Friday, April 19, 2019

ProPublica: "How The IRS Gave Up Fighting Political Dark Money Groups"

ProPublica, the nonprofit investigative journalism organization, has published a series of articles under the title "Gutting the IRS".  The latest installment is entitled "How the IRS Gave up Fighting Political Dark Money Groups." The article, published yesterday, relates the history of the Services' efforts to examine 501(c)(4) groups that seemed more intent on political advocacy than "social welfare," the whole "scandal" involving the Service's treatment of 1024-A's from conservative leaning social welfare organizations, little known but successful legislative efforts to completely defund examinations of (c)(4) organizations, and finally the exodus of examiners and other employees since Lois Lerner was figuratively burned at the public stake because she was forthright in describing TE/GE's attempts to make some sense out of the undefined phrase, "social welfare."  Here are some of the interesting points from the article. I highlighted what I thought was the most astonishing part:

  • In the past decade, people, companies and unions have dispensed more than $1 billion in dark money, according to the Center for Responsive Politics. 
  • Such spending is legal because of a massive loophole. Section 501(c)(4) of the U.S. tax code allows organizations to make independent expenditures on politics while concealing their donors’ names — as long as politics isn’t the organization’s “primary activity.” The Internal Revenue Service has the daunting task of trying to determine when nonprofits in that category, known colloquially as C4s, violate that vague standard.
  • Since 2015, thousands of complaints have streamed in — from citizens, public interest groups, IRS agents, government officials and more — that C4s are abusing the rules. But the agency has not stripped a single organization of its tax-exempt status for breaking spending rules during that period.
  • The IRS’ abdication of oversight stems from a trio of causes. It started with a surge in the number of politically oriented C4s. That was exacerbated by the IRS’ almost comically cumbersome process for examining C4s accused of breaching political limits; the process requires a half-dozen layers of approvals and referrals merely to start an investigation. That is abetted by years of IRS staff attrition and loss of expertise that was then compounded by steady budget reductions by Congress starting in 2010. The division that oversees nonprofits, known as the “exempt organization” section, shrank from 942 staffers in 2010 to 585 in 2018, according to the IRS. 
  • On top of that, the 2013 scandal in which the IRS was accused of targeting conservative nonprofits left the division seared by the vilification of the conservative politicians, media and the public, and by the resignation of Lois Lerner, who headed the division. Some IRS auditors say they were paralyzed. “I was scared of being pilloried, dragged to the Hill to testify, getting caught up in lawsuits, having to sink thousands of dollars in attorneys bills that I couldn’t afford, and having threats made against me or my family,” said one employee who worked in Lerner’s division at the time. “I locked down my Facebook page. I deleted all personal Twitter posts. I stopped telling people where I worked. I tried to become invisible.”
  • The Citizens United decision was followed by a surge in the formation of politically focused organizations seeking IRS approval as C4s. In 2012, at least $250 million passed through such groups and into efforts to elect candidates, an 80-fold increase from eight years prior.
  • Hearings on the [the IRS examination of (c)(4) applications] continued intermittently for four years. The IRS ultimately spent 98,000 hours in staff time responding to the congressional investigations, according to testimony by the agency’s former commissioner, John Koskinen.
  • The IRS responded by advocating a restrictive approach: C4s should be barred from any campaign-related activity. Those guidelines, released in late 2013, prompted 150,000 comments, the most public feedback in IRS history. Several Republican members of Congress circulated bills to block such a change.
  • Ultimately, Congress disagreed. In December 2015, 17 lines were inserted into an 888-page appropriations bill: “None of the funds made available in this or any other Act may be used ... to issue, revise, or finalize any regulation, revenue ruling, or other guidance … to determine whether an organization is operated exclusively for the promotion of social welfare.”  Since 2015, the lines have been carried over in each new appropriations bill. They remain in effect today.

Did you catch that last bullet point?  The agency legally responsible for administering 501(c)(4), among other duties, is not allowed to spend any money . . . administering 501(c)(4)!  Brilliant.

Darryll K. Jones

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I have written about 30 articles for The Nonprofit Quarterly on the IRS scandal , and have debated various points related to the scandal with David Cay Johnston on TaxProfBlog.

About a third of the IRS-named "Tea Party cases" were *not* 501(c)(4) applications, according to the Treasury inspector general (TIGTA) . Many were 501(c)(3) applications and some were 501(c)(6) groups, if memory serves me. However, the perception persists that the IRS scandal was a c4 issue.

Given that the same IRS Determinations Unit worked on multiple types of exemption applications, the oft-referred to surge in c4 applications didn't affect the Determinations Unit workload significantly (again, according to figures reported by TIGTA).

The overwhelmingly negative response (both in number and percentage of pro- vs. anti) to the Thanksgiving 2013 proposed regulations came from across the political spectrum. The IRS pulled the proposed regulations and said they would be reissued at a later date using the comments received. This never happened, and the attempt by the Bright Lines Project to address the need for regulations served to illustrate the difficulties in repairing the gaps in nonprofit political activity regulation without: 1) creating new ambiguities in regulation; and 2) ensnaring existing exempt groups performing heretofore presumed legal activities.

Added to the regulatory difficulties and Congressional actions (both attempted and successful) is the prospect of almost certain judicial challenge to whatever the IRS may develop. A U.S. Supreme Court that decided Citizens United and McCutcheon using the First Amendment as a key element of reasoning is unlikely to accept more governmental restrictions on political speech.

Posted by: Michael L. Wyland | Apr 19, 2019 10:38:06 AM

It is nonetheless the case that we have a problem with the disconnect between the requirement at (c)(4) that the org be operated "exclusively" for the promotion of social welfare and the more relaxed expression of this requirement in the reg that it be "primarily engaged." The failed regulatory project almost had the appearance of not really trying, and it was withdrawn in the face of an unprecedented public comment blowback that was obviously coordinated by a handful of Tea Party players. Folks can disagree about whether the Bright Lines criteria would be workable, but the reality is they have not been tried. The fact that new rules might push out some existing orgs does not answer the question whether those rules do or do not implement "desirable" policy objectives.

Posted by: Russ Willis | Apr 21, 2019 12:45:24 PM

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