Scandal Within A Scandal: IRS Misconduct Unfolded In Murky World Of Election Spending

Lawmakers and pundits may find that the investigation will raise more questions than it answers.
By @FrederickReese |
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    The Internal Revenue Service (IRS) finds itself in damage-control mode as allegations of targeting conservative groups are putting the constantly-beleaguered agency under attack from all directions. On Tuesday, U.S. Attorney General Eric Holder announced that the Justice Department will be coordinating with the FBI to determine whether any crimes were committed.

    Senate Minority Leader Mitch McConnell (R-Ky.) described the IRS’s actions as “a blatant and thuggish abuse of power,” and called on President Obama to “make available, completely and without restriction, everyone who can answer the questions we have as to what was going on at the IRS, who knew about it, and how high it went.”

    “No more stonewalling, no more incomplete answers, no more misleading responses, no holding back witnesses, no matter how senior their current or former positions,” McConnell said in remarks on the Senate floor. “We need full transparency and cooperation.”

    Obama, in a press conference, called out the tax bureau. “This is pretty straightforward,” Obama told reporters. “If in fact IRS personnel engaged in the kind of practices that have been reported on and were intentionally targeting conservative groups, then that’s outrageous and there’s no place for it.”

    “The IRS as an independent agency requires absolute integrity and people have to have confidence that they’re … applying the laws in a non-partisan way,” the president said. “If you’ve got the IRS operating in anything less than a neutral and non-partisan way then that is outrageous … People have to be held accountable and it’s got to be fixed.”

    Many Republicans have taken to using this case as an example of a bloated, out-of-control federal government. “This whole episode reinforces and confirms the American people’s worst fears about big government run amok,” Sen. John Thune (R-S.D.) told Fox News.

    “The startling revelations give real credibility to numerous reports over the last year that the IRS ‘inadvertently’ released donor information from conservative groups — and that information ended up in the hands of political opponents,” Sen. Jerry Moran (R-Kan.) said.

    In spite of raised tempers and allegations that the Democrats were targeting Tea Party and conservative Republican organizations, this case is more complicated than it may initially seem — it takes place deep in the already-murky realm of campaign finance laws.

    Discovering shenanigans

    In a report issued Tuesday, the U.S. Treasury Inspector General for Tax Administration (TIGTA) determined:

    “The IRS used inappropriate criteria that identified for review Tea Party and other organizations applying for tax-exempt status based upon their names or policy positions instead of indications of potential political campaign intervention. Ineffective management: 1) allowed inappropriate criteria to be developed and stay in place for more than 18 months, 2) resulted in substantial delays in processing certain applications, and 3) allowed unnecessary information requests to be issued.”

    That sounds straightforward enough, at least if you’re looking for a scandal. But what’s the context? Starting in 2009, the IRS was inundated with Internal Revenue Code (I.R.C.) § 501(c) applications from not-for-profit organizations, requesting special tax immunity. Within the IRS, the Exempt Organizations Rulings and Agreement office processes all application for tax exemption. The front-line office — the office that directly interfaces with the public — for Rulings and Agreement is the Determinations Unit in Cincinnati, Ohio.

    In 2010, the Determinations Unit noticed something peculiar about the I.R.C. § 501(c) applications it was receiving. Many of the applications requesting I.R.C. § 501(c)(4) status as a “social welfare” organization were clearly, on closer review, not social welfare groups. An example of this is Karl Rove’s Crossroads GPS, which sought social welfare organization status. Crossroads GPS’s parent organization, American Crossroads, is a I.R.C. § 527 organization, which are required to publicly disclose their donors.

    This raised a red flag with the IRS. First, no group has to file an application with the IRS to call itself a social welfare organization. Social welfare organizations cannot receive tax-deductible charitable contributions and cannot primarily engage in political campaign interventions.

    A social welfare organization can engage in unlimited legislative lobbying and can engage in general advocacy — as long as that advocacy does not favor specific legislation or the election of a candidate.

    In a 2012 article, investigative journalists at ProPublica pointed out that many “social welfare” organizations actively participated in the elections, donating millions. An example of this is the Republican Jewish Coalition, which had a plan to anonymously funnel $6.5 million into the Mitt Romney campaign.

    “Contributions to the RJC are not reported,” said Matt Brooks of the Republican Jewish Coalition, as reported by Propublica. “We don’t make our donors’ names available. We can take corporate money, personal money, cash, shekels, whatever you got.”

    According to estimates from Kantar Media’s Campaign Media Analysis Group (CMAG), social welfare groups spent more than $71 million on campaign ads.


    Individual discretion

    The IRS interpreted — correctly — the increased influx of 501(c)(4) “social welfare” organization applications as potential tax fraud that would fund mis-labeled organizations, free from transparency.

    How the IRS proceeded, however, is where the group blundered. The Determination Unit, at the behest of Congress and the media, set aside the troublesome applications until specialists could make a determination on their tax exempt status.

    To facilitate this auditing, the Determination Unit used search terms such as “patriot,” “Tea Party” and “9/12” to flag applications for further review without consideration of the organization’s actual purpose. Some legitimately questionable applications snuck through due to this error, while many innocent organizations’ applications were singled out.

    When the director of the Rulings and Agreements office learned of the specific nature of the search criteria, he feared that specific organizations may be actively discriminated against. In June 2011, the director ordered the criteria changed to make them more responsive to the potential “political, lobbying, or [general] advocacy” activities of the organization. However, the specialists reviewing the flagged applications changed the criteria back on their own accord multiple times, according to the TIGTA report.


    A corrosive atmosphere

    As stated in the Inspector General’s report,

    “[T]he Determinations Unit developed and implemented inappropriate criteria in part due to insufficient oversight provided by management. Specifically, only first-line management approved references to the Tea Party in the BOLO [‘be on the lookout’] listing criteria before it was implemented.

    As a result, inappropriate criteria remained in place for more than 18 months. Determinations Unit employees also did not consider the public perception of using politically sensitive criteria when identifying these cases. Lastly, the criteria developed showed a lack of knowledge in the Determinations Unit of what activities are allowed by I.R.C. § 501(c)(3) and I.R.C. § 501(c)(4) organizations.”

    All of this was made all the more complicated when, in response to a 2012 Freedom of Information Act request from ProPublica for 67 applications for nonprofits seeking 501(c) status, the Determinations Unit instead released 31. Nine were pending — their release was therefore a clear violation of the Privacy Act. Despite objections from the IRS, ProPublica published the applications with the personally-identifiable information redacted.

    How did all of this go wrong? How could frontline employees knowingly ignore the directives of upper management? Why can individual employees act outside of prescribed guidelines in such politically-charged cases? In the upcoming weeks and months, the question of the IRS’s character and its moral obligation to the taxpayers will be addressed. Lawmakers and pundits, however, may find that the investigation will raise more questions than it answers.

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    • attl

      There has been a over 50 years of abuse of the tax code by the applicants and IRS. IRS is in a no win situation. They lied once and have lied ever since and was exploited by political organizations. No way to get off for IRS. If the lower echelon took the strict interpretation of the code as it exists today, they are right in enforcing the law and ask questions. They didn’t overreach because they were underreaching before.

    • Mark

      One of the more truthful articles on this subject so far.

    • JK

      Nice clear explanation of the story so far, thank you!