Does the IRS Even Understand the Tax Code?

Josh Barro is the lead writer for the Ticker, Bloomberg View's blog on economics, finance and politics. His primary areas of interest include tax and fiscal policy, state and local government, and planning and land use.
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The Internal Revenue Service's Inspector General released a report last week detailing how the agency inappropriately singled out conservative nonprofit groups for investigation. Among the IRS's many problems, the report said, were its employees' confusion about the two sections of the tax code governing many nonprofit organizations that are active on public policy: "We also believe that Determinations Unit specialists lacked knowledge of what activities are allowed by I.R.C. § 501(c)(3) and I.R.C. § 501(c)(4) tax-exempt organizations."

On Friday, the Thomas More Society, a conservative public interest law firm, released documents providing more evidence that the IRS had agents enforcing laws they didn't understand. The society released communication between three anti-abortion groups (its clients) and the IRS regarding their 501(c)(3) status. The questions the IRS asked often reflected a misunderstanding of the law.

To Christian Voices for Life, the IRS asked: "In your educational program, do you education [sic] on both sides of the issues in your program?" To the Coalition for Life of Iowa, it made this request: "Please explain how all of your activities, including the prayer meetings held outside of Planned Parenthood are considered educational as defined under 501(c)(3). Organizations exempt under 501(c)(3) may present opinions with scientific or medical facts."

Both of these requests assume a much narrower test of what a 501(c)(3) organization's educational activities may be than the law actually provides. As the firm notes, "Section 501(c)(3) organizations may legitimately engage in a very wide range of educational activities, including advocacy for and against all sorts of causes."

The IRS went back and forth making requests of non-legal staff at both of the above organizations. Presented with letters from the firm's lawyers, the IRS in each case promptly responded with approval of 501(c)(3) status.

A lot of conservatives are saying this scandal shows that the IRS is being used as a political weapon. If these investigations of small conservative groups -- typos and all -- were part of a political strategy, it wasn't a smart one. Not only did the IRS end up embroiled in a scandal that is embarrassing to the left and will limit the service's room to restrict political activity by nonprofits, but it also chose to pick on groups so insignificant that harassing them probably had little impact on conservative efforts to influence policy.

If the IRS really wanted to damage conservative causes, it would throw its best lawyers at the largest conservative political groups, taking seriously questions like whether Crossroads GPS, Karl Rove's group that spent $70 million in support of Republican candidates during the 2012 election cycle, is too focused on electioneering to qualify as a 501(c)(4) nonprofit.

Whether or not IRS workers were being intentionally partisan, it's clear that they were incompetent. Justin Elliott and Kim Barker have done a good job reporting how the IRS left review of nonprofit applications to an understaffed office in Cincinnati, full of employees with excessive workloads and insufficient training on the rules surrounding nonprofits.

Politicians should demand that the IRS do better, and President Barack Obama should appoint a new IRS commissioner who makes sure that it does. But Congress should also simplify the rules about nonprofits. A particularly good idea would be to clarify the rule that 501(c)(4) "social welfare" organizations must not be "primarily" engaged in electioneering. The simpler the rules are, the less room there will be for IRS workers to misapply them, whether through incompetence or malice.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.