after the agency took more than the mandatory 270 calendar days to act.

The delays may have harmed groups seeking the charitable designation by denying them benefits like postal-rate discounts. exemptions from state and local taxes, or donations from foundations or individuals, the report said.

“In addition, some organizations withdrew their applications and others may not have begun conducting planned charitable or social welfare work,” it said.

For evidence of the spike in requests for tax-exempt status, Ms. Lerner said the IRS had begun to centralize its decision making on 501(c)(4) applications because the number had grown from about 1,500 in 2010 to nearly 3,400 in 2012.

But the procedures for identifying groups to screen began in early 2010, before the increase could have been observed.

On five separate occasions in 2012, the House Ways and Means Committee requested information about reports of the appearance of political bias only to be told by the IRS that it had no “knowledge of targeting conservative groups,” according to the committee’s timeline of events.

Confusing the Public

Some nonprofit leaders worry that the dispute will further confuse the public, which has trouble distinguishing between 501(c)(3) charities, which are not allowed to engage in any partisan activities, and 501(c)(4) advocacy groups, which can do so, as long as it is not their primary activity.

The latter, which unlike strictly political groups do not have to publicly reveal their donors, tend to run into more controversy because they sometimes face accusations that they are arms of political candidates or parties.

“All nonprofits are being smeared as though we are engaging in political activity,” said Tim Delaney, president of the National Council of Nonprofits.

Furthermore, if the IRS is distracted, both charitable and advocacy groups could operate outside of regulations with less oversight, Mr. Delaney added. “We depend on the IRS. We need a tough cop on the beat.”

Becky Gerritson, president of the Wetumpka Tea Party in Alabama, explains how her application was affected by the IRS approach.

She applied for tax exemption as a 501(c)(4) group in October 2010. When the IRS responded in February 2012, it required her to answer 90 questions that she called “very intrusive.”

The IRS asked for copies of speeches delivered at all of her group’s events since its founding in 2009 and the identities and credentials of the speakers. It also asked for the identities of all of her group’s volunteers and members; donors’ names and the amounts and dates of their gifts; and copies of all letters sent to elected officials.

She asked the American Center for Law & Justice to represent her, as it did for two dozen other groups facing the same scrutiny. Her application was approved in July 2012, but she said the IRS should have acknowledged its actions last year and believes it did not because of the presidential election. “This was an election year scandal,” she said.

Diana Aviv, president of Independent Sector, a coalition of nonprofits and foundations, said all nonprofits should be troubled by the IRS’s actions.

“There are government officials using search terms that relate to the mission of an organization,” she said. “If we go down that road, it’s pretty dangerous whether you’re on the left or the right.”

Fixing Errors

The IRS said in a statement that “the group of centralized cases included organizations of all political views.”

It said it had corrected flaws in its procedures last year based on its own review of the situation and held off from discussing it publicly while waiting for the Treasury inspector general’s office to finish its review.

The Treasury audit said IRS agents had difficulty evaluating the applications because they lacked specific guidance about how to measure whether partisan politics was the “primary activity” of a group seeking 501(c)(4) status.

The IRS agreed with the report’s recommendation to ask the agency’s chief counsel and the Treasury Department to include that question in the plan it publishes each year on priority tax issues that need new regulations or other administrative guidance.

As the controversy drags on, some nonprofit experts worry that the controversy will make charities even more shy about advocacy than they already are.

Many groups are reluctant to lobby Congress about budget issues because the debate is so partisan, Patrick Lester, director of federal fiscal policy at the Center for Effective Government, said in an e-mail.

“IRS investigations, even if they are rebuffed, will make those organizations even less likely to become involved in those issues.