Scandal Should Prompt IRS to Clarify Rules

Most Americans shared the feeling of Sen. Susan Collins, the Maine Republican, who said she was outraged when she learned the IRS had subjected conservative and Tea Party groups to extra scrutiny. And like other lawmakers and White House officials, she was quick to call for an investigation of how the tax agency reviewed applications by groups that sought approval as tax-exempt social-welfare groups.

No matter how upsetting it is to read the new report from the Treasury Department’s inspector general detailing missteps by the IRS, it would be a major loss if all of us who care about citizen participation didn’t take this opportunity to heed the advice of Rahm Emanuel: “You never let a serious crisis go to waste. And what I mean by that, it’s an opportunity to do things you think you could not do before.”

In this case, the opportunity is clear: Government leaders need to clarify ambiguous federal rules, both to avoid future problems in reviews of tax-exempt groups and to encourage all Americans to get involved in advocacy.

They also need to do more to enforce the laws once groups get tax-exempt status, because some groups that say they aren’t going to do any politicking are going to do it anyway.

Just as important, this is a perfect moment to encourage greater openness about the money flowing to political groups—and better protect the integrity of charities and advocacy groups that take nonpartisan approaches to helping society.

While some pundits call this scandal Nixonian in its political maneuvering, it seems to be nothing of the sort. Instead, it appears to be more a case of overwhelmed civil servants making very bad judgments at a time when they have been asked to do a lot more with a lot less.

According to Lois Lerner, who oversees the IRS’s tax-exempt division, the number of groups that sought tax-exempt status as social-welfare groups under Section 501(c)(4) jumped from around 1,500 in 2010 to around 3,400 by 2012.

IRS investigators have reason to be nervous about 501(c)(4) organizations after the Supreme Court ruled in the Citizens United case that corporations could spend unlimited sums on electioneering—money that everyone expected to be poured into new advocacy organizations.

The 501(c)(4) groups were expected to be popular because such organizations, like charities, don’t have to disclose the names of their donors. Other types of political-advocacy groups, classified under Section 527, must tell the public who gave and how much they contributed.

But it’s not just disclosure rules that are different: The social-welfare groups have the right to keep their donors secret, in part because they’re not allowed to spend the majority of their budgets on politics as 527 groups are allowed to do. That put the burden on the IRS to make sure no inappropriate politicking was planned by groups seeking social-welfare status.

Anticipating a surge of applicants, IRS staff members sought shortcuts to highlight applications that merited closer scrutiny so they could turn around the vast majority of less problematic applications promptly.

At first staff members simply searched for applications with names such as “Tea Party,” but Ms. Lerner told them it was an inappropriate criterion to identify groups that might not meet tax-exempt standards. At her direction, they changed the standard to look for groups with political, lobbying, or advocacy activities. However, IRS staff members found that to be too broad, so they started flagging all applications for groups involved in limiting or expanding government or educating the public about the constitution or economic and social reform.

When IRS senior managers learned that applications were being screened based on the viewpoint of the organization, they changed the rule to focus on any application that had “indicators” that the group was planning to spend significant sums on political campaigning.

The reason IRS staff members had to try so many approaches is that IRS rules are vague about just what kind of political activity—and how much—is appropriate for social-welfare groups.

Indeed, the process for figuring out what groups qualify for 501(c)(4) status is somewhat like a Rorschach test. Without knowing what to look for, IRS reviewers asked questions such as the whether any contributor has run or will ever run for elected office.

Under today’s imprecise rules, imagine what you might do if you were reviewing a group that planned to educate the public about the Bill of Rights.

This sounds like an activity that benefits the public regardless of whether the group self-identifies as conservative or liberal. But how should the IRS figure out if an applicant really means “educating voters in Ohio about how Obama is trampling on the Bill of Rights”?

The IRS wouldn’t struggle so much with this problem if it had substantive criteria to define the legal standards for groups that plan to spend lots of money getting involved in political campaigns.

A first step is to define “political intervention” for all tax- exempt groups and taxpayers. This is not a simple task, but a group of lawyers and nonprofit leaders that are part of the “Bright Lines Project,” now housed at Public Citizen, have been working for the past four years to develop just such a proposal.

Modeled after the very successful regulations defining lobbying by charities classified under Section 501(c)(3), the proposal would provide clarity instead of today’s vagueness and subjectivity. While the model may still need tweaking, it would apply uniformly to all tax-exempt organizations and business groups when they are dealing with the Internal Revenue Service.

Second, we need a clear understanding of how much political activity or other projects not involving a social-welfare mission are acceptable for a 501(c)(4). Some people assume that if a group spends 49 percent or less on politics and other activities unrelated to social welfare, the group can qualify as a 501(c)(4). But without any objective criteria, who knows?

Greg Colvin, a lawyer for tax-exempt groups, told a Senate subcommittee in April that he wants to set a 10-percent upper limit on political spending for all tax-exempt groups, except charities, which would continue to be completely banned from politicking.

His goal, with those limits, is to make it tougher for donors to keep secret their political giving. One can argue about the right amount, but given the large sums of money that passed through social-welfare groups during the last election cycle, we believe it is vital that Congress and the IRS flesh out a clear understanding of how much and what kinds of political activity tax-exempt groups can pursue.

Many Washington insiders already fear the IRS brouhaha will undercut the Obama administration’s second-term agenda. Congress is gearing up for hearings and investigations, and the Justice Department on Tuesday announced a criminal investigation.

Those inquiries should go forward, but so, too, should real efforts to promote change in how nonprofit political activities are regulated.

If Congress and the IRS can clearly articulate what level of political activity is acceptable for tax-exempt groups, that will significantly reduce uncertainty for groups seeking tax exemption and for the IRS employees reviewing such organizations. It will also greatly help to reduce the chilling effect today’s vague approach has created and further insulate the IRS from political manipulation.

After all, the top priority should be developing laws and rules that encourage people to participate in civic affairs. Our country is stronger when more groups are engaged in advocacy, lobbying, nonpartisan voter education, and other forms of civic engagement, not fewer.

Consistent enforcement of clear, fair rules will not stifle a vibrant civil society. But it will prevent dishonest groups from misusing tax exemption for political purposes and help restore public confidence in the impartiality and integrity of the IRS.