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Obama, Congress promise probe of IRS

  • McClatchy Washington Bureau
  • Published Monday, May 13, 2013, at 5:56 p.m.
  • Updated Tuesday, May 14, 2013, at 6:21 p.m.

What is a 501 (c)?

Tax-exempt organizations are referred to as 501 (c) organizations because of the section they appear in under the tax code.

A 501 (c) 3 organization is a religious, charitable and similar organization, including religiously-affiliated organizations. These are the common charities, such as the United Way. Donations to these organizations are tax deductible. These groups can lobby on certain issues tied to the reason for their existence.

A 501 (c) 4 organization must broadly promote social welfare, and donations to these are not tax deductible, but donations have the benefit of anonymity to the donor. Limited lobbying is allowed, tied to social welfare issues, but favoring or opposing specific candidates is prohibited. In 2012, both Obama and rival Mitt Romney had powerful 501 (c) 4 organizations spending millions on TV ads promoting their candidate’s issues or criticizing the issues of their opponent, never actually naming any candidate. Karl Rove’s Crossroads GPS was the most publicized GOP-linked 501 (c) 4 organization. Organizing for Action was the Democratic powerhouse.

527 tax-exempt organizations are named after the section of the tax code they fall under. These groups don’t openly advocate for or against a particular candidate or party, cannot coordinate with campaigns and must disclose donors. They’re largely free from donation limits but must register with both the IRS and Federal Election Commission and report periodically. They usually raise money for issue campaigns and voter turnout efforts. The best known of these groups is the Swift Boat Veterans for Truth, which indirectly attacked then Democratic Presidential Nominee John Kerry.

The latter two have encroached into the territory of political action committees, which are governed by the Federal Election Commission and must report the names of donors and the amount they gave.

— Political Washington reacted with bipartisan outrage Monday to reports that the Internal Revenue Service targeted conservative organizations applying for special tax-exempt status – though questions have been raised about politics and tax status since at least 2006.

President Barack Obama said it was “outrageous” if true that the IRS gave extra scrutiny to right-leaning groups applying for tax-exempt status. “They have to be held fully accountable, because the IRS as an independent agency requires absolute integrity, and people have to have confidence that they’re . . . applying the laws in a nonpartisan way,” he said at the White House.

“We need to get to the bottom of what happened here. I want to see all the facts,” said Sen. Max Baucus, D-Mont., chairman of the Finance Committee. “The American people have questions for the IRS and I intend to get answers.”

The top Republican on the panel concurred. “Bipartisanship on this issue is critical since both Democrats and Republicans have expressed considerable interest in these matters over the past couple of years,” said Sen. Orrin Hatch, R-Utah.

While the political leaders of the government reacted to the news, insiders noted that there had been complaints about IRS treatment of groups engaging in political activity since at least 2006. Then, it was scrutiny of liberal-leaning churches during the Bush administration. Now, it’s the treatment of right-leaning groups during the Obama administration.

“There are tea party groups that went out of business because of these (IRS) letters,” Tom Zawistowski, the executive director of the TEA Party in Portage County, Ohio, and president of the We the People Convention, told McClatchy. “How do you give (tea party and conservative) groups time and effort they put in back? I see a class-action suit.”

At issue is a Cincinnati-based office of the IRS that determines whether applications for tax-exempt status are legitimate.

The “determinations” unit in spring of 2010 began giving special scrutiny to organizations that mentioned tea party, patriots or other “take back the country” references in the name. They later extended to groups focused on government spending, according to a timeline obtained from congressional sources by McClatchy.

Word of the work was not limited to the Ohio office. IRS managers in Cincinnati and Washington decided in April 2010 to send a “Case Sensitive Report” about the tea party cases “up the chain” in Washington, according to Hatch. The report was given to two IRS executives in Washington the same month, including Lois Lerner, who heads the IRS division overseeing tax-exempt groups, and her subordinate, according to Hatch.

The timeline comes from an unreleased report from the Treasury Department’s inspector general for tax administration, which is due out this week.

That office began looking into a “campaign of intimidation” alleged in a June 28, 2012, letter and request for investigation from Rep. Darrell Issa, R-Calif, chairman of the House Committee on Oversight and Government Reform.

The inspector general, J. Russell George, responded July 11, 2012, pledging to look into Issa’s concern, specifically “questionnaires that the IRS has issued which may exceed appropriate scrutiny and a potential lack of balance in the use of criteria for reviewing organizations that are applying for tax-exempt status.”

Lerner acknowledged Friday that organizations were singled out because of their names in their applications for tax-exempt status.

The controversy underscores the less than clear line in the tax code distinguishing between organizations that are political in nature, vs. those that broadly promote social welfare.

“The line between different types of organizations engaging in advocacy and election activities is very blurry,” said Jeremy Koulish, a researcher for the Center on Non-Profits and Philanthropy at the Urban Institute, a centrist policy think tank. “That has a lot of implications and it makes it very difficult to enforce the regulations that exist.”

In fact, the current IRS firestorm isn’t exactly new.

Democrats in March 2012 called on the IRS to look broadly at the political behavior of certain tax-exempt organizations whose political involvement is supposed to be limited to issues and not particular candidates. They had in mind Crossroads GPS, the huge tax-exempt organization run by Republican strategist Karl Rove. Around the same time, GOP leaders such as Senate Minority Leader Mitch McConnell, R-Ky., began complaining that conservative groups were getting unfair attention.

Allegations of IRS meddling go back farther than that. In 2006, houses of worship across the nation reviewed their get-out-the-vote efforts after the IRS probed the liberal All Saints Episcopal Church.

The pastor of that church claimed he was targeted for criticizing the war in Iraq, and clergy of all faiths and religious-affiliated groups complained of undue IRS attention. During the 2004 election cycle, the IRS investigated 110 cases of alleged illegal political activity by churches, McClatchy reported on Oct. 31, 2006.

The Senate Permanent Subcommittee on Investigations has for months been looking into IRS regulation of nonprofit groups engaged in politics.

“We had tentatively planned a hearing on that issue for June,” said a joint statement Monday from Chairman Carl Levin, D-Mich., and ranking Republican Sen. John McCain of Arizona. “After Friday’s announcement that the IRS, to the extent it has been enforcing the law, may have done so in ways that singled out some groups for special scrutiny, we have determined that the subcommittee should investigate that additional issue as well.”

There are more than 25 special IRS designations for tax-exempt status, including special individual categories for cemeteries, war veteran organizations and social clubs.

The most common status, however, is for charities and religious organizations, named for section 501 (c) 3 of the tax code. The next most common, and most controversial, are the 501 (c) 4s, which are supposed to be social welfare organizations. There were 2,774 applications to the IRS for such a designation in fiscal 2012, with eight denials.

While charity groups enjoy tax-exempt status and their contributors can deduct donations from taxes, donors to social welfare groups don’t get such deductions but do get an equally important benefit - anonymity. If donors give to a political action committee, their name and donation must be made public. But if they give to an issue-oriented social welfare group, their name doesn’t appear.

The investigative news website ProPublica reported in August 2012 that “social welfare” organizations had spent to date more than $60 million on ads during the presidential campaign, outspending by $5 million the Super Political Action Committees, formed after the 2010 Supreme Court decision that allowed unlimited political donations from corporations.

Email: khall@mcclatchydc.com; Twitter: @KevinGHall; Email: wdouglas@mcclatchydc.com; Twitter: @williamdouglas; Email: lclark@mcclatchydc.com; Twitter@lesleyclark

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