How Political Pressure on the IRS Began

By

Published May 23, 2013

| FOXBusiness

The 2010 Congressional midterm elections were approaching. Attacks on the Tea Party and groups calling for less government spending and taxation were in full swing.

President Barack Obama in his state of the union address in January had attacked the Supreme Court with the justices in attendance for signing off on the Citizens United case, for opening the ”flood gates” for special-interest money in U.S. elections

And 2010 was the year Democrats went full bore pressuring the IRS to investigate nonprofit politicking, which resulted in the IRS targeting Tea Party and other nonprofit applicants who were ideological opponents.

Letters from 10 high-profile Democrats to then-IRS commissioner Doug Shulman pressured the IRS to investigate nonprofit politicking, even threatening legislation to change IRS standards if the IRS didn’t act.

The letters show how elected officials pressured the IRS during an election season, fearing opponents were unfairly using the tax law to raise money to their advantage.

Shulman testified yesterday that back in March 2012, there was “absolutely” no special targeting of conservative groups going on. “At no time, to the best of my memory, was I ever given the impression that these [IRS employees] were only [looking closely] at conservative groups,” Shulman told Congress on Wednesday.

IRS official Lois Lerner has already publicly apologized for the IRS’s targeting of tax-exempt applications by using key words such as "Tea Party" and "Patriots.”

The timeline of the events show top-ranking Democrats were sending a flurry of letters to Shulman, demanding that the agency act, and act fast.

Democrats' Letters to the IRS 

The letters to Shulman date from September 2010 through August 2012, and are from Democrat senators including Max Baucus, Carl Levin, Charles Schumer and Al Franken, as well as Rep. Peter Welch.

“We write to urge the Internal Revenue Service (IRS) to investigate whether any groups qualifying as social welfare organizations under section 501(c)(4) of the federal tax code are improperly engaged in political campaign activity,” wrote Vermont Democrat Welch to Shulman in March 2012. (for more, click here).

Seven senators, including Schumer and Franken, complained to Shulman in March 2012 that “lack of clarity in the IRS rules” is to blame, threatening “legislation” to enact bright-line rules.

The seven Democrat senators signed off: “We urge the IRS to take steps immediately to prevent abuse of the tax code by political groups.” 

The IRS is behaving “passively,” complained Levin to Shulman in July 2012, adding: “How long after a complaint to the IRS does a compliance review begin?” and “What approximate time does it take to review the complaint?”

Sen. Levin also asked Shulman to look into a dozen groups, including Americans for Prosperity, 60 Plus Association, Patriot Majority USA and Club for Growth.

IRS official Steven Miller wrote back to Sen. Levin that the “IRS routinely receives examination referrals from a variety of sources including the public, media, members of Congress or their staff.”

IRS Broke the Rules

Tax-exempt 501(c)(4) social welfare organizations may engage in limited political campaign activities. They can engage in unlimited lobbying and advocacy on the issues. Donors cannot deduct donations on their tax returns.

The intense pressure from the Democrats likely led to the IRS breaking the rules. It selectively targeted conservative groups, says the report from the Treasury Inspector General for Tax Administration (TIGTA).

Specifically, the IRS “developed and used inappropriate criteria to identify nonprofit applications” with the words “Tea Party,” “Patriots” and “9/12,” or had a focus on “government spending,” “debt” or “taxes,” or said they wanted to “make America a better place to live,” or had any statements that “criticize how the country is being run,” the report says, instead of focusing on all applications with indications of potential political campaign activities.

A nonprofit’s focus on “government spending,” “debt” or “taxes,” or wanting to “make America a better place to live” or “criticizing how the country is being run,” fall within the social welfare education mission of tax-exempt groups under the law.

What Happened in 2010 

The president said in his 2010 January state of the union address: “Last week, the Supreme Court reversed a century of law to open the floodgates for special interests -- including foreign companies -- to spend without limit in our elections,” adding, “I don’t think American elections should be bankrolled by America’s most powerful interests, and worse, by foreign entities.”

In May 2010, the IRS unit responsible for reviewing tax-exempt groups in Cincinnati launched “a spreadsheet that would become known inside the IRS as the ‘Be On the Look Out’ computer listing, which included “the emerging issue of Tea Party applications,” the Treasury IG report says.

In June 2010, this unit “began training its specialists on issues to be aware of,” including Tea Party cases, the IG report says. “By July 2010, Determinations Unit management stated that it had requested its specialists to be on the lookout for Tea Party applications,” the IG says. 

