Evelyn Brody (Chicago-Kent) & Marcus Owens (Loeb & Loeb, Washington, D.C.), Exile to Main Street: The I.R.S.’s Diminished Role in Overseeing Tax-Exempt Organizations, 91 Chi.-Kent. L. Rev. 859 (2016):
The Chicago-Kent conference on charity oversight took place on Day 924 of the TaxProf blog's “IRS Scandal”—Day 1 being the Friday two-and-a-half years ago that the Internal Revenue Service's Lois Lerner apologized for inappropriate use of Tea Party and other names in selecting applicants for Internal Revenue Code § 501(c)(4) status for further review. This article examines the IRS's role in administering the regime for federally tax-exempt organizations. Our focus, however, should not obscure the very real corrosive impact, whether deserved or pretextual, that the IRS's exempt-organization imbroglio has had on the health of the entire agency, and thus to the revenue needs of the federal government.
The IRS—an agency which in the best of times suffers from a siege—is now starved for resources both financial and political. The IRS has predictably and understandably responded to the “scandal” by retreating into a shell of bureaucratic reshuffling, management mumbo-jumbo, and paper moving. There has never been a better time to apply for tax-exempt status or push the boundaries of permissible activities.
Will the IRS's decision to exile the Exempt Organization Division from Washington, D.C. to Cincinnati save the agency as well as the exempt-organization function by removing its operations from the glare of Washington's perpetual partisan politics? Or will this attempt to jettison the albatross from the sinking ship instead stifle the effectiveness of the IRS's role in charity and nonprofit oversight, suggesting—as co-author Marcus Owens has written about at length—the need for a new and independent agency to carry out that role?
This article proceeds in three parts. Part I describes the framework for federally tax-exempt organizations engaged in advocacy and political activity, and recites the sorry saga of the recent unpleasantness. Part II summarizes the IRS's managerial reaction. Part III focuses on the IRS's new procedure for granting speedy recognition of tax-exemption to new small charities—perhaps setting the agency up for the next debacle. Our conclusion sets out the not-so-great choices, mindful that the goal is to avoid making the wrong mistake. ...
On July 21, 2015, President Barack Obama commented to Jon Stewart, host of The Daily Show on Comedy Central: “When there was that problem with the IRS, everyone jumped . . ., saying, ‘Look, you've got this back office, and they're going after the Tea Party.’ Well, it turned out, no, Congress had passed a crummy law that didn't give people guidance in terms of what it was they were trying to do. They did it poorly and stupidly.” The president added: “The truth of the matter is that there was not some big conspiracy there. They [(the IRS)] were trying to sort out these conflicting demands. You don't want all this money pouring through not-for-profits, but you also want to make sure everybody is being treated fairly.” Alluding to the bigger problem, he emphasized: “Now, the real scandal around the IRS right now is that it has been so poorly funded that they cannot go after these folks who are deliberately avoiding tax payments . . . .”
Jon Stewart, of course, did not point out to the president that ambiguous concepts—such as “unrelated business activity” and “educational”—are the hallmark of the federal tax rules applicable to tax—exempt organizations, and have defied specific definition since their enactment.
The IRS has taken a series of major organizational and procedural steps, clearly moving as quickly as it can to address the May 2013 TIGTA Report's recommendations and to align the Exempt Organizations Division (and the Employee Plans Division) with the organizational structures of the rest of the IRS National Office. These changes, though, are being developed by an entirely new cadre of senior management, virtually all of whom lack significant experience in the function or with the tasks required to administer the relevant substantive sections of the Internal Revenue Code.
In addition, the agency is proceeding piecemeal, focusing initially on the exemption-application processing function, to be followed at some point by a review of the examination function. In view of the huge amounts of funds flowing into the nonprofit sector, particularly to social welfare organizations exempt under section 501(c)(4), the IRS's sense of urgency is understandable. However, this emphasis on granting recognition of exemptions now and (possibly) asking questions later does not seem sustainable. The nonprfit sector and practitioners should be alert to developments to target noncompliance, as they are likely to occur quickly, and without an opportunity for public comment and discussion. In addition, the decoupling of the enforcement function from the interpretative function, now located in a different organization unit (the Office of Chief Counsel), suggests that there may be a greater risk for inconsistent or incorrect positions being taken in IRS audits.
