Will IRS Controversy Create Real Change or Partisan Gain?

Americans have never particularly liked the taxman, but the recent IRS scandal has driven the agency’s reputation to a new low. It also created a rare consensus in Washington as Republican and Democratic officials issued nearly identical denunciations of reports that groups were targeted based on indicators of partisan ideology. The IRS’s feeble explanation for the unacceptable breach was that it occurred because of “insufficient oversight provided by management.”

As the second wave of fallout unfolded, however, a number of commentators pivoted from questioning the “insufficient oversight” of line workers in Cincinnati to condemning the IRS’s systemic failure to provide oversight of free spending, purely political groups that abuse the tax code by claiming non-profit status.

These observers are right to argue that the biggest threat to our democracy is that the scandal, by shifting outrage from the groups breaking the law to the agency that is supposed to enforce it, will eliminate any hope of neutral, non-partisan enforcement of the tax and election laws, opening the door to even more flagrant violations than we see now.

The groups at the center of the storm — known as 501(c)(4)s based on the provision of the tax code they are incorporated under — are required by federal law to be “operated exclusively for the promotion of the social welfare.” And, prior to 2010, groups using (c)(4) status included primarily groups that did serve the public: financial counseling groups, grocery co-ops, tenant associations, public beautification groups — even public rifle ranges. These organizations served the entire community, not partisan political ends.

Groups promoting the public good — and avoiding baldly political activities — operated consistently with the federal statute, as well as with IRS regulations that said promoting social welfare “does not include direct or indirect participation or intervention in political campaigns.”

Unfortunately, another IRS rule seriously undermined the law. That regulation provides that a group is focused “exclusively” on promoting social welfare as long as it is “primarily” engaged on promoting the common good. How it is that “exclusively” and “primarily” can mean the same thing is a question the IRS has never explained adequately, leading to confusion about how much electioneering was permissible for (c)(4) groups. But a common understanding emerged that (c)(4)s could spend up to 49 percent of their budgets on explicitly political activity without running afoul of the rules.

What’s more, because the IRS generally avoided policing non-profits even under the permissive 49 percent standard, the stage was set for the loophole to swallow the plain meaning of the law.

We reached the tipping point in 2010, when the Supreme Court’s Citizens United decision struck down restrictions on corporate political activity. The case fundamentally altered the use of the social welfare tax status, and over the last two election cycles, political consultants have formed countless groups that use non-profit status as a fig leaf for secretive partisan political activity.

Non-profits became the preferred vehicle for political spending because they don’t have to publicly disclose their donors — unlike Super PACs, which report contributors to the FEC. Individuals and corporations that prefer to conduct their political spending outside the public eye funneled millions into secretive 501(c)(4)s, leaving voters in the dark about who was paying to influence their votes.

In the two years after Citizens United, political spending by non-profits mushroomed. In 2008, non-profits spent $78 million in federal elections. This past election, their spending nearly quadrupled, to $308 million. Over the same period, applications from new groups for 501(c)(4)s status more than doubled — from 1,500 to 3,400.

It was the explosion of new social welfare groups and their outsized political spending that led to the unfolding scandal. And while the IRS’s misguided approach unacceptably targeted groups because of ideology — and involved inappropriate information gathering tactics — the agency was right to recognize that the new wave of 501(c)(4) groups warranted scrutiny. These groups are not meant to serve as secretive, partisan slush funds.  

The integrity of our election system demands effective, non-partisan policing of phony non-profits — evenly applied to groups on both sides of the political aisle. For the last two years, good government groups have begged the IRS to establish and enforce clear, bright-line rules about how much political activity is permissible, but the agency hasn’t responded. The current scandal underscores the need for such a non-partisan approach, and creates a moment ripe for reform. Congress needs to amend the tax code to either prohibit political activity by 501(c)(4) groups all together, or to set a clear rule that permits them to spend only a fixed, minimal sum on politics.

The question now is whether policymakers in Congress have the political will to take advantage of this opportunity to set clear rules regulating or barring political activity by non-profits — or whether they’ll simply try to leverage IRS scandal for partisan political gain. If they choose not to take meaningful action, it won’t be long before the anything-goes approach to political money produces scandals that make the latest chapter look like child’s play.

Photo by kenteegardin.