The Internal Revenue Service has been accused of discriminating against certain groups that applied for tax-exempt status under the 501(c)(4) section of the Internal Revenue Code during the last presidential election campaign.
But why is there a section 501(c)(4) designation under the Internal Revenue Code? It is designed to reward "civic leagues or organizations not organized for profit but organized exclusively for promotion of social welfare." This is in keeping with the belief that organizations beneficial to society as a whole (churches, for example) deserve to be encouraged and promoted with favorable tax treatment. In the year of 1959, the meaning of "social welfare organization" was changed in a fundamental way. "To qualify for 501(c)(4) tax-exempt status an organization must operate primarily to further the common good and general welfare of the community. Note the change from the word "exclusively" to the word "primarily."
To qualify for this tax-privileged status, the group may not spend 51 percent or more of its operating budget to pursue political objectives. But when can the pursuit of a political outcome be said to also promote the welfare of society? And when is an organization promoting the benefit of society primarily, rather than merely incidentally or occasionally? These are questions that make the law open to interpretation depending upon a person's political outlook.
The Citizens United decision by the Supreme Court created an explosion of political organizations requesting tax-exempt status under section 501(c)(4). Organizations at either end of the spectrum were begun exclusively to promote or attack political candidates. Yet they still applied for tax-exempt status as 501(c)(4) social welfare organizations.
Now, we might well ask why it is important to make a clear distinction between social welfare and political groups. Here's the reason: if an organization is given tax exempt status we, the tax payers of the United States, indirectly underwrite the operating costs of that organization. We tell that group that it can generate income that is never taxed and use that income for its own purposes. We foster the goals and objectives of the group by indirectly paying its expenses. Thus it is terribly important that we, as a society, identify groups that do and do not deserve this favorable tax treatment.
The Citizens United Decision opened the floodgates to tons of new groups requesting tax-exempt status. The IRS was clearly taken off guard because of the massive influx of tax returns applying for the 501(c)(4) designation. Thus it became necessary to employ a set of "red flags" to identify groups more likely to have a political purpose as opposed to those intended to promote community welfare. A "red flag", as you know, is simply an indicator that the return in question deserves some additional attention. For example, including a home office deduction in a return is a "red flag."
The flagging of a return for greater scrutiny is simply a way of screening out those returns that are marginally likely not to deserve the favorable tax treatment that is requested.
The IRS knows it cannot possibly honor every request for tax-exempt status. So it has to have a way of selecting out those returns most likely to be fraudulent. Every person who did not sleep through the last presidential campaign knows that organizations with "Tea Party" in their names exist to further the election of conservative Republican candidates and to defeat congressional legislation introduced by Democrats like the Affordable Care Act ("Obamacare"). No reasonable interpretation of the law would allow tax-exempt status to any such group with such an obvious political purpose. No fair-minded person would argue that Crossroads GPS, Karl Rove's political action group to elect Mit Romney, deserved tax-exempt status as a social welfare organization.
Nor would any reasonable person give such privileged tax treatment to Organizing for America, the PAC created to re-elect President Obama. This ought to be obvious. But here's the crux of the matter: the name of an organization may sometimes provide a useful clue as to whether or not it exists for a political purpose. That's the "red flag." The words "Tea Party" and "Patriot" are tipoffs that might lead a reasonable person to suspect that the organization exists to pursue a conservative Republican political agenda and not a social welfare purpose.
So here we have IRS agents merely attempting to do their job. They were caught quite by surprise after the Citizens United decision by the huge number of returns seeking 501(c)(4) tax-exempt treatment. In some cases it there might have been legitimate disagreement over whether such an organization exists for a political purpose rather than for the benefit of society. In some cases IRS agents simply used the name of a group to select its tax return for more careful examination because prior experience told them that this likely indicated a fraudulent return.
What we are being told now is that it would have been reasonable for these Tea Party groups to sail through the approval process without any greater attention at all. We are being told that IRS agents should ignore the likelihood of a fraudulent return simply because all returns should be treated equally.
We are told that "red flags" should be disregarded for the sake of impartiality, even if the organization is seeking a tax-privileged status it probably does not deserve.
Here is the sad irony in this whole episode: in the future the IRS may be terrified of setting off a political firestorm by auditing groups it suspects of tax cheating. As a result, groups with known political purposes may be subsidized by the American taxpayer even though this is contrary to common sense and contrary to the intent of the law.
It is my view that this so-called scandal has absolutely nothing to do with either the present Congress or President, and should not be used to make a political point for or against either party.
Alan Ruben, M.D., is a resident of Wheeling