Ask The Experts: What to Make of the IRS “Tea Party” Scandal

IRSWho knew what when?  Whose heads should roll?  Is Democracy itself in jeopardy?  The recent turmoil surrounding the IRS’s Nonprofit Division has sparked no shortage of sensationalism or bravado-filled calls to action.

But is it possible that we’re failing to see the forest for the trees?  Sure, an arm of the IRS used right-wing buzzwords to help identify organizations trying to take advantage of tax breaks meant to encourage advancements for the public good, rather than the causes supported by one particular political group or another.  But might this “scandal” – which is all the rage in the current news cycle, yet sure to fade in time – speak more to the pervasive posturing in contemporary politics and the way the IRS is viewed than any sort of bias or conspiracy theory?  There has been an explosion in the number of tea-party themed nonprofits in recent years, after all, and they’re not in the business of giving dolls to impoverished children or anything like that.

You might not come to the conclusion that this scandal is a bit overblown after reading the paper in the morning, but ask a few tax law experts and that’s the impression you’ll get.  CardHub did just that because while our main focus is on how consumers manage credit, tax policy is something that affects all of our wallets.  And if the IRS is up to something fishy when it comes to how political nonprofit organizations are characterized for tax purposes, who’s to say they’re not crossing lines in other areas as well?

Expert Opinions

Please find our experts’ takes on the following questions below:

Are the actions of the IRS’s Nonprofit Division examples of a partisan witch hunt that’s setting a disturbing precedent or a misguided attempt at efficiency?

Ellen Aprill - Loyola Law

I worked in the Office of Tax Policy at the U.S. treasury for two years and was always impressed with the dedication of the people at the IRS.  Thus, while I acknowledge that facts may come out to show that this was a partisan hunt, until I have facts to show that, I approach it as a very misguided attempt at efficiency by civil servants who had a ‘tin ear’ as to how their attempt would be seen and heard.

- Ellen Aprill, John E. Anderson Chair in Tax Law at Loyola Law School


Thomas Kelley - UNC Law

Like most folks, I abhor the IRS’s use of what appears to be political ideology in deciding who deserves c4 tax exempt status.  Sadly, this is not the first time the IRS has allowed politics to creep into its mission.  During the Bush (#2) Administration, for example, the IRS investigated Democratic-leaning c3 organizations such as the NAACP and All Saints Church in California, claiming without much justification that they were intervening in political campaigns.  These sorts of things should not happen.

While on the subject of the IRS’s current monitoring of c4 organizations, it should not be forgotten that it seems fairly clear that many of the c4s are in fact breaking the law, and that, after Citizens’ United, many organizations are using c4s to engage in campaign activity while hiding their donors’ identities.

In short, this whole area is a mess.  And the U.S. Congress, which has devolved into a quagmire, is unlikely to do anything productive about it.

- Thomas Kelley, Professor of Law and Director of Clinical Programs at the University of North Carolina School of Law


Nicholas Mirkay - Creighton Law

I don’t think that this was a political witch hunt, although that it is an easy conclusion based on the preliminary evidence.  Rather, the report by the Treasury Inspector General for Tax Administration reveals significant ineptitude and lack of close oversight by IRS management with respect to such applications.

In reviewing the comments by Lois Lerner (Director, Exempt Organizations Division), it makes ample sense that similar applications should be grouped for purposes of consistent application of the law.  However, proper management would have ensured that criteria other than just names would have guided such grouping and then additional requests for information were both proper and uniform.  It is completely plausible that such lack of oversight resulted in certain IRS employees acting improperly.  I don’t think the leap to a political witch hunt can be made after reviewing the TIGTA’s report.

- Nicholas Mirkay, Professor of Law at the Creighton University School of Law


Philip Hackney - LSU Law

Misguided attempt at efficiency.

- Philip Hackney, Assistant Professor of Law at the Louisiana State University Law Center


Lloyd Mayer - Notre Dame Law

The Inspector General’s report strongly indicates that the IRS management and staff acted in good faith to enforce the existing laws and not out of intentional partisan bias.  For example, the IG faults the IRS Determinations Unit for ‘giv[ing] the appearance that the IRS is not impartial in conducting its mission,’ for ‘not consider[ing] the public perception of using politically sensitive criteria when identifying these cases,’ and ‘lack[ing] knowledge of what activities are allowed by … tax-exempt organizations.’

