Understanding the I.R.S. “Scandal”

Journalists without a political ax to grind have been trying to explain what actually happened at the Cincinnati I.R.S. office. After reading some of these articles and looking at the official report issued by the Treasury Department’s Inspector General (see the links below), it’s reasonable to conclude that the so-called “scandal” amounts to some relatively over-worked, relatively low-level bureaucrats (aka accountants) trying to do their job (what Congress told them to do) but not quite following the rules (which are hard to understand).

Every application to be considered a tax-exempt “social welfare” organization under Federal tax code section 501(c)(4) is reviewed by the I.R.S. There are a few thousand such applications every year. One of the benefits of being granted this tax-exempt status is that an organization’s donors don’t need to be made public.

Some of these applications receive extra attention, often because they are suspected of being political groups masquerading as social welfare groups. A 501(c)(4) organization is allowed to engage in more political activity than a 501(c)(3) group like the Red Cross, but isn’t supposed to be “primarily engaged” in political activity (note the vagueness of the phrase “primarily engaged”).

In trying to figure out which 501(c)(4) applications needed extra attention, I.R.S. employees in Cincinnati devised some criteria to “be on the lookout for” (i.e. to help determine whether the group would be “primarily engaged” in politics or not).

Since the number of applications was steadily increasing, and there were lots of applications coming from groups associating themselves with the Tea Party and Glenn Beck, the criteria included references to “Tea Party”, “Patriots” and “9/12 Project” (a group created by Beck). The criteria for further review also included references to government spending, debt and taxes; educating the public by advocacy or lobbying to “make America a better place to live”; and statements “criticizing how the country is being run”.

So the immediate question is whether using these criteria would tend to identify groups whose main purpose was “political” rather than “social welfare”. Common sense suggests that the answer is “Yes”.

Roughly 1/3 of the applications that received extra attention included the terms “Tea Party”, “Patriots” or “9/12 Project”. The extra reviews took a long time and sometimes featured burdensome questions from the I.R.S., but the principal issue, according to the Inspector General’s report, was that:

“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.”

One might argue that referring to yourself as a Tea Party or Project 9/12 group or claiming that your main purpose is to fight government spending is a good indication that you might be spending most of your time trying to affect political campaigns, especially in an election year. But, according to the Inspector General’s report, this wasn’t the correct way to identify such groups.

I’m not sure how the I.R.S. accountants are supposed to  predict which 501(c)(4) groups will primarily engage in improper political activity. At any rate, all of the applications getting this questionable special attention were ultimately approved or are still being evaluated.

This is the “scandal” that some foolish and/or unscrupulous politicians and journalists are making such a big deal about. The especially noxious Peggy Noonan recently claimed that this, along with some right-wing contributors being audited, is the biggest scandal since Watergate (the I.R.S. audits between 1 and 2 million individual tax returns every year, so it isn’t surprising that some of the taxpayers involved are right-wing contributors).

What should be a scandal receiving Congressional and media attention is that several 501(c)(4) groups, such as Karl Rove’s American Crossroads, spend millions of dollars intervening in political campaigns, but (apparently because they can afford talented lawyers) don’t pay taxes and don’t have to say who their donors are. 

It’s politics as usual in the Greatest Country in the World.


Those links I promised:

The differences between 501(c)(3), 501(c)(4) and political organizations:


The Inspector General report:


What went on in Cincinnati:


Some context and commentary from the Columbia Journalism Review:


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