Workers in the IRS’s Cincinnati Determinations Unit then used the Tea Party criterion as “a shorthand term for all potential political cases,” the report says, even though it appears so far the IRS did not use key words such as, say, the word “progressive” to target liberal groups.

IRS officials then started asking about the political affiliations of the groups’ speakers and candidates they supported; for a list of issues important to the group, its positions about the issues; details about the conversations and discussions the groups’ members had about the issues; and other jobs the groups’ members held outside the organization, including hours worked.

The IRS also demanded these groups fork over lists of names of past and future donors, which could put a chill on donations. The IG report says the IRS asked how the applicants used donations and grants, and whether the groups’ donors or officials have run or will run for public office, in violation of the rules.

By law, applicants for 501(c)(3) and 501(c)(4) tax-exempt status do not have to disclose this information, tax pros note.

Baucus Letter to the IRS 

On Sept. 28, 2010, Sen. Max Baucus, Democrat chairman of the Senate Finance Committee which oversees the IRS, wrote a three-page letter on Senate Finance letterhead noting: “The Committee has jurisdiction over revenue matters” and the IRS.

The Senator noted his concern about nonprofit lobbying for financial or political gain, and that the tax code was being used to “eliminate transparency in the funding of our elections” with “hundreds of millions of dollars” being spent by nonprofits in elections.

“I request that you and your agency survey major 501(c)(4)” groups for “possible violation of tax laws,” he demanded.

In June 2011, the IRS director of exempt organizations “immediately directed that the criteria” used to review tax-exempt applicants “be changed,” the Treasury IG report says.

Next month, in July 2011, the criteria were changed to focus on the “potential political, lobbying” or “advocacy activities” of the groups applying for tax-exempt status, targeting Tea Party and other groups worried about the size of government, for example.

The IRS workers then “used inappropriate criteria” that stayed in place for more than 18 months, the IG report says.

Congressman Calls for Action 

In March 2012, Welch decried “political groups masquerading as nonprofits,” the Congressman’s office said in a statement.

Rep. Welch said at the time: “The spigots of spending have been opened and the rules of the campaign road are muddier now than ever before. While we work to overturn this horribly misguided Supreme Court decision, federal agencies should send a clear signal that there is a cop on the beat enforcing federal laws.”

The statement from his office went on to say: “Welch is calling on the Internal Revenue Service (IRS) to investigate whether nonprofit 501(c)(4) organizations affiliated with Super PACs – such as Crossroads GPS, the Karl Rove-backed group spending millions of dollars in campaigns across the country – are in violation of federal law and IRS regulations.”

A the same time, Rep. Welch sent a letter to the President urging him to “use his constitutional authority to fill five openings on the six-member Federal Election Commission,” so the commission “can immediately get back to work policing the new campaign landscape.” 

And Rep. Welch sent a letter to IRS commissioner Shulman that said: “We write to urge the Internal Revenue Service (IRS) to investigate whether any groups qualifying as social welfare organizations under section 501(c)(4) of the federal tax code are improperly engaged in political campaign activity.”

He urged the IRS “to fully enforce the law” and “investigate and stop any abuse of the tax code by groups whose true mission is to influence the outcome of federal elections.” 

Rep. Welch tells FOX Business: “Our letter was sent in the context of the Supreme Court’s decision in Citizens United that opened the floodgates of corporate spending in 2012 election. We asked the IRS to do its job and make sure that no group was taking advantage of the taxpayer by claiming a tax break to which they were not entitled.”

Ryan Nickel, spokesperson for Congressman Welch, said: “No group was singled out in the letter which was sent nearly two years after the IRS began to focus on conservative organizations.”

Seven Senators Write to the IRS 

In March 2012, nine days after Welch wrote to the IRS, seven Democrat senators -- Charles E. Schumer (NY), Michael Bennet (CO), Sheldon Whitehouse (RI), Jeff Merkley (OR), Tom Udall (NM), Jeanne Shaheen (NH) and Franken (Minn.) -- sent a letter to Shulman which demanded the IRS “immediately change the administrative framework for enforcement of the tax code as it applies to groups designated as ‘social welfare” organizations.’”

The senators cited an “absence of clarity in the administration of" nonprofit laws, which groups could be “tempted to abuse” to their advantage, noting “worse,” they may take advantage of the law “even though they are not legitimate social welfare organizations.”

