FAIR USE NOTICE

FAIR USE NOTICE

A BEAR MARKET ECONOMICS BLOG

OCCUPY EVERYTHING

This site may contain copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in an effort to advance understanding of environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. we believe this constitutes a ‘fair use’ of any such copyrighted material as provided for in section 107 of the US Copyright Law.

In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml

If you wish to use copyrighted material from this site for purposes of your own that go beyond ‘fair use’, you must obtain permission from the copyright owner.

FAIR USE NOTICE FAIR USE NOTICE: This page may contain copyrighted material the use of which has not been specifically authorized by the copyright owner. This website distributes this material without profit to those who have expressed a prior interest in receiving the included information for scientific, research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107.

Read more at: http://www.etupdates.com/fair-use-notice/#.UpzWQRL3l5M | ET. Updates
FAIR USE NOTICE FAIR USE NOTICE: This page may contain copyrighted material the use of which has not been specifically authorized by the copyright owner. This website distributes this material without profit to those who have expressed a prior interest in receiving the included information for scientific, research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107.

Read more at: http://www.etupdates.com/fair-use-notice/#.UpzWQRL3l5M | ET. Updates

All Blogs licensed under Creative Commons Attribution 3.0

Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 Unported License.

Tuesday, May 14, 2013

Congress And The President Want You To Get Mad At IRS Over Tax Exempt Targets (Just Not At Them)






Taxes

5/13/2013 @ 10:26PM |934 views

Congress And The President Want You To Get Mad At IRS Over Tax Exempt Targets (Just Not At Them)

Kelly Phillips Erb


Kelly Phillips Erb, Contributor
I cover tax: paying tax is painful but reading about it shouldn't be. 






WASHINGTON, DC - JANUARY 26:  Internal Revenue...
WASHINGTON, DC - JANUARY 26: Internal Revenue Service Commissioner Douglas Shulman testifies before the Senate Homeland Security and Governmental Affairs Committee January 26, 2012 in Washington, DC. (Image credit: Getty Images via @daylife)



“IRS Issues Apology for Targeting Tea Party Group”

I’ll admit that headline caught my attention – but probably not for the reasons you think. The targeting bit didn’t give me pause at all – but the apology did. The Internal Revenue Service rarely apologizes. On the other hand, the IRS has always given a second glance to organizations with political ties. Always.





In case you missed the story, here’s what happened: the IRS, in a weak moment, admitted that it had been targeting certain applications for tax-exempt status based on key words and politically charged language. This wasn’t a planned statement but rather popped up when Lois Lerner, the head of the tax exempt organization section of IRS, made the confession at an American Bar Association event last week.

While initial reports said that the IRS targeted groups with “tea party” or “patriot” in their names, reports now indicate that the agency used a much broader brush, applying extra scrutiny to applicants critical of the government or engaging in other kinds of speech that is political in nature. And that part, quite frankly, isn’t a surprise. Let me tell you how the IRS feels about political speech: they are not fans. The IRS is very clear that “[s]ection 501(c)(3) organizations are restricted in how much political and legislative (lobbying) activities they may conduct.”

There are 29 different nonprofit types of organizations under section 501(c) of the Tax Code for tax exempt purposes but the ones that get the most attention are 501(c)(3) and 501(c)(4). The applications that appear to have been targeted most for additional scrutiny in this case are section 501(c)(4) organizations. Those are defined under the Code as:

Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.
While the rules are similar, there is, however, an important distinction here as between 501(c)(3) and 501(c)(4) organizations: the latter may participate in political campaigns and elections, so long as the organization’s primary activity is the promotion of social welfare. Donations are not generally deductible and any income devoted to political activities is not tax exempt.

And while the criteria for the 501(c)(4) does allow for some (with an emphasis on some) politicking, the rules are largely the same as those for 501(c)(3) organizations; in fact, the IRS manual actually states that “there is considerable overlap between IRC 501(c)(4) and IRC 501(c)(3).” The politicking must not outweigh other goals of the organization and the primary activity must still be the promotion of social welfare. The IRS Regs at 1.501(c)(4)–1(a)(2)(ii) make it clear that “the promotion of social welfare does not include participation in political campaigns on behalf of or in opposition to any political candidate.” Additionally, the rules for determining what constitutes intervention in a political campaign for an IRC 501(c)(4) organization are the same as those governing IRC 501(c)(3) organizations.

