The Real Villain in the IRS Scandal

It’s easy to hate the IRS, since it’s the agency that separates taxpayers from their taxes. But the mushrooming scandal involving the targeted enforcement of tax laws against some conservative political groups may leave the IRS more vilified than it deserves.

On the surface, the controversy suggests the IRS perpetrated a disturbing abuse of government power. An internal investigation by the Treasury Department (which hasn’t been fully released yet) reportedly found the IRS sought out tax-exempt groups with words such as “tea party” or “patriot” in their names, aiming to investigate whether those groups violated certain laws limiting what nonprofits can do.

Details of the Treasury investigation have leaked, prompting howls on Capitol Hill and allegations that the Obama administration is playing dirty pool with political opponents. And now Attorney General Eric Holder says the Justice Department is formally investigating whether the IRS broke any laws. That transforms the matter from a political controversy into a potential criminal case in which IRS officials could face federal prosecution if they improperly divulged taxpayer information or lied under oath when questioned by members of Congress. It also gives a shred of political cover to the Obama administration, which can claim it's doing everything possible to determine if tax collectors broke the law.

The notion of unleashing the IRS on political enemies is so odious that even President Obama has slammed the agency, saying that if the allegations are true, they’re “outrageous.”

“They have to be held fully accountable,” Obama said of the IRS. “People have to have confidence that they're ... applying the laws in a nonpartisan way."

'PTAs and citizens' associations'

In a nutshell, here’s how the whole IRS scandal seems to have developed: The Citizens United Supreme Court case in 2010 allowed unlimited campaign contributions by corporations, labor unions and other organizations. That provided a powerful incentive for political operatives to tap huge new sources of potential funding. Clever lawyers, anticipating weak IRS enforcement, figured they could keep the donors secret -- thus attracting even more money -- by setting up the new political groups as tax-exempt 501(c)(4) organizations, which are named after that section of the Internal Revenue Code.

The IRS defines such groups as “civic leagues, social welfare organizations, and local associations of employees.” But in recent years, many new 501(c)(4)s have been overtly political “super PACs,” including Karl Rove’s Crossroads GPS advocacy group and Tea Party Patriots, which supports smaller government and many conservative causes. Priorities USA, President Obama’s super PAC during the 2012 election, was also a 501(c)(4) organization.

IRS enforcement officers, prodded by exposes in the press, knew something was fishy, and for reasons that still aren’t clear, began checking out conservative groups without applying the same type of scrutiny to liberal groups.

The IRS gradually improved its search criteria so as not to target one type of political group over another, and it has since admitted that it bungled the initial effort to better police 501(c)(4) outfits. But the basic problem is that the IRS is trying to enforce outdated tax laws never meant to govern political groups. “The law was created years ago for PTAs and citizens’ associations,” says Howard Gleckman of the Tax Policy Center. “It’s been turned into something it was never meant to be, and the IRS is being forced to do something for which it is very ill-equipped.”

There are other IRS designations intended for political groups, but 501(c)(4)s have one key advantage: They’re not required to publicly disclose their donors. That allows wealthy contributors, including corporate executives, to funnel large amounts of money to favored candidates without generating unwanted controversy. The flow of such money became a gusher after the 2010 Citizens United case.

The Supreme Court ruling seems to have spurred many groups to organize themselves as 501(c)(4)s rather than more traditional political groups that would have to disclose their donors. And Republican organizers got a head start on Democrats, which might explain why IRS agents zeroed in GOP groups when they started snooping in 2010. A New York Times expose published on September 20, 2010, for example, found that campaign spending by such groups in the 2010 midterm elections “heavily favored Republicans.”

What they knew, when they knew it

Tax experts have long complained about porous laws governing political groups and weak IRS enforcement of those laws. In a 2010 blog post, Gleckman called politically focused 501(c)(4) groups “money laundries” that “violate the spirit of the tax laws and may well violate the letter of the law as well.”

Around the same time, Ohio State tax professor Donald Tobin chastised the IRS for basically turning a blind eye to such groups. “In most cases, the (c)(4)s formed to engage in independent advocacy are not complying with the law,” he wrote. “The fact that enforcement is lacking does not make the action legal.”

As arcane as the law may sound, ordinary people can see the problem for themselves simply by browsing a bit of the fine print on some 501(c)(4) Web sites. Right below its disclosure of its nonprofits status, for instance, Crossroads GPS explains that its mission is to “engage in issue advocacy and grassroots lobbying.”

The disclosure also points out that there are no limits on contributions and that the group does not disclose who its donors are. MoveOn.org, which generally supports liberal causes, is a bit more circumspect, claiming on its Web site that it promotes “nonpartisan civic engagement projects.”

While the IRS has acknowledged mistakes made back in 2010, what it hasn’t explained is why it failed to notify Congress of the ham-handed early investigations, even when members of Congress were asking about it.

So while the core problem is a flimsy set of campaign-finance laws that invite exploitation, the brouhaha in Washington is now centered on which top IRS officials knew what, when, and why they weren’t more forthcoming. As is often the case in Washington, the sideshow is now the main show.