The IG also found that senior management in DC quickly eliminated the problematic selection criteria on learning about it in the summer of 2011, although the Determinations Unit later altered the revised criteria in a problematic manner without clearing it with DC first in early 2012, an error that again DC management fixed after they learned of it.   Finally, the IG found no evidence that anyone outside of the IRS influenced the choice of selection criteria.

For all of these reasons, as well as my knowledge of IRS operations in this area, I believe the IRS officials and employees were attempting in good faith to enforce the law and were not engaged in a partisan effort.

- Lloyd Mayer, Associate Dean for Academic Affairs and Professor of Law at the University of Notre Dame Law School


David Gamage - Berkeley Law

To begin with, I think the term scandal is somewhat overstated. … Congress, through the tax code, has charged the IRS with regulating the political activity of non-profit organizations, yet the IRS lacks the tools to do so effectively. The underlying law is a complete mess. Congress has known this for a long time and has not made significant efforts to address the underlying problems and the IRS lacks anything close to the resources that would be needed to meaningfully oversee what we might call political advocacy non-profits, or non-profit organizations that engage in political activities. The IRS is understaffed and lacks a variety of other resources that might be needed.

So, the IRS has for a long time been in effectively a lose-lose situation. The IRS is criticized for failing to monitor political activity by non-profits, yet the IRS is also criticized quite severely anytime IRS personnel try to effectively regulate political activity among non-profits.

Certainly in this case, there was not the wisest behavior in terms of the screening metrics used by the IRS employees in question. But again, that has to be understood with the background that this is a lose-lose situation and there’s no way the IRS can carry out the duties it’s been charged with by Congress effectively. …

Tea Party groups aren’t the first politically-oriented nonprofits to be subject to significant IRS scrutiny. The key, I think, behind the motives of the IRS personnel is that a very large number of Tea-Party related groups were formed all in a small time period. And the IRS division responsible for managing these nonprofits was given no increase of resources to deal with this large expansion of case load. And it’s pretty reasonable to assume that Tea Party groups are engaged in political advocacy in some form or another or are at least skirting the border of what the law allows. Now, lots of other groups are also skirting the border of what the law allows, but there wasn’t a sudden increase in the applications filed by these other groups.

- David Gamage, Assistant Professor of Law at the University of California, Berkeley


Michael Livingston - Rutgers Law

I think the scandal is rather overblown. There is a pretty clear pattern of abuse of the 501(c)(4) and similar forms by political groups, and the Tea Party is more or less a political organization. So I’m not especially offended that these groups were targeted. If on the other hand they were targeted selectively, that is, equivalent liberal groups were not similarly audited–or if the techniques used were overly aggressive or invasive–that is a different story. Some level of investigation is plainly justified to determine if this is true. But as for a major scandal that deserves the national attention it is receiving, I think that has more to do with a slow news cycle and the usual second-term blues than any inherent substance.

- Michael Livingston, Professor of Tax Law with the Rutgers University School of Law


Lawrence Zelenak - Duke Law

According to the regulations, a 501(c)(4) ‘social welfare organization’ can’t have as its primary activity ‘direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.’ Most (maybe even all) of the IRS scrutiny of the Tea Party organizations seems defensible as an attempt to determine whether the organizations complied with that restriction. The problem is that the IRS did not seem to be giving a similar level of scrutiny to applicants from the other end of the political spectrum. Whether this difference was the result of ‘a partisan witch hunt,’ or a bureaucratic failure to recognize there were applicants from the other end of the political spectrum raising the same concern, I can only speculate.

-Lawrence Zelenak, Professor of Tax Law at Duke Law School


What, if any, laws do these actions violate?  What types of punishments can we expect to be levied against the IRS and its employees as a result?

We certainly can expect personnel actions and apparently two employees have already been disciplined.  Attorney General Holder is apparently looking to see if there have been any civil rights violations.

- Ellen Aprill, Loyola Law School


As you can read from other nonprofit law professors who have written or commented on this unfortunate situation (Professor Mayer from Notre Dame Law School), there needs to be Congressional action that addresses disclosure rules on a more uniform basis, without the arbitrary differences currently utilized between ‘types’ of tax-exempt organizations.  Congress should also weigh in on whether 501(c)(4)s should be used for organizations that engage in political campaign activities – is that what Congress originally envisioned with respect to ‘social welfare’ when it enacted 501(c)(4)?  Should organizations be able to exploit the disclosure differences between 501(c)(4)s and 527s if substantively their mission involves political campaign activities?