The senators even attacked IRS rules for being in violation of the law: “We think the existing IRS regulations run afoul of the law,” which allows wiggle room for nonprofit politicking “behind a facade of charity work,” they said.

The letter writers threatened “legislation” if the IRS failed to “adopt a bright line test” for nonprofits.

The senators signed off: “We urge the IRS to take steps immediately to prevent abuse of the tax code by political groups focused on federal election activities,” adding, “If the IRS is unable to issue administrative guidance in this area then we plan to introduce legislation to accomplish these important changes.”

Sen. Levin's Letters to the IRS 

On July 27, 2012,  Levin wrote a six-page letter to Shulman on Homeland Security and Governmental Affairs letterhead complaining that the July 13, 2012, response from Lerner "was unsatisfactory.” (Read letter: Levin letter to IRS re 501(c)(4) &quotsocial welfare&quot organizations)

In his letter, the senator criticized Lerner, quoting her as saying that the IRS only “takes steps to continually inform organizations of their responsibilities as social welfare organization [sic] to help them avoid jeopardizing their tax-exempt status’” and only “‘actively educates’” these groups on nonprofit tax law.

Senator Levin complained that her response “shows the IRS is passively making some information available” once a nonprofit is already in existence.

His stated fear: “Organizations are using Internal Revenue Code Section 501(c)(4) to gain tax exempt status while engaging in partisan political campaigns.”

The senator added: “Making the problem worse is that the IRS knows there is a problem because of the public nature of the activity, but has failed to address it.”

He cited two TV ads attacking Ohio Democrat senator Sherrod Brown and Nevada Republican senator Dean Heller, ads paid for by 501(c)(4) nonprofits.

“The IRS needs to immediately review the activities of 501(c)(4) entities engaging in partisan political ads,” the senator wrote.

Levin also asked IRS commissioner Shulman: “Typically, how long after a complaint to the IRS does a compliance review begin?” and “What approximate time does it take to review the complaint?”

He asked: “How many persons are involved in the enforcement of the 501(c)(4) rules?” and “why does the IRS allow 501(c)(4) organizations to self-declare?” Meaning, nonprofits get to hang out a shingle as nonprofits and are only scrutinized after the fact.

Sen. Levin’s letter noted that nonprofit “advocacy communication is [emphasis the senator’s] political campaign activity” if that activity “coincides with an electoral campaign” and “targets voters,” among other things.

The senator then asked: “Have the following 501(c)(4) organizations applied for..exemption for political activity from the IRS?” The senator listed in his letter to the IRS:

Crossroads Grassroots Policy Strategies

Priorities U.S.A.

Americans Elect

American Action Network

Americans for Prosperity

American Future Fund

Americans for Tax reform

60 Plus Association

Patriot Majority USA

Club for Growth

Citizens for a Working America Inc.

Susan B. Anthony List

IRS Responds to Levin 

On August 24, 2012, Steven Miller, IRS deputy commissioner for Services and Enforcement, wrote a seven-page letter back to Sen. Levin, noting “the IRS routinely receives examination referrals from a variety of sources including the public, media, members of Congress or their staff” and that the IRS has “an impartial, independent review process” in place. (Read letter here: IRS response letter re 501(c)(4) &quotsocial welfare&quot organizations).

Because they were already nonprofits, Miller could then disclose to Sen. Levin that the groups Americans for Prosperity, American Future Fund, 60 Plus Association, Patriot Majority USA, and Citizens for a Working America Inc. are in fact 501(c)(4) groups, but that the IRS was still determining whether the others were nonprofits.

Sen. Levin again wrote a two-page letter on August 31, 2012, to Shulman thanking him for Miller’s letter, but complaining: “I find it unacceptable that the IRS appears to be passively standing by while organizations that hold themselves out to be ‘social welfare’ organizations clearly ignore the tax code with no apparent consequences.” (Read letter here: Levin response letter to IRS re 501(c)(4) &quotsocial welfare&quot organizations).

He demanded: “How many 501(c)(4) organizations which appear to be primarily engaged in political activity have been notified by the IRA [sic] within the last 6 months that they may be in violation of the law?”

The senator signed off: “It is urgent that I receive your answers promptly.”

Miller then wrote a four-page letter back to the Senator reiterating the IRS’s process. (Read letter here: IRS response letter re 501(c)(4) &quotsocial welfare&quot organizations).

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