So what’s the appeal? The key draw is that unlike 501(c)(3) organizations, 501(c)(4) organizations are not required to disclose the the names of their donors publicly; they are also not required to pay attention to those pesky contribution limits for campaign finance purposes. That combination has made the organizations extremely attractive to so-called Super PACs who have been accused of using the organizations to circumvent existing campaign laws.

That makes these organizations extremely controversial. The IRS has shown increasing concern about the potential for abuse. This accelerated a few years ago after the darling of the time, section 527 groups, began to get a bad rap based largely on the Swift Boat saga during the Bush-Kerry 2004 election and Hillary Clinton supporters’ American Leadership Project in 2008. The bad taste those efforts left in the mouths of taxpayers forced political strategists to switch gears – and they focused their sights on 501(c)(4) organizations.

The IRS scrambled to react to this influx of new organizations. And they clearly reacted badly. Very badly. But while it’s easy to make assumptions about who did what and when and why, it’s important to slow down and figure out the facts.
The question that will likely get the most focus is whether this behavior was the result of a directive. So far, there’s no evidence to support such a charge.

Realistically, no matter who is President, there is very little direct oversight from the Oval Office over tax exempt organizations: it’s just not a priority for any administration. The majority of the targeted applications were submitted between 2010 and 2012 while President Obama was in office. That is not disputed. Who was at the head of the IRS during that term? Doug Shulman, an appointee of former President Bush. Do I think either of President Obama or former President Bush ordered Shulman to focus on tax exempts? Of course I don’t. In fact, I think the focus on the Oval Office is misplaced in terms of directives (reactions are another issue altogether).

There has also been a lot of discussion about whether this behavior was a violation of the right to free speech under the First Amendment. As Americans, we completely have the right to free speech. Agreed. But let’s take a peek at the text:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.
Sure, you have the right to say what you want. Shout it from the mountaintops. Just don’t use the Tax Code to subsidize and/or justify it. While it is a free country and we do have the freedom of speech, the Tax Code has had, since 1954, prohibited tax-exempt organizations “from directly or indirectly participating in, or intervening in, any political campaign on behalf of [or opposing] any candidate for elective public office.” And that includes churches. And every other tax exempt organization. Crossing that line can result in the loss of tax-exempt status. It doesn’t matter if you’re conservative, center or liberal.

In fact, the 2008 election – a few years before this increased scrutiny – saw the IRS investigating a number of incidents of tax exempt organizations (largely churches) using their platforms to support or oppose candidates and issues.
First Baptist Church of Buena Park Pastor Wiley Drake was investigated for formally endorsing Mike Huckabee for President on church letterhead – and later praying that those who objected to his endorsement would die. During that same race, Bill Keller of liveprayer.com was called out for advising his followers that a vote for Mitt Romney was a vote for Satan because, writing, “Romney winning the White House will lead millions of people into the Mormon cult…” And, who can forget Pastor James David Manning of Atlah World Ministries, made headlines for repeatedly calling then Senator Barack Obama a pimp before later referring to him as an “emissary of the devil”?
As I wrote that same year:

[W]hether you’re Pastor Manning speaking from the pulpit, Joe Paterno, Coach of Penn State University’s football team on the field or Gail J. McGovern, President and CEO of the American Red Cross speaking from the front lines of natural disasters, your speeches, articles and appearances will be subject to scrutiny (to be clear, the last two folks are merely examples of high profile leaders of tax exempt organizations and are not examples of folks who have said anything inappropriate with respect to the elections). Tax exempt organizations are aware of the rules that govern them – and most have guidelines in place to remind employees and representatives of the dangers of ignoring the rules against politicking. The ramifications, if such rules are broken, can be severe, including loss of tax-exempt status.
Anyone who was aware of what was going on in the tax exempt world after 2008 knew that these 501(c)(4) organizations (and, in fact, a number of 501(c)(3) organizations) were trying their darnedest to get around those rules.

I suggested that the move to expand the role of politics in tax exempt organizations would increase, thanks to the internet, with such organizations becoming “even bolder in their approach.” And that’s exactly what happened.