- Nicholas Mirkay, Creighton University School of Law


In terms of the actions described in the IG report it is hard for me to find a violation of law. There may be some vague notion of denial of civil rights, but I think that far-fetched for a criminal action. I expect that we will see more employees fired.

- Philip Hackney, LSU Law Center


Selection of groups for additional scrutiny based on their policy positions is almost certainly a violation of the First Amendment.  The remedy for such a violation would be to redo the selection process using only neutral criteria and in an expedited fashion.  It is not clear what, if any, penalties there might be for the IRS and its employees.  If a group could prove that an IRS employee violated a clearly established constitutional right, the employee might be personally liable for the costs incurred by the group as a result of the additional scrutiny.  Such liability is difficult to prove, however.  Furthermore, the errors at issue here might be grounds for demotion or even termination of employment, although the latter would likely only be the case if it could be shown an employee actually engaged in intentional partisan bias.  Senior IRS officials will also feel pressure to resign, as some in Congress have already called on them to do so.

- Lloyd Mayer, Notre Dame Law School


How will this affect people’s perception of government?  Will this “scandal” impact President Obama’s legacy?  Who ultimately takes the fall for this?

Although I think the ‘scandal’ overblown, I can perceptibly see it have a deleterious impact on people’s perception of government.  It makes people much less likely to trust the government on many fronts and particularly less likely to trust the IRS. I expect it could cause an uptick in tax protesters, tax evaders, etc.

[It’s] too early to tell whether it impacts President Obama’s legacy. It will if Congress chooses to make sweeping changes to the IRS once more. If it does I would predict that the changes will be uniformly to the worst for the IRS. Steve Miller and Lois Lerner both take the fall for this. Maybe a few lower level employees [as well].

- Philip Hackney, LSU Law Center


I’m sure that in the short-term this will not improve people’s perception of the IRS as an intended non-partisan administrator of the federal revenue laws.

- Nicholas Mirkay, Creighton University School of Law


This scandal undoubtedly will cause many people, of all political persuasions, to be more suspicious of the motives and actions of government employees and officials.  Some will believe that the White House and even President Obama had a role in how the IRS handled the applications, despite the lack of any evidence of their involvement.  Others will understandably be concerned that these egregious errors illustrate that government employees have too much power and too little oversight, leading to problems even when they act in good faith.  While one or more IRS senior officials may resign as a result of this scandal, the ultimate victim will be the already shaky public’s confidence in the ability of the federal government to govern well.

- Lloyd Mayer, Notre Dame Law School


Can we expect the passage of reactionary legislation?

What Congress and the President have endorsed is having the IRS and the Department of the Treasury issue new rules to clarify some of the ambiguity in the law that created the problem – [a tax-exempt nonprofit’s] primary activity cannot be political campaign intervention, but currently there is no guidance as to what ‘Primary Activity’ means, just a list of possible factors that the IRS can apply under appropriate facts and circumstance.  It is my hope and that of others that this revelation will lead to reforms in the law that many have long endorses rather than reactionary legislation, but that hope may be a bit optimistic.

- Ellen Aprill, Loyola Law School


Absolutely, and it will be bad.

- Philip Hackney, LSU Law Center


Legislation is unlikely because how to regulate these social welfare organizations is highly controversial and views are split primarily along partisan lines.  While it would be desirable for Congress to make the applicable rules more clear, to provide better guidance regarding disclosure of election-related political activity, and to consider shifting responsibility for enforcing such disclosure away from the IRS, it is unlikely Congress will take any of these steps even given this scandal.

- Lloyd Mayer, Notre Dame Law School

 


Takeaways

  • The IRS lacks the resources necessary to effectively evaluate and monitor tax-exempt nonprofit organizations.
  • The law makes it difficult to determine whether or not a politically-active group qualifies for nonprofit status.
  • The number of Tea Party affiliated organizations applying for tax-exempt nonprofit status skyrocketed in recent years.
  • Nevertheless, IRS officials did indeed cut corners in an unfortunate manner.
  • The stance taken by many mainstream media outlets and politicians in the aftermath of the IRS Inspector General’s report is perhaps more worrisome than the actions taken by the Nonprofit Division.
  • While fundamental changes to the underlying tax laws are what we really need, this scandal will most likely result in cosmetic, reactionary rulemaking and the firing of a few.
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