The IRS Was Wrong — But Many Political Groups Should Not Be Tax-Exempt

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Let’s start with the obvious. Those IRS employees who singled out conservative groups for scrutiny over their tax-exempt status were wrong, wrong, wrong.  Any whiff of politics at the agency is unacceptable, and this is far more than a whiff. In time, we shall see how far up the agency food chain the scandal goes.

But this unsavory episode should also shine a light on the law that gives tax-exempt status to political groups of all ideological stripes, often described by the code section that grants their exemption—501(c)(4)s.  That is especially true since one outcome of this scandal will be to give these partisan groups even more freedom to operate outside of at least the spirit of the law.

The only way to stop the proliferation what are often-secret campaign money laundries is for Congress to change the law that grants these groups this form of tax-exempt status.

(JOE KLEIN: The IRS Mess—and the GOP’s Campaign to Paralyze Washington)

As I wrote in a blog post back in 2010, the tax law is relatively clear about what a (c)(4) can and cannot do. The IRS defines these groups as “civic leagues, social welfare organizations, and local associations of employees.” Their net earnings are supposed to be used for charitable, educational, or recreational purposes. They may lobby and participate in political activities but their primary purpose must not be campaigning.

Thanks to smart lawyers who have exploited an outdated law, the tax-exempt status of many groups may be perfectly legal. But others simply do not pass the smell test.  Does anybody really claim the primary activity of these organizations is anything other than getting their favorite candidates elected to political office, or defeating those they disagree with?

If you have doubts, here is what one group, teaparty.org, says about itself on its website:

We are going to build on the foundation of success we used to elect more governors, grab more seats in the House of Representatives and force the Washington establishment to respect the demands of “We The People.”

In contrast to public charities organized as 501(c)(3)s, contributions to (c)(4)s are not tax-deductible. So why would they want (c)(4) status? One reason: It allows them to hide the names of their donors.

In the past, these groups would have claimed tax-exempt status as Sec. 527 organizations. There are no contribution limits, no restrictions on who may give, and no limits on how they spend their money (except they cannot advocate for a specific candidate). But 527s must disclose the names of the fat cats who use them to finance political campaigns.  And groups that thrive on political dark money will do almost anything to avoid transparency. So they walked through the (c)(4) door opened by the Supreme Court’s 2010 Citizens United decision.

(MOREObama: Targeting by IRS is ‘Outrageous’)

Because the law is so ambiguous and because IRS scrutiny of these groups is so fraught with political landmines (as the recent unpleasantness proves), the IRS had been reluctant to review this issue all.  Now it seems, the agency took a much-needed hard look at some groups, but did so in a clumsy and seemingly partisan way.

Regrettably, by apparently focusing only on conservative (c)(4)s, the IRS has only succeeded in making all these groups—on the political right and the left– even more immune from investigation.

The solution, then, is for Congress to change the law. Many of these groups are not social welfare organizations by any reasonable standard. They clearly exist for political purposes. Many are unabashedly partisan—supporting only Democrats or only Republicans.

Last month, Sen. Tom Coburn (R-OK) introduced a bill to eliminate the tax-exempt status of professional sports leagues, such as the NFL (yes, Virginia, the NFL is tax-exempt).  That’s an excellent idea, but maybe he ought to expand it to include practitioners of America’s other favorite sport—politics.

Howard Gleckman is Resident Fellow at the Urban-Brookings Tax Policy Center and editor of its fiscal policy blog TaxVox, where this article previously appeared.

7 comments
SmoothEdward1
SmoothEdward1

This is absolutely true. Many of these organizations are just abusing tax laws. Karl Rove, running a social welfare organization? Give me a break. This designation just allow them to hide the identities of their donors - wealthy, right-wing, Libertarian types.

dochosvet
dochosvet

I would support the IRS>  Over the years I run into people laughing about phony church tax deduction scams and other ways to get  away without paying tax's.  I think  that is the IRS job to make them hustle for their  deductions and you can bet the Koch brothers and  Rockafellers and other big wigs get their political party tax deduction scams going. 

JimB210
JimB210

The real issue here should be -- are those organizations really working primarily for social welfare and not for political gains? In the absence of a clearcut objective test for the level of political activity it looks like these IRS employees used a shortcut for picking groups for closer scrutiny. If I created a group named "Elect Republicans Only" and yet claimed it was a social welfare organizatioin, would it be reasonable to expect that the name of my organization might attract more attention than if I named my group "Americans for Good Government"? Surely an organization named "Tea Party Patriots" might expect to attract a question about the level of political activity they engage in... yet now all this outrage surfaces. Further, the fundamental premise of these organizations seems to be to dodge taxes (essentially government subsidizing of partisan political activity) and provide anonymity for donors (which should not be part of the Citizen's United decision -- unlimited money should be balanced by disclosure, or we should just allow outright bribery and slush funds. My solution would be that all these organizations pay taxes, and all of them fully disclose all donors within 24 hours. I'll wait for Congress to enact that - but I won't hold my breath.

Travon
Travon

Why do you need to exempt others? Those shrewd people would find ways to be under tax-exemption.I've read Vivek Sood’s book The 5-Star Business Networks wherein he mentioned that innovation is important for business and so is the different strategies the company will present. I reckon it is applicable in everything even in the IRS tax exemption law. please do something, tweak it, be fair.

smehgol
smehgol

IRS would be derelict by not subjecting the One Percent Tea Party Ayn Rand people and monied Israel Firsters to special IRS scrutiny. They are poor nonprofit candidates, cunningly resist taxes, and seek to conceal donor names.

SanMann
SanMann

@smehgol ,

 What you're saying is that the IRS should treat people differently based on their political ideology. I find that chilling. How do you reconcile your views with the requirements of a democratic system? Obviously, you don't care about democracy, which requires credibility from all sides in order to work.

smehgol
smehgol

@SanMann@smehgol 

From experience IRS can estimate workload based on type of applicant and application. Some require greater scrutiny than others. This enables efficiency and is as it should be. The potential for political always bias exists. Predictably, right leaning news claims political bias dangerous to our democratic system.