The furor over scrutiny of Tea Party groups by the Internal Revenue Service, which hurt President Barack Obama politically, has heightened difficulties for tax preparers dealing with the agency, according to a lawyer who specializes in tax-exemption issues.
Preparers representing groups who have or are seeking tax-exempt status frequently are working with IRS employees who have little experience in such matters, said Marcus Owens, a partner with the Caplin & Drysdale law firm.
Most senior officials in the IRS’s Exempt Organizations Division have either retired or been pushed out following the agency’s disclosure earlier this year that the office was giving extra attention to some of the anti-tax Tea Party groups seeking tax exempt status, Owens said at a Nov. 15 conference in Washington, and he expressed concern about the loss of seasoned personnel, Bloomberg BNA reported.
The replacements for these officials have “essentially no tax administration experience,” he said. ‘No experience interpreting the Internal Revenue Code, no experience dealing with taxpayers that apply the code, no experience in doing what the exempt organizations function has done and is in charge of doing.’’
Owens formerly headed the IRS’s Exempt Organizations Division. The conference where he made his comments was sponsored by the American Law Institute Continuing Legal Education and the American Bar Association Section of Taxation.
Lois Lerner, a successor of Owens’ at the IRS, in May disclosed that her office had flagged applications for tax-exempt status from some Tea Party groups based solely on their names, not their activities. The groups -- and others, including some with the word “progressive” in their names -- encountered delays in the handling of their applications and were asked questions that the inspector general for the IRS deemed inappropriate.
In the political uproar that followed, Obama forced the acting IRS commissioner, Steven Miller, out of his job and replaced him with Daniel Werfel. Other agency officials who have left include Lerner, who after being suspended with pay from her post later retired.
Multiple congressional investigations into the IRS’s actions were begun, with Republicans probing whether the treatment of the Tea Party groups was politically motivated. IRS and administration officials have denied that was the case.
The IRS apologized for its actions, and it and the Treasury Department are working to develop clearer rules for deciding when politically oriented nonprofit groups should receive extra scrutiny.
Federal law empowers the IRS to police groups’ nonprofit status. Many of the Tea Party groups are set up under section 501(c)(4) of the Internal Revenue Code, which requires them to operate exclusively for the benefit of social welfare and allows them to keep their donors secret.
IRS rules interpret that to mean that social welfare groups can’t be primarily political. That requires the tax agency to look at the groups’ activities and campaign involvement.
Many of the IRS’s newer employees don’t grasp some of the concepts involved in determining an organization’s tax-exempt status, Doug Mancino, a partner with Hunton & Williams LLP, said at last week’s conference. These include the commensurate-in-scope test, in which the IRS at whether an exempt organization is conducting activities at a level in line with its financial resources, he said.
He gave as an example the proposed revocation of a community college alumni association he is representing. Mancino said the dispute derives from an examiner not having the background to appropriately judge ordinary and necessary business expenses by a group involved in charitable work.
“You have people who are in final decision-making positions that don’t have five, 10 or 15 years of experience” in gauging the activities of tax exempt groups.
Miriam Fisher, a tax controversy and litigation lawyer with Latham & Watkins LLP, urged a sympathetic approach to the challenges facing the IRS, telling the conference attendees they should put themselves in the new employees’ shoes.
“They’re probably feeling more sensitive and defensive right now,” she said.
Owens said there is a tendency for difficult audit issues to be resolved and policy decisions made in IRS field offices. To the extent there is involvement from Washington, it is coming from the IRS legal office, he said, not from the exempt organizations’ unit.
The Exempt Organizations unit is increasingly being steered by counsel, Owens said, “and counsel is always thinking about litigating.”
Keeping the opponent in the dark is a strategy in legal standoffs, and that has spilled over into tax preparers getting less information about where the IRS is going with tax-exempt issues, he said.
“There will be consultations in audit,” he said, “but you as the taxpayer’s representative will not be part of those discussions the way you would be” if the focus was on gathering technical advice.