IRS Employee Used Politics Standard Denied by Executive

The Internal Revenue Service used a numerical test for deciding whether nonprofit groups were too political to qualify for a tax exemption, said an agency employee, contradicting a former IRS executive’s statement.

Groups that devoted no more than 49 percent of their activities to politics were deemed acceptable, IRS employee Elizabeth Hofacre told congressional investigators, according to a transcript reviewed by Bloomberg News. Those decisions are at the center of the controversy about the agency’s extra scrutiny of anti-tax Tea Party groups’ applications.

“They can do 49 percent,” said Hofacre, a Cincinnati-based employee who assessed the first batch of Tea Party cases in 2010. Fifty-one percent of activities “have to be for the purpose of promoting social welfare,” she said.

For years, IRS officials have insisted that no such clear practice exists and that they instead made judgment calls about each group.

“We’ve never been that precise,” Steven Miller, then the acting IRS commissioner, told the House Ways and Means Committee on May 17 when asked about a 49 percent standard.

Six congressional committees are investigating the IRS, as are the agency’s inspector general and the Justice Department. At least four IRS executives left their jobs following disclosure of the tougher scrutiny given to Tea Party cases.

Social Welfare

The portion of the tax law at issue is section 501(c)(4). Groups seeking tax exemptions under that provision must be organized “exclusively” for the purposes of promoting social welfare, according to the statute. IRS regulations interpret that to mean that such groups can’t have politics as their primary purpose.

“There is not a cookie cutter,” Hofacre said. “It is just based on their activities. You just have to review and analyze their activities.”

Political involvement, in this case, means participation in campaigns, not lobbying on issues.

Social welfare groups don’t have to pay taxes on any of their earnings. Unlike charities, donations aren’t tax deductible. The groups don’t have to disclose their donors, a feature that has made them an attractive vehicle for political activity.

Many of those groups have been relying on their lawyers’ advice to respect the 49 percent line, even without the IRS saying so explicitly, said Sheila Krumholz, executive director of the Center for Responsive Politics, a Washington group that researches the influence of money in politics.

‘Safe Bet’

“The 49 percent rule seemed, I think, like a safe bet,” she said.

As part of its response to the investigations, the IRS is considering changes in how it handles requests for tax-exempt status.

“It’s time for this country and our leaders to have an honest conversation about the social welfare category,” Krumholz said, adding that such a dialogue is necessary after the Supreme Court’s 2010 decision in Citizens United that removed restrictions on campaign donations by companies and unions.