IRS scandal, in context

Choking back tears, the president of the Wetumpka Tea Party last week delivered powerful testimony to receptive members of the U.S. House and to a national TV audience.

“This was not an accident,” Becky Gerritson said of her organization’s dealings with the Internal Revenue Service. “This is a willful act of intimidation to discourage a point of view. What the government did to our little group in Wetumpka, Alabama, is un-American.”

Gerritson no doubt believes the America of her childhood “is slipping away.” Whether IRS procedures in handling 501(c)(4) applications is evidence of the nation’s decline, however, is doubtful.

The issue that got Gerritson a national audience was a monumentally stupid move by the IRS. Flooded with applications seeking tax-exempt status as 501(c)(4) “social welfare” organizations, the least popular agency of the federal government figured out a way to make itself even less popular. It gave extra scrutiny to organizations with terms like “tea party” in their name. Maybe it was a plot to suppress vocal opponents of President Barack Obama’s re-election campaign. Maybe it was a shortcut to sort out applications that seemed least likely to meet the requirements of 501(c)(4). Certainly it was a bone-headed move.

For charitable and religious organizations, IRS approval of 501(c)(3) status is critical. Contributors to such organizations depend on the fact that their contributions are deductible from their income for tax purposes. Such organizations are barred from any political activity.

Social welfare organizations under 501(c)(4) are different. The tax-exempt status extends to the organization, not its donors. Whether or not the Wetumpka Tea Party has 501(c)(4) status is irrelevant to the tax liability of those who contribute to it.

The tax-exempt status usually has little relevance to the organization, either. Since most operate primarily on gifts — money on which the contributor already paid a tax — such organizations rarely would have significant tax liability even without 501(c)(4) status.

The amazing jump in 501(c)(4) applications in recent years had little to do with tax ramifications. It had to do with transparency.

Contributions to political action committees and candidates generally must be disclosed under state or federal law and sometimes are limited in amount. Those who wanted to circumvent such campaign-finance laws saw 501(c)(4) organizations as the answer.

IRS rules on the organizations do not contemplate significant political activity. The law Congress passed, 26 USC 501(c)(4), reserves the status to, “Civic leagues or organizations … operated exclusively for the promotion of social welfare.”

The problem came in applying the law. Let’s say a 501(c)(4) organization is dedicated to the elimination of crabgrass. What happens when a mayoral candidate adopts a platform promoting crabgrass?

So the IRS developed a rule: “The promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.” That sounds like an easily applied rule. It’s also a rule that would have made it obvious the Wetumpka Tea Party had no shot whatsoever at 501(c)(4) status. A look at its website archives reveals numerous attacks on candidate Obama.

“Campaigning for the 2012 Presidential election has already begun,” its website reported in April 2012, while its application for 501(c)(4) status was pending. “There is much to do to insure that Barack Obama does not win reelection. If he does, our nation will quickly finish sliding into a socialist nation and your children will never know the wonders of living in a Free Nation.”

The IRS rule prohibiting social welfare organizations from opposing candidates, however, was muddled by another rule: “a section 501(c)(4) social welfare organization may engage in some political activities, so long as that is not its primary activity.”

When 501(c)(4) became the vehicle of choice for “dark money” political contributions, IRS’s failure to develop a clear, easy-to-apply rule became a huge problem. In order to determine whether political advocacy was an organization’s “primary activity,” it had to know all sorts of details that would otherwise be irrelevant.

Proponents and opponents of tea party organizations can probably agree they are inherently political. Their missions require the election of politicians who agree with their goals and the ouster of those who do not.

Complicating public debate on the issue is that federal law bans the IRS from revealing the details of the organization’s application process. In a June 2012 post complaining of the IRS “attack,” Wetumpka Tea Party said it was refusing to answer “questions that are not appropriate and violate our First Amendment rights.”

The IRS had to determine whether the “primary activity” of the organization was political, but the organization was not answering its questions. Nonetheless, IRS approved Wetumpka Tea Party’s application in July 2012.

The Wetumpka Tea Party was completely within its rights, of course, not to answer the IRS questions. It also had every right to oppose Obama. The only significant issue was whether it could acquire the 501(c)(4) status allowing its donors to avoid campaign-finance laws.

No question, the IRS messed up. Its first mistake was failing to amend its 501(c)(4) rules when it became obvious they were being used to funnel “dark money” into political campaigns. Its bigger mistake was singling out tea party organizations for scrutiny.

Gerritson’s emotional lament, however, was extreme.

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