As for small charities, regardless of whether Congress or the IRS adopts the five-year provisional-exemption proposal described in Part III, the agency should expand information collection. Importantly, a charity that grows sufficiently—which could happen even before five years pass—will have to file a Form 990-EZ or even a Form 990. Thus, the IRS should require a successful Form 1023-EZ applicant, when it first files one of those information returns, to submit the organizational documents and certain other information (notably, about activities and related party transactions and relationships) that would have been required on a full Form 1023 application. In addition, the IRS should continue sampling to ensure the eligibility of 1023-EZ applicants.
The bigger question—should the IRS be the locus of federal regulation of charities?—might more usefully be narrowed to “should the IRS be the locus of regulation for political activity by tax-exempt organizations?” If significant abuse arises, particularly if due even in part to the reduction in scrutiny of applications for tax-exempt status and in audit enforcement, one of us has proposed that it might be appropriate to move the entire regulatory function over tax-exempt organizations to a different governmental or quasi-governmental structure.
- The IRS Scandal, Day 1333: Republicans Weasel Out Of Impeaching IRS Commissioner John Koskinen (Jan. 1, 2017)
- The IRS Scandal, Day 1332: The House GOP's Ridiculous Impeachment Crusade (Dec. 31, 2016)
- The IRS Scandal, Day 1331: Rep. Jim Jordan Offers Resolution To Impeach IRS Commissioner John Koskinen (Dec. 30, 2016)
- The IRS Scandal, Day 1330: House Republicans And Democrats Forge Rare Bipartisan Agreement To Block Impeachment Of IRS Commissioner (Dec. 29, 2016)
- The IRS Scandal, Day 1329: Did The IRS's Targeting Of Conservative Groups Lead It To Grant Tax-Exempt Status To 'Hate Groups'? (Dec. 28, 2016)
- The IRS Scandal, Day 1328: House's Referral Back To Judiciary Committee Is Likely To Kill Koskinen Impeachment (Dec. 27, 2016)
- The IRS Scandal, Day 1327: Delay In Koskinen Impeachment Is Discordant Note In Kumbaya Between Trump And GOP Congress (Dec. 26, 2016)
- The IRS Scandal, Day 1326: Only 72 House Republicans Voted Against Delay In Impeachment Of IRS Commissioner (Dec. 25, 2016)
- The IRS Scandal, Day 1325: House Impeachment Leader Grills Witness Over Giving Koskinen 'Excellence In Public Service' Award (Dec. 24, 2016)
- The IRS Scandal, Day 1324: Ways & Means Committee Seeks Information From IRS About Continued Targeting Of Organizations Based On Political Beliefs — This Time, Pro-Israel Groups (Dec. 23, 2016)
- The IRS Scandal, Day 1323: Tea Party Group Decries IRS's 'Latest Bob And Weave To Avoid Accountability' (Dec. 22, 2016)
- The IRS Scandal, Day 1322: Government Denies That It Continues To Harass Tea Party Group (Dec. 21, 2016)
- The IRS Scandal, Day 1321: Maureen Dowd, Donald Trump, And The IRS Scandal (Dec. 20, 2016)
- The IRS Scandal, Day 1320: How The GOP Establishment Teamed With Nancy Pelosi To Table Impeachment Vote On IRS Commissioner (Dec. 19, 2016)
