Skip to main content

IRS scandal is about donors, not tax

By Roger Colinvaux, Special to CNN
May 17, 2013 -- Updated 1922 GMT (0322 HKT)
STORY HIGHLIGHTS
  • Roger Colinvaux: The outrage over the IRS's conduct is based on a misunderstanding
  • Colinvaux: The issue is fundamentally about disclosure of donors, not tax-exempt status
  • He says that after ruling, political groups can use the tax law to hide identity of donors
  • Colinvaux: The IRS should not be put in the position of deciding whether a group is political

Editor's note: Roger Colinvaux is associate professor of law at Catholic University of America. He was counsel to the U.S. Joint Committee on Taxation from 2001 to 2008 on tax-exempt organization issues and recently testified before the House and Senate on tax reform and 501(c)(3) organizations.

(CNN) -- The outrage over the IRS's conduct in targeting certain tax-exempt groups is based on a misunderstanding. Obviously, mistakes were made in how the IRS examined the groups, but what should not get lost amid the resulting hue and cry is that this is fundamentally about disclosure of donors, not tax-exempt status.

First of all, the IRS is to a certain extent in the "targeting" business. The agency's job -- like it or not -- is as an enforcer. It is supposed to go after tax scofflaws. It has to look for clues in tax returns and other materials to find the cheaters and dodgers.

In the current scandal, the method of the "targeting" -- searching returns for names like "tea party" as indicators of possible misfeasance -- was a mistake. But it does not follow that the IRS should not have been looking at these and other groups as a class, without regard to political affiliation.

Roger Colinvaux
Roger Colinvaux

Second is the question of what the IRS is looking for. Because the IRS is the cop guarding tax-exempt status, we think that the IRS is supposed to be deciding whether a group should be granted the "privilege" of tax exemption. It follows that we would and should be outraged if the IRS grants or denies the "privilege" because of an organization's political beliefs.

But this is wrong. This is not really what the IRS is doing when enforcing the tax laws in this context. To be clear: Tax exemption here is not much of a privilege and is not the main issue.

IRS commissioner: I did not mislead
Penn Jillette on IRS: Breaks my heart

Tax-exempt status is offered by many parts of the tax code and not primarily to bestow some special tax break on an organization because of its function. Here's a breakdown:

501(c)(3) charity

Process for Exemption: Must apply to IRS. Scrutiny required because of other tax benefits charities receive.

Reason for Exemption: Performs a public benefit, lessens burdens of government.

501(c)(4) social welfare, 501(c)(5) labor union, 501(c)(6)

Process for Exemption: Not required to apply to IRS but can self-declare exempt status.

Reason for Exemption: Administrative convenience. Not much taxable income. Generally for a nonprofit purpose.

527 political organization

Process for Exemption: Must notify IRS (but approval not required).

Reason for Exemption: Historically always exempt on contributions -- seen as a pass-thru entity.

The exception is for charitable organizations, i.e., 501(c)(3)s, which do have heightened standards for tax exemption. But the extra scrutiny here is less because of tax exemption and more because of other tax benefits that flow from tax-exempt status, such as the ability to receive tax-deductible contributions. Importantly, charitable organizations are not allowed to engage in any political activity, because Congress long ago decided that charity and politics are incompatible.

For noncharitable groups like the tea party groups, organized on a not-for-profit basis, tax exemption flows almost as a matter of course. Tax exemption is not viewed primarily as a subsidy of the federal government but more as a matter of administrative convenience.

Many nonprofit groups do not have much income, would not owe much tax, and so tax exemption is not that much of a "benefit." This is why such groups are not even required to apply for tax-exempt status but rather can just hold themselves out as tax exempt and simply start filing annual returns as an exempt group.

If this is true, however, then why does the IRS care about any group applying for exemption as other than a charity?

Well, the question for the IRS here is not really one of whether a group is tax exempt but under which part of the code the exemption will come from. Will a group be "tax exempt" under one part of the tax code, e.g., as a section 501(c)(4) "social welfare" organization, or under another part, e.g., as a section 527 political organization?

Both sections offer a form of tax exemption. But the big difference between the two has nothing to do with taxes. Rather, it has to do with the disclosure of donors.

