What Taxpayers Deserve to Know in IRS Nonprofit Controversy

The controversy now unfolding at the Internal Revenue Service -- that it targeted for rejection the nonprofit status of the Tea Party and other conservative groups that raised concerns about "government spending, government debt or taxes” as early as 2011 -- raises again the problematic oversight at the agency of a nonprofit sector that now is about the size of India.

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Tax laws covering nonprofit activities, and what the IRS is allowed to do, are notoriously murky. But the IRS appears to have seriously crossed the line (see bottom for the roadmap of questions to ask).

Both sides of the political aisle have been under the gun at the IRS for pushing the envelope of the law. Since the 1930s, nonprofits have abused the law and lived off the taxpayers’ nickel by hiding in the shadowy corners of a shambolic U.S. tax system.

But the IRS has an ugly history of conducting political audits and unfairly attacking individuals and nonprofits at the behest of politicians -- a history that involves the FDR, Eisenhower, Nixon, Kennedy and Clinton Administrations. To date, there is no indication the Obama Administration has had anything to do with the latest controversy.

History of Political Audits

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Former IRS commissioner Mortimer Caplin under the Kennedy Administration has said the IRS under the Eisenhower Administration was notoriously aggressive in auditing nonprofits and other individuals. IRS documents support those claims, and also show political audits dating back to the FDR administration, often done at the behest of FBI director J. Edgar Hoover.

The Kennedy Administration launched the “Ideological Special Organizations Project” at the IRS after it was attacked by right-wing groups due to the failed Bay of Pigs invasion, among other issues, putting their personal friend Carmine Bellino in charge of audits of tax-exempt conservative groups. The IRS then audited more than 10,000 groups, mostly right-wing oriented -- but the IRS also audited the group Lee Harvey Oswald pamphleteered for, the “Fair Play for Cuba” committee. The audits continued under the Johnson Administration, but were then terminated.

The Nixon Administration was notorious for its political audits of individuals on its enemies list. Although the Congressional Joint Committee on Taxation has said there was not an unusual number of audits of individuals under the Nixon Administration, these audits changed tax laws, including the debut of new IRS confidentiality statutes governing tax returns.

Prior to these new laws, the IRS had routinely answered White House calls to investigate political opponents, including groups on the right and left. During the ‘60s and early ‘70s, a secret unit of IRS investigators probed the tax returns of 3,000 "notorious" groups and 8,000 individuals, Nixon’s former IRS commissioner Donald Alexander has said.

Under the Clinton Administration, accuser Paula Jones said she was audited in 1997. Gennifer Flowers, Juanita Broaddrick, and fired White House Travel Office Director Billy Dale also reportedly said they were audited.

Nonprofits said they were audited under the Clinton Administration, including: Citizens for a Sound Economy, Christian Film and Television Commission, the National Rifle Association, the Heritage Foundation, Citizens Against Government Waste, Citizens for Honest Government, National Review, American Spectator, Freedom Alliance, National Center for Public Policy Research, American Policy Center, American Cause, Progress and Freedom Foundation, and Concerned Women for America.

The Christian Coalition, and various Christian ministries and churches, including Pat Robertson’s Christian Broadcasting Network, have been alleged to have come under IRS scrutiny.

Problematic Laws

The problem has to do with murky tax laws governing what are called 501(c)(3) or (c)(4) nonprofits that are exempt from paying federal income tax. Donors to 501(c)(3) organizations can deduct their donations on their tax returns. Donations made to 501(c)(4) organizations are not deductible, though some businesses who make these contributions often write them off as advertising or business expenses.

As FOX Business has reported, nonprofits over the decades have pushed the envelope of the law with tortured readings of highly subjective law, to the point where the IRS quotes Pontius Pilate in one background document: “What is truth? (John 18:38).”

As far back as before World War I, when the federal income tax was enshrined in law, charities by law were supposed to serve the public’s interest, not private interests, in their charitable and educational activities.

Since then, nonprofit tax law has evolved. Partisan activity must not take up a substantial part of a tax-exempt group’s operations, and it generally must not use its tax-free revenues for political activity. Nonprofits can’t participate in political campaigns on behalf of or in opposition to any candidate for public office.

The IRS allows limited political activity at certain nonprofits, so long as it does not make up a substantial amount of their operations.

For instance, if tax-exempt organizations are listed as social-welfare groups under section 501(c)(4) of the tax code, they can engage in limited political activity, so long as the primary focus is about promoting social welfare. That activity can include lobbying and advocating for issues and legislation, but not outright political-campaign activity. This is a tough judgment call because candidates are often about the issues   they’re trying to get elected upon.

The IRS by law has to probe donors with a political axe to grind. High on the IRS’s radar screen: A tax-exempt organization can't act as a stalking horse for a donor’s benefit, but that activity usually can only be discovered in an audit. Again, a private benefit cannot be furthered by the charitable organization under the tax law. Also, the IRS under the law has to ascertain a nonprofit’s application as to whether or not it will engage in politicking.

The IRS tries to be strict about nonprofit politicking. But nonprofits often get away with questionable activity. Moreover, the IRS only has several thousand workers to cover an estimated 1.5 million nonprofits with $1.4 trillion in revenues and an estimated $4.3 trillion in assets.

Former IRS nonprofit head Marcus Owens has already told FOX Business that nonprofit oversight is often an afterthought at the IRS because “the IRS is a debt collector, while its nonprofit division also is a regulator, which is a bad fit.”

And Owens has told FOX Business that “U.S. society doesn’t want a hyper-efficient IRS, because that starts to smack too much of a police state.” Nonprofits, or 501(c)(3) or (c)(4)s, have in the past won in tax court asserting first-amendment rights to protect their statements, as well as their tax-exempt status.

What the Public Deserves to Know in the Latest IRS Controversy

Here’s what the public deserves to know about the IRS workers scrutinizing Tea Party or patriot groups:

*What were they probing in asking about political interests or leanings? According to reports, IRS workers were probing tax-exempt applications from Tea Party and other groups using the following criteria: "issues include government spending, government debt or taxes; education of the public by advocacy/lobbying to 'make America a better place to live'; statements in the case file criticize how the country is being run." The IRS is on a knife edge here.

* “We had a shortcut in the process. It wasn’t appropriate. We learned about it and we fixed it,” IRS nonprofit official Lois Lerner reportedly said at a news conference. What exactly was the short cut, and who enacted it?

*Lerner reportedly confirmed that employees at a Cincinnati IRS office in 2012 flagged 300 applications for tax-exempt status, and a quarter of those were from the conservative groups. When asked for an exact number, and whether it was safe to assume that 75 applicants were Tea Party or patriot groups, Lerner said, “I’m not good at math.” What was the exact number?

*Lerner claimed the problem was that low-level IRS agents saw a higher number of incomplete or questionable applications coming in from “Tea Party” and “patriot” organizations. What was the incomplete information that caused IRS workers to red flag these groups?

*IRS workers also reportedly wanted to know about issues discussed at public forums conducted by the nonprofit applicants. In the past the IRS has asked for copies of literature distributed at these meetings, the intent of the meetings, and material published on websites. But how deep did the questions go?

*IRS workers also reportedly wanted to know whether the organizations collected dues, and how much the dues were, which sounds like they were crossing the line. Also, the IRS workers would have crossed the line, too, if they demanded résumés of the groups’ workers and any information about the groups’ family members.

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