- The IRS Scandal, Day 1319: How Will The Koskinen Saga End? (Dec. 18, 2016)
- The IRS Scandal, Day 1318: More On Koskinen And Trump (Dec. 17, 2016)
- The IRS Scandal, Day 1317: Koskinen Says He Is Willing To Serve Another Term As IRS Commissioner If Trump Wants To Reappoint Him (Dec. 16, 2016)
- The IRS Scandal, Day 1316: IRS Commissioner Koskinen Says Resignation Did Not Come Up In Meeting With Trump Transition Team (Dec. 15, 2016)
- The IRS Scandal, Day 1315: Bureaucratic Bumbling Or Targeting Of Conservatives? (Dec. 14, 2016)
- The IRS Scandal, Day 1314: How The Trump Administration Can Stop IRS Abuse of Political Groups (Dec. 13, 2016)
- The IRS Scandal, Day 1313: The Koskinen-Trump Connection (Dec. 12, 2016)
- The IRS Scandal, Day 1312: Impeachment Averted, But Will Koskinen Resign Or Be Fired By President Trump? (Dec. 11, 2016)
- The IRS Scandal, Day 1311: The IRS 'Scandal' Was Part Of GOP's Strategy To Bog Down Obama Administration (Dec. 10, 2016)
- The IRS Scandal, Day 1310: Rep. Jim Jordan Is 'Frustrated' By House Passing On IRS Chief Koskinen's Impeachment (Dec. 9, 2016)
- The IRS Scandal, Day 1309: How Trump Got Yanked Into GOP's IRS Impeachment Fight (Dec. 8, 2016)
- The IRS Scandal, Day 1308: House Votes To Send Koskinen Impeachment Back To Judiciary Committee (Dec. 7, 2016)
- The IRS Scandal, Day 1307: Group Seeks Summary Judgment On Claim That Rev. Rul. 2004-6 Is So Vague That It Allows The IRS To Target Conservative Groups (Dec. 6, 2016)
- The IRS Scandal, Day 1306: Government Rejects Claim That Rev. Rul. 2004-6 Allows The IRS To Target Conservative Groups (Dec. 5, 2016)
- The IRS Scandal, Day 1305: Group Seeks Summary Judgment On Claim That Rev. Rul. 2004-6 Is So Vague That It Allows The IRS To Target Conservative Groups (Dec. 4, 2016)
- The IRS Scandal, Day 1304: 'The IRS Has Never Stopped Targeting Conservatives' (Dec. 3, 2016)
- The IRS Scandal, Day 1303: Group Sues IRS For Failure To Produce Communications With Joint Committee on Taxation (Dec. 2, 2016)
- The IRS Scandal, Day 1302: The 'Corrupt' IRS Is Still Persecuting The Tea Party (Dec. 1, 2016)
- The IRS Scandal, Day 1301: If Koskinen Is Impeached Or Fired, Trump Could Appoint New IRS Commissioner To Go Easy On His Taxes (Nov. 30, 2016)
- The IRS Scandal, Days 1201-1300 (Aug. 22, 2016 - Nov. 29, 2016)
- The IRS Scandal, Days 1101-1200 (May 14, 2016 - Aug. 21, 2016)
- The IRS Scandal, Days 1001-1100 (Feb. 4, 2016 - May 13, 2016)
- The IRS Scandal, Days 901-1000 (Oct. 27, 2015 - Feb. 3, 2016)
- The IRS Scandal, Days 801-900 (July 19, 2015 - Oct. 26, 2015)
- The IRS Scandal, Days 701-800 (April 10, 2015 - July 18, 2015)
- The IRS Scandal, Days 601-700 (Dec. 31, 2014 - April 9, 2015)
- The IRS Scandal, Days 501-600 (Sept. 22, 2014-Dec. 30, 2014)
- The IRS Scandal, Days 401-500 (June 14, 2014 - Sept. 21,2014)
- The IRS Scandal, Days 301-400 (Mar. 6, 2014 - June 13, 2014)
- The IRS Scandal, Days 201-300 (Nov. 26, 2013 - Mar. 5, 2014)
- The IRS Scandal, Days 101-200 (Aug. 18, 2013 - Nov. 25, 2013)
- The IRS Scandal, Days 1-100 (May 10, 2013 - Aug. 17, 2013)