For reasons of campaign finance law (not tax law), public disclosure of donors is required for political organizations but not for social welfare organizations. And this brings us to the current scandal.

After the Supreme Court's Citizens United decision, it became possible for a 501(c)(4) organization to engage in unlimited amounts of political spending. It thus also became possible for a political organization to use the tax law to hide the identity of donors. After Citizens United, the abuse the IRS is tasked with policing is whether an organization that claims to be a "social welfare" organization is in reality a political organization in disguise.

So the IRS, when faced with a deluge of new applications for 501(c)(4) status, rightly had to decide whether some or many of these groups were actually political organizations, tax-exempt under section 527, and so subject to disclosure rules.

Primarily for reasons of campaign finance law, the IRS has been put in the position of deciding whether a group is primarily political. This is not a job the IRS is good at or ever will be good at. And as we have seen, it is not a job that we want the IRS to have.

The solution is disclosure. Congress has the power to level the playing field on disclosure and should take action to do so. This will allow legitimate nonpolitical social welfare organizations to enjoy their appropriate tax status and return section 501(c)(4) to the backwater of exempt law it once was.

Follow us on Twitter @CNNOpinion.

Join us on Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of Roger Colinvaux.

ADVERTISEMENT
Part of complete coverage on
September 16, 2014 -- Updated 1305 GMT (2105 HKT)
LZ Granderson says Congress has rebuked the NFL on domestic violence issue, but why not a federal judge?
September 16, 2014 -- Updated 1149 GMT (1949 HKT)
Mel Robbins says the only person you can legally hit in the United States is a child. That's wrong.
September 15, 2014 -- Updated 1723 GMT (0123 HKT)
Eric Liu says seeing many friends fight so hard for same-sex marriage rights made him appreciate marriage.
September 15, 2014 -- Updated 1938 GMT (0338 HKT)
SEATTLE, WA - SEPTEMBER 04: NFL commissioner Roger Goodell walks the sidelines prior to the game between the Seattle Seahawks and the Green Bay Packers at CenturyLink Field on September 4, 2014 in Seattle, Washington. (Photo by Otto Greule Jr/Getty Images)
Martha Pease says the NFL commissioner shouldn't be judge and jury on player wrongdoing.
September 16, 2014 -- Updated 1315 GMT (2115 HKT)
It's time for a much needed public reckoning over U.S. use of torture, argues Donald P. Gregg.
September 16, 2014 -- Updated 1225 GMT (2025 HKT)
Peter Bergen says UK officials know the identity of the man who killed U.S. journalists and a British aid worker.
September 16, 2014 -- Updated 1128 GMT (1928 HKT)
Joe Torre and Esta Soler say much has been achieved since a landmark anti-violence law was passed.
September 12, 2014 -- Updated 2055 GMT (0455 HKT)
David Wheeler wonders: If Scotland votes to secede, can America take its place and rejoin England?
September 16, 2014 -- Updated 1241 GMT (2041 HKT)
Jane Stoever: Society must grapple with a culture in which 1 in 3 teen girls and women suffer partner violence.
September 12, 2014 -- Updated 2036 GMT (0436 HKT)
World-famous physicist Stephen Hawking recently said the world as we know it could be obliterated instantaneously. Meg Urry says fear not.
September 12, 2014 -- Updated 2211 GMT (0611 HKT)
Bill Clinton's speech accepting the Democratic nomination for president in 1992 went through 22 drafts. But he always insisted on including a call to service.
September 12, 2014 -- Updated 2218 GMT (0618 HKT)
Joe Amon asks: What turns a few cases of disease into thousands?
September 11, 2014 -- Updated 1721 GMT (0121 HKT)
Sally Kohn says bombing ISIS will worsen instability in Iraq and strengthen radical ideology in terrorist groups.
September 16, 2014 -- Updated 2231 GMT (0631 HKT)
Analysts weigh in on the president's plans for addressing the threat posed by the Islamic State of Iraq and Syria.
September 11, 2014 -- Updated 1327 GMT (2127 HKT)
Artist Prune Nourry's project reinterprets the terracotta warriors in an exhibition about gender preference in China.
September 10, 2014 -- Updated 1336 GMT (2136 HKT)
The Apple Watch is on its way. Jeff Yang asks: Are we ready to embrace wearables technology at last?
ADVERTISEMENT