IRS Scandal Rooted in Money, Power and Washington

May 16 (Bloomberg) -- Addressing the scandal exposed at the Internal Revenue Service last week, President Barack Obama announced the resignation of the agency’s acting commissioner, adding: “I’ll do everything in my power to make sure nothing like this happens again.”

Ideally, the scandal will lead to reform of the vague rules that govern political groups. It will also lead Congress to end the practice of anonymous donations to political causes, which is at the heart of the controversy. Are you sufficiently naive to believe such a fruitful outcome is possible? We didn’t think so.

Nevertheless, it’s important to understand the troubling events that unfolded at the IRS Determination Unit in Cincinnati, where employees reviewed applications from groups seeking tax-exempt status and apparently targeted conservative groups for enhanced scrutiny.

Beyond the bureaucratic incompetence it exposed, this fiasco says something about the power of both money and influence in U.S. politics -- and it isn’t good.

The groups in question were applying for recognition as social welfare organizations under section 501(c)(4) of the tax code. Among other advantages, these groups needn’t disclose their donors.

“The promotion of social welfare,” according to the IRS, “does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.” The IRS then effectively voids that prohibition in its very next sentence, explaining that a social welfare organization “may engage in some political activities, so long as that is not its primary activity.” What constitutes “primary” activity? Who knows?

In a report released this week, the IRS inspector general made clear that employees at the determination unit screened applications for tax-exempt status using keywords such as “Tea Party” or “Patriots” as proxies for political intent. Other application screens initially used by the unit included references to “government spending, government debt or taxes” -- all interests more prevalent among conservatives than liberals.

The report cited “ineffective management” and shoddy procedures as the sources of the problem. This appears to be a genial understatement.

In order to determine whether groups applying for tax-exempt status were “primarily” engaged in partisan politics or not, it seems the IRS employees were on the lookout for conservative buzzwords. This had a crude logic to it: The amorphous Tea Party phenomenon, which inspired many of the groups submitting applications, is hardly apolitical. If you were looking for organizations likely to be devoted to electioneering and partisan politics during Obama’s first term, screening for “Tea Party” would be one way to flag them.

Unfortunately, this defense crumbles when examined in the context of the IRS’s approach to other groups. Indeed, some highly political 501(c)(4) applicants seem to have enjoyed smooth sailing. Karl Rove’s Crossroads GPS, a tax-exempt organization that spent more than $70 million in the 2012 campaign aiding the election of Republican candidates, experienced no great IRS troubles. Similarly, the Service Employees International Union used a 501(c)(4) to work just as obviously (albeit with fewer dollars) for the election of Democrats. No hassles there, either.

The key question to be determined -- by a pending Justice Department investigation and perhaps even by congressional hearings, if they don’t devolve into farce -- is whether IRS actions were informed by obtuseness or partisan spite. The inspector general report clearly suggests that rank incompetence (and a shocking degree of insubordination) had the upper hand on partisanship in the Cincinnati office. This is a comfort -- but not much of one.

It’s possible, too, that volume played a role: The number of applications for 501(c)(4) status jumped from 1,735 in 2010 to 3,357 in 2012. Likewise, the amount of political spending by these groups exploded. According to the Center for Responsive Politics, political spending in 2012 by 501(c)(4) organizations surpassed $250 million.

The inspector general made a series of recommendations to the IRS, which Obama said will be implemented. But according to the report, the agency has already rejected two of them: that it better document why applications are chosen for review and that it develop guidance on “how to process requests for tax-exempt status involving potentially significant political campaign intervention.” For an institution that is feared and loathed in roughly equal parts, declining an opportunity to explain its murky ways seems ill-advised.

Then there’s the deeper dysfunction this episode exposed. Until Congress passes the Disclose Act, which would end the practice of anonymous political spending, the IRS will continue to oversee groups that spend millions to influence the political process. What’s more, well-financed, powerful groups with deep political connections and access to first-rate legal advice will continue to whiz through the IRS express lane while genuine citizen organizations, Tea-Party-inspired and otherwise, will endure long waits to have their applications approved. The inspector general found one hapless applicant waiting 1,138 days for approval. We don’t know the victim’s name. We’re pretty sure it wasn’t “Rove.”

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