IRS Should Make Payments to Harmed Groups, Advocate Says

Congress should allow “apology payments” of as much as $1,000 to tax-exempt groups and other taxpayers who incur significant expenses or burdens because of the agency’s failures, said Nina Olson, the national taxpayer advocate.

In a special report to Congress today responding to the controversy surrounding the agency, Olson recommends clearer rules governing political involvement of nonprofit groups and simpler forms to make it easier for the IRS to enforce limits on political activity. Olson operates an independent office within the IRS that assists taxpayers and makes suggestions to lawmakers.

In light of the IRS’s verbal apology to groups affected by delays and inappropriate screening criteria, Olson renewed a 2008 recommendation that her office make as much as $1 million a year in apology payments. The report doesn’t say they would be retroactive; it notes that payments could help identify problems more quickly and make IRS employees more sensitive.

“The rationale for an apology payment is not to compensate the taxpayer fully for his or her time and frustration, but to serve as a symbolic gesture to show that the government recognizes its mistake and the taxpayer’s burden,” the report said.

The IRS disclosed May 10 that it had subjected Tea Party groups applying for tax-exempt status to tougher scrutiny and delays of as long as three years.

Congressional Inquiries

The IRS’ disclosure, made in advance of an inspector general’s audit, prompted six congressional inquiries and a Justice Department criminal probe. President Barack Obama replaced the acting commissioner, installing Danny Werfel, who then replaced three officials who oversaw tax-exempt groups.

The inspector general’s audit is receiving renewed attention this week after the IRS disclosed that it had given additional scrutiny to “progressives” applying for tax-exempt status, a fact the audit didn’t include. Some Democratic-leaning groups had their applications delayed, according to Democrats on the House Ways and Means Committee.

It’s not clear yet how, when and why the IRS focused on progressives. Olson’s report says one group with a “progressive-sounding name” had its application for tax-exempt status delayed and that an IRS official told the advocate’s office that it was “taking so long due to the name.”

According to Olson, the IRS didn’t provide taxpayers with adequate guidance for how it would assess political involvement of nonprofit groups and failed to keep the groups informed.

‘Template Responses’

“Their concerns were met with stock, template responses, and during the periods of delay, taxpayers were not told what additional information they should be gathering to dislodge their cases,” she wrote.

Olson also blamed the IRS for asking unnecessary questions of applicants, lacking a tracking system for cases and operating in a way that questioned the impartiality of tax administration. The IRS’s failure to disclose its instructions to its own staff “appeared to violate the law,” she writes.

She placed part of the blame on the lack of clarity on the rules governing politically oriented nonprofit groups. Groups seeking tax-exempt status under section 501(c)(4) of the tax code can’t have politics as their primary purpose.

Olson said Congress should either ban political activity by these groups, make it unlimited or clarify the meaning of “primarily.”

‘Inherently Controversial’

IRS application forms don’t give the agency enough information to make that judgment quickly. Assessing political activity, Olson writes, is an “inherently controversial determination” that might be better performed by an agency such as the Federal Election Commission.

Olson recommended that Congress grant 501(c)(4) groups a right that charities organized under section 501(c)(3) already have -- the ability to sue if the IRS doesn’t respond to their applications within nine months.

The report also discloses that as many as 19 groups affected by the delays brought their cases to the taxpayer advocate service and requested answers from IRS officials.

From February 2011 to February 2012, the taxpayer advocates received e-mails with identical language about how these cases presented “novel” issues and that the agency was trying to come up with a “template” to address them.

In a statement issued today, Werfel said he and the IRS plan to work with Olson to improve employee training and taxpayer education.