That’s exactly why I’m not giving IRS a pass here. It could not have come as a surprise to IRS that applications for tax exempt would heat up after the 2004 and 2008 elections. In fact, over the time period that’s now being questioned, those applications doubled. There should have been a strategy in place – and it’s clear now that didn’t happen.

Similarly, to pick and choose which organizations deserve a second glance based on key words is, to quote Lerner, “absolutely inappropriate.” But I don’t even think that was politically motivated per se. I think it’s lazy. And the worst kind of lazy. It’s like pulling over all of the red sports cars because you assume red cars tend to speed more rather than actually get the radar gun out. According to what we know so far, about 75 groups were selected for extra inquiry due to those key words; that constituted about 25% of all of the groups flagged for additional examination. None of those groups were ultimately denied status. That outcome suggests that while there was a link between politics and scrutiny, politics didn’t sway the final determination.

To be clear, I’m not saying that these arguments don’t have anything to do with politics. I think politics have played a huge part in all of this from start to finish. But I think you need to dig a little deeper and not make it a surface “us versus them” issue. That’s the easy way out.

If you look back to 2011, the IRS raised eyebrows when it announced that it would no longer pursue an investigation into certain donors to nonprofit groups for the purpose of political ads. Specifically, the IRS was investigating whether donors to certain tax-exempt organizations organized under – you guessed it – section 501(c)(4) of the Tax Code would be liable for gift tax on those donations. The IRS had taken the position for about thirty years that those transfers were subject to the federal gift tax but they had not made much noise about enforcing it. That’s not surprising since the IRS often has rules on the books that they don’t make an issue until something happens. So something must have happened in 2011 to make transfers to 501(c)(4) organizations an enforcement target. My non-cynical guess at the time was “that the sheer numbers – and dollars – of transfers have increased and that’s attracting attention.”

The more cynical answer circulating at the time was that it was politically motivated. Rep. Dave Camp (R-MI), Chairman of the House Ways and Means Committee, vowed to look into what happened, claiming that he was “troubled that the IRS did not explain why the investigations were started in the first place” and added that he will “continue my investigation until the complete story behind the actions of the IRS has been told.”

Sound familiar?

This week, Sen. Carl Levin (D-MI) seemed to take a page from that playbook by ordering “that the subcommittee should investigate that additional issue as well.” He also vowed to “continue to work… to ensure the integrity of our political process and of enforcement efforts.”

Right. It’s easy for Congress to sit back and complain about IRS’ bad behavior. And again, yes, I think they erred. And they lied about it which is even worse. And those are terrible, terrible acts. But Congress has happily given them plenty of rope.

The IRS has practically begged for clarity on the issue of 501(c)(4) organizations. With respect to the gift tax, for example, they publicly stated that “it is possible that Congress may choose to clearly articulate through legislation the applicability of the gift tax to contributions to 501(c)(4) organizations.” And Congress did not. They chose instead to look the other way, as they continue to do. Congress is one of the the biggest beneficiaries here (presidential candidates are a close second) since these organizations are how many election campaigns are supported, even if indirectly.

So mark my words: this round of screaming will end with no real reform. Not with respect to campaign finance. Not with respect to IRS. Not with respect to tax exempt organizations. There will be, instead, lots of hand slapping and finger waggling. The Republicans will crow and the Democrats will vow “to get to the bottom of this” – just like 2011 – and nothing will really happen.

I am not saying that means that we should look the other way. Someone at IRS knew this was happening. It’s clear that those at the top knew something (it has been reported that Shulman was alerted to the issue in 2012) and that it wasn’t the work of a handful of rogue operatives. It was a plan. And then IRS lied about it. And they should be held accountable.

But it still disturbs me that no one in Washington really seemed to care until the behavior went public. When Sen. Orrin Hatch (R-UT) now complains that he asked for answer three times last year because he had heard that there might be issues, it should give you pause. Why didn’t he push harder? Why didn’t anyone ask these kinds of questions publicly? Why wasn’t he – and the President – and every other Washington official that can now get themselves in front of a camera making the same kind of noise last year? Or in 2011?

I would suggest that we all really know the answer.


Want more taxgirl goodness? Sign up to receive posts by email, follow me on twitter (@taxgirl), hang out with me on Facebook or check out my new YouTube channel. You can also buy my book in print at Amazon.com or as an ebook for the Kindle, the Nook from Barnes and Noble or through Hyperink.

No comments:

Post a Comment