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Tuesday, May 21, 2013

The IRS Scandal, Day 12

Prior TaxProf Blog coverage:

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Let’s try and bring some reality into this discussion of what is a serious, but not major scandal.

First of all with respect to being tax exempt under Sec. 501(c)(4), IRS approval or review is not needed. A group can simply ‘self declare’ that they are tax exempt, and as long as they follow the rules and the IRS does not successfully challenge them, they remain tax exempt.

So why do groups file an application with the IRS? Simple, they want the assurance that goes with the IRS granting tax exempt status. But once an application is filed the IRS has an obligation to investigate to see if tax exempt status is allowed. This is what happened in the Cincinnati affair.

As for the issue of d donors, the IRS has, or at least believes it has, the authority to ask for donor information as part of its investigation. What it does not have the authority to do is to release donor information on a regular basis as part of the tax return filing, form 990. Notice that these two areas are separate. Asking for donor information as part of the process of approving a Form 1024 application appears to be legitimate and no organization that has voluntarily filed a Form 1024 should be surprised if the IRS asks for donor information and other information.

As for disclosure of information in the process of approving tax exempt status, that policy is proscribed by statute, not IRS discretionary policy. And all of this has been in place and documented for decades. All of this is known by anyone who practices in this field. Nothing is new here other than the practice of the IRS (wrongly so) of concentrating on conservative groups.

So is it ok for the IRS to request both donor and non-donor information when investigating whether or not to grant tax exempt status to an organization that has voluntarily requested it, that answer is an emphatic YES. That is the purpose of filing the form and subjecting the organization to IRS scrutiny, it is to make the IRS comfortable so that tax exempt status is not in question. It would not be acceptable or legal for the IRS to require or release donor information on an ongoing basis as part of an annual return. And it would not be acceptable, legal or even logical that the IRS should approve tax exempt status without an investigation. Otherwise what's the point?

So what we have here are conservative groups that applied for tax exempt status under Sec. 501(c)(4) and asked to be investigated by the IRS, even though they were not required to do so, and then are outraged and furious that they were investigated by the IRS. Huh?

The great wrong here was not the process of investigation that the IRS used. That seems to be perfectly legal and acceptable and standard practice. The wrong was singling out suspected conservative groups for special attention. Even worse than wrong, it was grossly stupid. And the result, conservative groups will be even less investigated for violating tax exempt status than they were before.

Finally, it may be time to scrap the non-election related requirement. As long as a group is not a profit making firm masquerading as a tax exempt entity then it should be a tax exempt entity.

Posted by: David R. | May 21, 2013 5:45:10 PM

David R., you can't say that this isn't a major scandal because, as Obama would say, "the investigation is in progress." Paul's updates will get as long as other coverage under another failed presidency >>>>> Nightline .

Posted by: Woody | May 21, 2013 8:39:27 PM

Woody is right, and if it turns out that the Administration was directing the IRS to target its enemies than I will be the first to say they should be prosecuted to the full extent of the law, and that if the President was directing this he should be tossed out of office.

But the point here is that for the IRS this is no political or other kind of major scandal that requires a daily blow by blow analysis. The IRS was overbearing, it acted stupidly, it was insenstitive to taxpayers, it did not understand its mission or directive, it was poorly managed with little oversight, it behaved inappropriately etc, etc. etc.

In short, it was being the IRS. And in the end no one's rights were trampled, no one had to pay taxes they did not owe, no one was denied the opportunity to organize a 501(c)(4) group and campaign actively, no donor list was disclosed in violation of the law and so far nothing really happened to generate the responses that have taken place. At this point the outrage is phony politics.

Posted by: David R. | May 22, 2013 6:17:13 AM

David R.- You should read some of the more detailed coverage to get a fair and balanced opinion. Do you know the stated criteria to determine who was investigated and who wasn't (hint: "Tea Party" requires follow-up, "Progressive" doesn't). Do you know the disclosures they required for recognition from targeted groups, and no others? Do you think the Democracy 21 was denied recognition until they provided IRS agents access to facebook accounts of the founder and her family, disclosure of the contents of a founder's prayers, disclosure of all "potential" or "future" participants and members? Was any non-conservative group required to disclose such things.

Those details don't appear to interest sources like the NYT, Slate, etc., who cater to readers with little to no sympathy for these victims and have been told that Tea Party activist are dangerous, illegal, violent, racist, etc. and deserve this treatment. Those sources focus coverage on the GOP-Democrat balance of power, D.C. politics, etc. Find a source that cares about civil liberties and not politics, that considers the Tea Party, MoveOn.Org, the AFL-CIO, 21 Democracy, etc. as law-abiding Americans congregating to exercise sacred political speech. Those sources have factual details.

Posted by: Yo Gabba Gabba | May 22, 2013 12:56:43 PM

Only first amendment rights were trampled and a cover-up maintained before the election. And, don't you think that leaking Romney's tax returns to Harry Reid and leaking Romney 's private donations to s liberal media source during the campaign should be included in the investigation? I think you're looking at criminal matters.

Posted by: Woody | May 22, 2013 7:25:11 PM