July 24, 2014


Some nonprofits concerned that IRS scandal will stain their good work

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State and national 501(c)(3) charities are expressing concern at being unfairly implicated by the growing scandal over the way the Internal Revenue Service's (IRS) Exempt Organizations Division has handled applications submitted by certain 501(c)(4) social welfare entities.

A report issued Tuesday night by the Treasury Inspector General for Tax Administration (TIGTA) was tellingly titled Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review. TIGTA conducted the audit based on allegations that the IRS process "1) targeted specific groups applying for tax-exempt status, 2) delayed processing of targeted groups' applications, and 3) requested unnecessary information from targeted groups."

Findings confirmed that the IRS used "inappropriate criteria that identified Tea Party and other organizations applying for tax-exempt status based upon their names or policy positions instead of indications of potential political campaign intervention." The audit also cited ineffective management, which allowed the practice to continue for more than 18 months; substantial delays in processing certain applications; and allowing unnecessary information requests to be issued.

At the same time, and without applying the above criteria, the IRS approved 501(c)(4) applications from organizations with liberal-sounding names, including the words Progress and Progressive.

President Obama has directed the Treasury to hold responsible those who are accountable for failures and to quickly implement recommendations from the Inspector General's report. Additionally, the Justice Department is conducting an investigation to determine if any criminal violations occurred.

"Charitable nonprofits are justifiably outraged by reports that the Internal Revenue Service targeted applicants for tax-exempt status based on their apparent political beliefs," says Tim Delaney, president and CEO of the National Council of Nonprofits, in a written statement. "As more facts emerge on the developing story, the National Council of Nonprofits calls on policymakers and the news media to strengthen public respect for, and not exacerbate ignorance of, the laws governing and distinguishing the nonpartisan work of charitable nonprofits in communities across the country."

Delaney expresses the frustration of many nonprofit leaders about coverage of the controversy that generically lump all nonprofits into the same category, when in fact federal tax code assigns different rules and responsibilities.

"It's important for 501(c)(3) nonprofits to communicate with their stakeholders about the differences between these nonprofits and 501(c)(4) social welfare organizations to lessen any confusion that may exist," says Trisha Lester, vice president of the N.C. Center for Nonprofits.  "The former group may not engage in any political activity as that is strictly prohibited by the IRS. "

While organizations determined to be tax exempt under the 501(c)(3) tax code may engage in limited amounts of lobbying, they are expressly banned from engaging in partisan political electioneering, 501(c)(4) tax exempt organizations may engage in some political activities.

Richard M. Clerkin, associate professor of public and international affairs at NC State University, is unaware of any academic research that speaks to the issue. However, a potential outcome could be a renewed call for change at an institution that is historically reluctant to embrace it.

"Is the IRS, a federal agency set up to collect taxes as efficiently and effectively as possible, the right agency to monitor organizations from which it will not collect taxes?" Clerkin says. "There have been calls to set up a new federal bureau to regulate and monitor nonprofit organizations. These recently revealed IRS activities may create the political will necessary to bring this change about."

Marcus S. Owens is an exempt organizations specialist at Caplin & Drysale and the former director of the IRS Exempt Organizations Division, a position currently held by Lois Lerner. A statement posted on the firm's website says that Owens anticipates "significant repercussions" as a result of the audit. Changes could include extending some provisions of 501(c)(3) status to other groups seeking tax exempt approval and creating "a penalty structure for IRS employees and a taxpayer bill of rights."

Owens additionally expressed concern about Lerner attributing the problem to low-level employees in Cincinnati. "It shouldn't be low-level employees making decisions about general case processing," Owens says in the statement. "That's a management job."

See related story here.



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