Ellen Aprill (Loyola-L.A.), The TIGTA Report on the IRS Scandal: Questions about the IRS and About the Report:
We now have the report from the Treasury Inspector General for Tax Administration, Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review (the Report). The Report details certain problems that have already been made public, such as the Exempt Organization’s Determination Unit relying on names such as “Tea Party” or “Patriot” to identify potential cases of excessive campaign intervention or asking inappropriate questions of applicants, such as names of donors and the intention of officers, directors, etc. to run for political office. There is also new and disquieting information. We discover, for example, that it took the Director, Rulings and Agreements, three months to learn that the reviewers of these applications had in January 2010 changed the criteria being applied. Moreover, processing of cases stopped in October 2010, but the Determination Unit Program thought the cases were still being processed, and draft written guidance was not received from the Technical Unit until November 2011, 13 months after the Determinations Unit stopped processing cases. At the same time, the Report documents that the Director, Exempt Organizations acted promptly when, however belatedly, problems did come to her attention.
Nonetheless, the quality of some aspects of the Report troubles me. Figure l on page 2 of the Report purports to display “Characteristics of
Certain Common Types of Tax-Exempt Organizations.” According to the
Figure, section 501(c)(3) organization do not have to publicly disclose
the identity of their donors. That is simply wrong.
One important category of section 501(c)(3) organization, private foundations -- which are generally grant-making organizations supported by an individual, couple, family or corporation (think Ford Foundation or Gates Foundation) -- are required to disclose publicly the identity of their donors. The Report several times faults the IRS for not properly applying the applicable laws and Treasury Regulations. According to page 14 of the Report, “Treasury Regulations state that I.R.C. § 501(c)(4) organization should have social welfare as their ‘primary activity.’” The Treasury Regulations, however, do not use this phrase. They provide, “An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements.” While exempt organization specialists often use the phrase “primary activity” as a shorthand for the regulatory requirements, nowhere do these regulations speak of “primary activity.” That is, the Report, which faults the IRS for its understanding of the applicable rules, fails to quote the key Treasury Regulations accurately.
At other points, the Report seems to me to forget that it focuses on only one particular aspect of the IRS Exempt Organizations Division. For example, the Report recommends that the IRS develop guidance for specialists on how to process requests for recognition of exempt status involving potentially significant political campaign intervention and post this guidance on the Internet. The IRS disagreed with this recommendation. The Report insists that posting such guidance on the Internet could “address a concern raised in the IRS’s response that many applications appear to contain incomplete and inconsistent information.” The IRS, however, must process applications for all categories of tax-exempt organizations. It is not just those applications with potentially significant campaign intervention that often contain incomplete and inconsistent information. According to the Exempt Organizations FY 2012 Annual Report and FY 2013 Work Plan, its Determinations Unit receives approximately 60,000 new applications for exemption annually. If the IRS is to post guidance on the Internet regarding processing of requests for recognition of exemption, it needs to do so more broadly than just for section 501(c)(4) organizations with political campaign involvement. The Report fails to take account of such considerations in rejecting the IRS response.
The Report has exposed a number of needed procedural and substantive changes in connection with applications for section 501(c)(4) status. I heartily endorse all the recommendations on which TIGTA and the IRS agree. We should, however, consider the need for procedural reform and greater substantive guidance for exempt organizations generally, and not just exempt under section 501(c)(4) organizations.