Advertisement
YOU ARE HERE: LAT HomeCollectionsBusiness

The real IRS scandal

Allowing so many 'social welfare' groups to enjoy tax-exempt status while participating in politics must stop. The IRS is obligated to scrutinize applicants, 'tea party' or no.

May 14, 2013|Michael Hiltzik
  • C4s are allowed to engage in lobbying, but not (“primarily”) in campaign activity. Their donors don’t get a tax deduction, but the organizations are tax-exempt. Above, the IRS building in Washington.
C4s are allowed to engage in lobbying, but not (“primarily”)… (Jim Lo Scalzo, Eurpoean…)

It's strange how "scandal" gets defined these days in Washington. At the moment, everyone is screaming about the "scandal" of the Internal Revenue Service scrutinizing conservative nonprofits before granting them tax-exempt status.

Here are the genuine scandals in this affair: Political organizations are being allowed to masquerade as charities to avoid taxes and keep their donors secret, and the IRS has allowed them to do this for years.

The bottom line first: The IRS hasn't done nearly enough over the years to rein in the subversion of the tax law by political groups claiming a tax exemption that is not legally permitted for campaign activity. Nor has it enforced rules requiring that donors to those groups pay gift tax on their donations.

The organizations at issue are known as 501(c)4 groups (call them C4s for short) after the section of the tax code that applies to them. They're nonprofit "social welfare" organizations that by law must be devoted primarily to programs broadly serving their communities, not private groups. IRS forms reveal what the agency considers to be mainstream C4s: religious groups; cultural, educational and veterans organizations, homeowners associations, volunteer fire departments. In recent years, however, overtly political groups have been claiming C4 status, which allows them to keep their donor lists secret and to avoid paying taxes on certain income.

Our lunatic campaign finance system is what turned the typical C4 from a volunteer fire department into a conduit of anonymous political cash. Big donors were given the green light to spend freely on elections by the Supreme Court's 2010 Citizens United decision. That wasn't good enough for some; they wanted to distribute their largess secretly.

C4s were there for the exploitation, and the result has been a wholesale decline of donor disclosure on the national level: As recently as 1998, nearly 100% of all donors to federal campaigns were publicly identified, according to the Center for Responsive Politics, a campaign finance watchdog group. By the 2012 presidential election, that was down to 40%.

The beneficiaries of the C4 tax break, understandably, will employ any subterfuge to keep it. That's what's behind the current firestorm over disclosures that in 2010 and 2011, IRS personnel screened requests for C4 status by applicant organizations with "tea party," "patriot" or "9/12" in their names.

Those weren't the only groups whose applications were selected for extra scrutiny on the reasoning that they might be devoted to more than "social welfare." According to an IRS Inspector General report made public this week, they represented only about a third of the 298 applications selected. That was certainly too coarse a screen, and by January 2012 the IRS had scrapped those definitions. It had substituted a screen designed to capture "political action type organizations involved in limiting/expanding government, educating on the constitution and bill of rights, [and] social  economic reform/movement."

Conservatives contend that this is still an anti-conservative screen. It sounds perfectly neutral to me, unless someone knows of a conservative organization devoted to "expanding government," or unless right-wing groups are supposed to have a monopoly on "social economic reform." In any case, the inspector general found that most of the 298 selected applications indeed showed indications of "significant" political activity that might have made them ineligible for the tax exemption.

It's about time the IRS subjected all of these outfits to scrutiny. The agency's inaction has served the purposes of donors and political organizations on both sides of the aisle, and contributed to the explosive infection of the electoral process by big money from individuals and corporations.

Nor is Congress innocent. The lawmakers have dodged their responsibility to make the rules crystal clear. On the rare occasions when the IRS has tried gingerly to impose regulatory order, members of Congress have forced the agency to back off. There should be a rule in Washington that if you give regulators deliberately vague guidelines, you're not allowed to protest when they try to figure out where the lines are.

Thanks to ambiguity about what it means to be "primarily" concerned with "social welfare," political activists have reaped a bonanza for years while the IRS ignored their chicanery. And once again, now that the agency has tried to regulate, the regulated parties have blown its efforts up into a "scandal." It's amusing to reflect that some politicians making hay over this are the same people who contend that we don't need more regulations, we just need to enforce the ones we have. (Examples: gun control and banking regulation.) Here's a case where the IRS is trying to enforce regulations that Congress enacted, and it's still somehow doing the wrong thing.

Advertisement
Los Angeles Times Articles
|
|
|