The IRS is charged by Congress to enforce the Federal Income Tax laws. U.S. citizens and taxpayers also expect the same. There is always a “Goldilock’s and the Three Bears” effect. From time to time taxpayers and politicians claim that the IRS is too soft, too hard or just right in its enforcement of the myriad Tax laws.
There is nearly always a political agenda behind the Federal Income Tax laws. That is, the laws are enacted by politicians to encourage or discourage certain behavior. This is not unique to any one political party. However, the enforcement by the IRS must be apolitical.
Inquiring Minds Want to Know!
- Did the IRS unlawfully target Republican leaning groups applying for tax exempt status, or did the IRS lawfully carry out its mission to enforce the Tax Laws?
- Did a few IRS agents in the Cincinnati Office of the IRS’s Tax Exempt Division “Go Rogue”, or were they merely misinterpreting the line between proper procedures and improper targeting.
- Is there a national crisis pertaining to the IRS and Section 501(c)(4) organizations, or are Republican claims and Democrat gesticulations mostly political circus?
Some Republicans have recently expressed outrage, claiming the IRS’s Tax Exempt Division unfairly targeted Republican leaning organizations that were applying for tax exempt status under IRC Section 501(c)(4). Some even allege that there was an evil conspiracy in which the President ordered the IRS to do so for his own political benefit.
The President also recently rushed to judgment by demanding the resignation of the acting Director of the IRS, Steven Miller. Between March of 2008 and November of 2012 (the period during which the alleged malfeasance occurred) Douglas Shulman was the Director of the IRS. George W. Bush had appointed Mr. Shulman. If it turns out that there was a great, and well known conspiracy within the IRS to hurt Republicans and help Democrats, and it occurred while Mr. Shulman was the Director of the IRS, then why was Mr. Miller sacked?
IRC Section 501(c)(4) Basics:
The Federal Income Tax laws allow certain qualified organizations to have tax exempt status. These wonderful tax benefits are not simply handed out to anyone who asks. Organizations that want tax exempt status must prepare and file numerous extensive documents, answers pages of questionnaire’s regarding their intended activities and jump through many hoops. It is quite common that the IRS requests that additional information be provided to substantiate that they qualify.
IRC Section 501(c)(4) allows qualifying civic associations and social welfare organizations to take in money without having to pay tax on it. Among the many requirements is that a Section 501(c)(4) must be primarily engaged in civic and social welfare activities and for educational purposes. This means that as long less than 50% of the purpose is political the organization could qualify as tax exempt under IRC Section 501(c)(4). This is based upon a facts and circumstances test.
Determining whether an activity is political or merely educational is difficult. It is an even greater challenge for the IRS to determine whether a non-educational political purpose comprises more than 50% of the organization’s intended purpose.
Public Service Announcements for the mere education of the public is within the mission of a qualifying Section 501(c)(4) organization while political advertisements are not. Remember the hundreds of advertisements during the 2012 election season? Did you take note as to which stated, at the end, that it was a “Paid Political Advertisement” or a “Public Service Announcement”? It was probably difficult to tell the difference.
There were a number of factors that affected (and still affects) the IRS’ ability to carry out the mission that Congress directs it to carry out, particularly as they relate to tax exempt organizations.
- Burden On IRS: There was a significant rise in the burden placed upon on the IRS. Between 2008 and 2012 thousands of changes were made to the Federal Income Tax laws, including many that affected millions of taxpayers (e.g. Making Work Pay, First Time Home Buyer Credit, etc.).
- IRS Budget Cuts: Congress has applied budget caps and reductions to funding the operations of the IRS.
- Citizens United: In 2010 the U.S. Supreme Court handed down its decision in Citizens United vs. Federal Election Commission allowing corporations, LLC’s, associations, labor unions, etc. the right to put an unlimited amount of money into the political process under the banner of free speech. Money put into a Section 501(c)(4) would not even have to be disclosed as a political contribution since no “legitimate” Section 501(c)(4) is allowed to have politics as its primary purpose.
This caused a huge surge in the number of organizations applying for tax exempt status under IRC Section 501(c)(4) as well as tens of millions of dollars of tax revenue at stake.
People often want the name of their organization to indicate their purpose. It is entirely plausible that some IRS employees working in the Cincinnati office would consider the name of an organization in trying to decipher the intended purpose of the organization. What is not permissible, if it occurred, is to target certain organizations for political purposes.
If one or more people at the IRS targeted republican leaning organizations for political purposes then those people acted inappropriately and should be sanctioned. If there was an evil conspiracy, those evildoers should also be sanctioned.
The Treasury Inspector General for Tax Administration is in the process of auditing the IRS on this affair and will soon issue its report. It is too early to conclude that anyone at the IRS intentionally did anything wrong, let alone the existence of a great illegal conspiracy. However, what we already know is that this has turned into a political circus.
Copyright ©, Keith B. Baker – 2013
This article is designed to be a public resource of general information. It does not constitute “legal advice” nor does it create a “client-attorney” relationship. While the information is intended to be accurate, this cannot be guaranteed. Tax laws are complex and constantly changing as a result of new laws, regulations, court interpretations and IRS pronouncements. Often, there are also various possible interpretations. Further, the applicable rules can be affected by the facts and circumstances of a particular situation. Because of this, some of the information may no longer be correct or may not apply to all situations. We are not responsible for any consequences or losses resulting from your reliance on such information. You are urged to consult an experienced lawyer concerning your particular factual situation and any specific legal questions you may have.
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