Has IRS Improved Tax-Exempt Review Process or Maintained Status Quo?

It has been approximately nine months since an investigation initiated by the Federal Bureau of Investigation (FBI) forced the Internal Revenue Service (IRS) to admit that it had improperly delayed applications for tax-exempt status submitted by conservative organizations.  Although IRS leaders vowed to eliminate the targeting, it is unclear that the process has changed significantly.

Some members of Congress believe the IRS has taken the steps necessary to eliminate the practice.

“A great deal has changed at the IRS to prevent this from happening again,” said Representative Elijah Cummings, a Maryland Democrat.  Cummings is on the Committee on Oversight and Government Reform, one of several bodies responsible for investigating the IRS targeting and ensuring they took steps to eliminate the unfair treatment.  IRS changes noted by Cummings include replacing leadership, improving training for personnel about how to apply Internal Revenue Code Section 501(c)(4) when reviewing tax-exempt applications, and shortening the approval timeframe for the approval process.

However, although the IRS has made changes, it is debatable if the changes have made the Tax Exempt and Government Entities Division of the IRS capable of performing its job.

“I’m quite sure they’re not going to go after tea party groups again,” said Paul Streckfus, editor of EO Tax Journal, which focuses on tax topics related to exempt organizations.  “The larger question is, is the system working better than it did?  And the answer, as far as I can tell, is it’s not.”

Removal of Key IRS Leaders in Tax-Exempt Division

The largest visible change because of the scandal was the removal of Steve Miller and Lois Lerner, as well as several other IRS leaders deemed responsible for allowing the targeting of conservative organization to happen.

Miller was the Commissioner of the IRS, while Lerner was the Director of the IRS Exempt Organizations division.  Lerner looked especially bad in the aftermath of the scandal.  Lerner initially expressed shock at the targeting, but investigators uncovered e-mails from Lerner to leaders over the IRS’ Cincinnati field office directing them to step up targeting of conservative organizations.

However, although the leaders had to go because of their culpability in the matter, they took with them years of positive leadership experiences in other matters that is difficult to replace.

Elimination of Tax-Exempt Watch Lists

The IRS targeted conservative applications for tax-exempt status based on keywords used in the application.  Those keywords included “Tea Party,” “Patriots,” and “progressive” among others.

Acting IRS Commissioner Danny Werfel banned use of such keyword lists for identification of applications flagged for additional scrutiny, directing personnel to focus instead on the activities of the organization.  The focus is now primarily on the amount of political activity groups perform.

However, the IRS has not released the new guidelines given to field agents on when applications should undergo additional review.  At least one agent told investigators he flagged all applications from organizations with political affiliations for additional review, as the direction on which organizations should undergo review is unclear.

Confusion Concerning Allowed Political Activities

Part of the confusion stems from the wording in Internal Revenue Code Section 501(c)(4), which notes that tax-exempt organization should operate “exclusively for the promotion of social welfare.”  Many interpret this wording to have originally meant groups offering services to disadvantaged groups such as the homeless or those with certain disabilities or churches.

But the IRS clarified the wording in a separate release in 1959 that noted social welfare had to only be their primary goal, not their exclusive goal.  It was this “clarification” that opened the door for tax-exempt organizations to support political candidates, as there is no formal definition of “primary” in this context.

“The problems… are not going to be solved by training workers in Cincinnati, even though that’s fine,” said Fred Wertheimer, an advocate for campaign finance reform.  Rather, Wertheimer wants the IRS to make it clear that tax-exempt organization must focus exclusively on social welfare, not political, activities.

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by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.