Who's to blame for murky regulation in IRS scandal: Agency or lawmakers?

The IRS should move unilaterally to fix the law sitting at the root of the agency’s targeting of conservative groups, according to Senate Democrats who grilled the agency’s two most recent chiefs at a Senate Finance Committee hearing on Tuesday.

Plenty of questions remain unanswered after senators lit into the two men, Steven Miller and Doug Shulman, about the agency’s managerial competence, the thoroughness of its investigation into the matter given that the IRS has yet to identify exactly who is responsible for the targeting, and whether IRS officials were less than forthcoming with members of Congress during 2011 and 2012 when lawmakers were looking into allegations that eventually proved true.

But they were nearly as irate that the IRS claimed it was overwhelmed and confused about how to evaluate applications for tax-exempt status but did nothing to clarify the regulation at the crux of its discomfort.

“Why didn’t you do anything on your watch to correct it?” asked Sen. Ron Wyden (D) of Oregon. “When the lines are blurring on this disclosure issue, as far as I can tell, you all didn’t do anything to correct the problem in a meaningful way. And I find that very regrettable.”

There’s been no legislative fix proffered for what actually occurred – no lawmakers or IRS officials were making excuses for the agency’s decision to give extra scrutiny to scores of conservative groups’ applications for 501(c)(4) tax exempt status.

That tax status, which is offered to so-called social welfare organizations, is sought by many groups on both sides of the political spectrum because it allows organizations to engage in some political activity while not disclosing their donors.

The problem for the IRS arises in attempting to determine whether an organization is primarily involved in political activity or not. The original law as passed by Congress, as several Democratic senators noted on Tuesday, says 501(c)(4) organizations must be “exclusively” devoted to charitable, educational or recreational purposes.

When the IRS began implementing that rule half a century ago, however, they decided that exclusively really meant not “primarily” engaged in political activity, leaving the door open for groups like the Sierra Club or the AARP to claim the status but devote less than half their activities to politics.

But figuring out just what counts as political activity and what’s an educational offering tied to social welfare is often in the eye of the regulator rather than a definitive science.

Because the IRS, along with the Treasury Department, handles the regulations that spring from the tax code, “the IRS should be able to fix it on their own,” says Annette Nellen, a professor of accounting at San Jose State University. “The language in the statute does say ‘exclusively.’ ”

Members of Congress look at the original law and say, like Sen. Ben Cardin (D) of Maryland, “I don’t know what else we can do.”

“When you say ‘exclusively’ … What stronger word do you want us to use?” Senator Cardin says.

Citizens for Responsibility and Ethics in Washington (CREW), a government watchdog group, is even suing the IRS, asking a court to require the organization to reconcile the differences between what the law says and what the IRS does.

Why didn’t the agency take on the issue previously? IRS officials argued that the agency was caught flat-footed with a wave of applications for 501(c)(4) status, which doubled between 2011 and 2012 in the aftermath of the Citizens United Supreme Court decision that allowed corporations and labor unions to participate more aggressively in the political process.

And the bureaucracy is notoriously hesitant to take on such large political issues on its own, says Melanie Sloan, CREW’s executive director.

“They’re afraid to take a position,” Ms. Sloan says. “All that happens is they get beat up no matter what they do.”

Case in point: In 2010, Democrats led by Sen. Max Baucus of Montana asked the IRS to look into such groups because of concerns groups fully committed to politics were hiding behind the social welfare exemption to shield their donors from public scrutiny.

The problem? The IRS wasn't doing enough, allowing too many groups to get the status. 

But Republicans lead by Sen. Orrin Hatch (R) of Utah rapped the IRS in 2011 when the IRS sent letters to donors to 501(c)(4) groups reminding them that gifts to those groups over $13,000 are subject to the federal gift tax. Senator Hatch argued that those letters were designed to intimidate conservative donors.

The problem? After 30 years of failing to enforce the gift tax law, the IRS was suddenly doing too much. 

Mr. Shulman said that the IRS did not act because Congress has asked the service to do too much with too little funding.

“Treasury ought to look at the regulations, and all I can say is that this is a very hard task given to the IRS,” said Shulman, who left the agency after his term expired in November of 2012.

Given all the agency’s other responsibilities, “to also have this piece of the operation that by the law has to be asking questions about political activities is very difficult,” Shulman said.

Moreover, Shulman turned the question back around on Congress: If this was such a big problem, he wondered, why had Congress done nothing to address it for half a century?

“This was a regulation, a Treasury regulation, that’s been in effect for many years,” Shulman said. “This is a place that Congress should look. Because where I sit the IRS is given a very, very, very difficult task,... You can do some political activity, but you can’t do too much.”

San Jose State’s Professor Nellen points out that congressional inaction on the regulation over such a long time is tantamount to Congress indirectly endorsing the IRS’s interpretation.

“Congress knew they were interpreting these rules in a certain way,” she says.

Senator Hatch agreed that the onus falls on Capitol Hill.

“It’s Congress’s obligation” to fix the statute, said Hatch, the committee’s ranking Republican, “we ought to do it the right way.”

Tax reformers like Senator Baucus and House Ways and Means Chairman Dave Camp (R) of Michigan have vowed to include a rewrite of these laws in their push for comprehensive tax reform. 

But can Congress muster the will to confront an issue that’s been lingering for years?

“Congress doesn’t seem to be in any rush to tell them what to do,” says Sloan. “Congress hasn’t been in a rush in the last 50 years to tell them what to do.”