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
December 20, 2014 -- Updated 0242 GMT (1042 HKT)
Conservatives know easing the trade embargo with Cuba is good for America. They should just admit it, says Fareed Zakaria.
December 20, 2014 -- Updated 0112 GMT (0912 HKT)
We're a world away from Pakistan in geography, but not in sentiment, writes Donna Brazile.
December 19, 2014 -- Updated 1709 GMT (0109 HKT)
How about a world where we have murderers but no murders? The police still chase down criminals who commit murder, we have trials and justice is handed out...but no one dies.
December 18, 2014 -- Updated 2345 GMT (0745 HKT)
The U.S. must respond to North Korea's alleged hacking of Sony, says Christian Whiton. Failing to do so will only embolden it.
December 19, 2014 -- Updated 2134 GMT (0534 HKT)
President Obama has been flexing his executive muscles lately despite Democrat's losses, writes Gloria Borger
December 18, 2014 -- Updated 1951 GMT (0351 HKT)
Jeff Yang says the film industry's surrender will have lasting implications.
December 18, 2014 -- Updated 2113 GMT (0513 HKT)
Newt Gingrich: No one should underestimate the historic importance of the collapse of American defenses in the Sony Pictures attack.
December 10, 2014 -- Updated 1255 GMT (2055 HKT)
Dean Obeidallah asks how the genuine Stephen Colbert will do, compared to "Stephen Colbert"
December 18, 2014 -- Updated 1734 GMT (0134 HKT)
Some GOP politicians want drug tests for welfare recipients; Eric Liu says bailed-out execs should get equal treatment
December 18, 2014 -- Updated 1342 GMT (2142 HKT)
Louis Perez: Obama introduced a long-absent element of lucidity into U.S. policy on Cuba.
December 16, 2014 -- Updated 1740 GMT (0140 HKT)
The slaughter of more than 130 children by the Pakistani Taliban may prove as pivotal to Pakistan's security policy as the 9/11 attacks were for the U.S., says Peter Bergen.
December 17, 2014 -- Updated 1600 GMT (0000 HKT)
The Internet is an online extension of our own neighborhoods. It's time for us to take their protection just as seriously, says Arun Vishwanath.
December 16, 2014 -- Updated 2154 GMT (0554 HKT)
Gayle Lemmon says we must speak out for the right of children to education -- and peace
December 17, 2014 -- Updated 1023 GMT (1823 HKT)
Russia's economic woes just seem to be getting worse. How will President Vladimir Putin respond? Frida Ghitis gives her take.
December 17, 2014 -- Updated 0639 GMT (1439 HKT)
Australia has generally seen itself as detached from the threat of terrorism. The hostage incident this week may change that, writes Max Barry.
December 12, 2014 -- Updated 2020 GMT (0420 HKT)
Thomas Maier says the trove of letters the Kennedy family has tried to guard from public view gives insight into the Kennedy legacy and the history of era.
December 15, 2014 -- Updated 1456 GMT (2256 HKT)
Will Congress reform the CIA? It's probably best not to expect much from Washington. This is not the 1970s, and the chances for substantive reform are not good.
December 15, 2014 -- Updated 2101 GMT (0501 HKT)
From superstorms to droughts, not a week goes by without a major disruption somewhere in the U.S. But with the right planning, natural disasters don't have to be devastating.
December 15, 2014 -- Updated 1453 GMT (2253 HKT)
Would you rather be sexy or smart? Carol Costello says she hates this dumb question.
December 14, 2014 -- Updated 2253 GMT (0653 HKT)
A story about Pope Francis allegedly saying animals can go to heaven went viral late last week. The problem is that it wasn't true. Heidi Schlumpf looks at the discussion.
December 14, 2014 -- Updated 1550 GMT (2350 HKT)
Democratic leaders should wake up to the reality that the party's path to electoral power runs through the streets, where part of the party's base has been marching for months, says Errol Louis
December 13, 2014 -- Updated 2123 GMT (0523 HKT)
David Gergen: John Brennan deserves a national salute for his efforts to put the report about the CIA in perspective
December 12, 2014 -- Updated 1426 GMT (2226 HKT)
Anwar Sanders says that in some ways, cops and protesters are on the same side
December 11, 2014 -- Updated 1439 GMT (2239 HKT)
A view by Samir Naji, a Yemeni who was accused of serving in Osama bin Laden's security detail and imprisoned for nearly 13 years without charge in Guantanamo Bay
December 14, 2014 -- Updated 1738 GMT (0138 HKT)
S.E. Cupp asks: How much reality do you really want in your escapist TV fare?
ADVERTISEMENT