Hobbled IRS can't stem 'dark money' flow

Center for Public Integrity
JUDGE WANTS IRS MYSTERY SOLVED
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A federal judge has given the IRS a month to present written explanations on how the emails to and from former IRS official Lois Lerner disappeared.

When federal election lawyers decided the nonprofit Crossroads Grassroots Policy Strategies likely violated political spending limits, campaign finance watchdogs were certain the Internal Revenue Service would take action.

After all, lawyers for the Federal Election Commission argued that Crossroads GPS, co-founded by Republican operatives Karl Rove and Ed Gillespie, spent more on politics than anything else leading up to the 2010 election.

Then the IRS tea party scandal exploded.

Related: How IRS' nonprofit division fared in 5 charts

Republicans in Congress began waylaying the IRS over what they said was the systematic and inexcusable targeting of tea party and conservative groups. And the Treasury Inspector General for Tax Administration declared that the agency had employed “inappropriate criteria” in heavily scrutinizing some groups' tax-exemption applications.

The scandal has persisted with the recent revelation over missing agency emails, which the IRS has blamed on a computer hard drive crash in 2011.

The IRS’ nonprofit division, grappling with a decimated staff and limited resources, effectively lost whatever nerve it had left. Notably, it came to a near standstill on deciding whether it should grant "social welfare" nonprofit status to Crossroads GPS and other conservative groups. It likewise balked at denying or revoking nonprofit status for a growing constellation of politically driven, big-spending liberal nonprofits such as Patriot Majority USA and Priorities USA.

Related: Decades in the making: The decline of IRS nonprofit regulation

The IRS knew that many of these groups were highly political. But “nobody wanted to say 'no, you’re not exempt,'” said an IRS exempt organizations division staffer who asked not to be identified for fear of losing his job.

“We stalled so we wouldn’t have to say no,” he added.

The paralysis allowed organizations waiting for IRS approval to continue to spend freely on elections while keeping the names of their donors secret.

Related: Reid on money in politics

The tea party scandal, combined with Congress systematically stripping the IRS of resources and clout over decades, has led to an exempt organizations division that has all but quit regulating politically active nonprofits in any consistent, demonstrable way, a six-month Center for Public Integrity investigation reveals.

The investigation, which involved a review of thousands of pages of IRS documents and interviews with more than two dozen current and former IRS employees and administrators, finds the agency’s nonprofit regulation division has:

IRS Commissioner John Koskinen says the agency he’s led since December is in peril.

Related: Boustany on oversight

“We don’t have enough employees anywhere,” he told the Center for Public Integrity when asked about its ability to regulate nonprofit groups. “I think the whole agency is at risk at the level of underfunding we have.”

‘Social welfare’ explained

“Social welfare” nonprofits, also known as 501(c)(4) organizations, today play a key role in many federal political elections.

Related: Chasin on IRS

But they began their existence as entirely different — and unassuming — kinds of creatures.

A federal law passed in 1913 created them as a "catch all" for nonprofit groups that weren’t necessarily educational or charitable but provided a public service and operated “exclusively for the promotion of social welfare.”

Thank a macaroni factory run by the nonprofit New York University Law School for their evolution.

Related: How to fix the IRS nonprofit division

Responding to business complaints about the arrangement, Congress in 1950 passed a law levying taxes on nonprofits’ “unrelated business income.” If nonprofits — 501(c)(3)s like hospitals, charities and universities and 501(c)(4)s — could run a side business, it meant they weren’t operating “exclusively” for their exempt purpose.

The U.S. Department of the Treasury, the IRS' parent agency, ultimately issued new regulations interpreting “exclusively” as “primarily.” In other words, social welfare nonprofits could engage in other kinds of activities so long as they operated primarily for the common good.

By 1981, the IRS further relaxed the rules by saying social welfare nonprofits could “carry on lawful political activities” as long as their work primarily benefited society’s welfare.

Related: Tea party scandal brews FOIA backlog at FEC

It wasn’t until the Supreme Court’s Citizens United v. Federal Election Commission decision in 2010, however, that politically active nonprofits — social welfare groups as well as 501(c)(5) labor unions and 501(c)(6) trade groups — became a major force in political elections, all while receiving a de facto tax subsidy.

The decision allowed corporations, unions and certain nonprofit groups to spend unlimited amounts of cash supporting or opposing political candidates so long as they didn’t coordinate with candidates or their committees.

Social welfare and other nonprofit groups galloped into the post-Citizens United era with an inherent advantage over overtly political groups: They could hide the source of their funding, regardless of whether those sources were corporations, individuals or other special interests. And they're only required tell the FEC the names of donors who give money to help produce specific ads — something that rarely happens. 

Social welfare groups’ political spending, specifically, ballooned to $256 million during the 2012 election cycle from next to nothing only a few years before, according to the Center for Responsive Politics.

Aghast, watchdog groups and politicos filed numerous complaints with the IRS in hope the agency’s exempt organizations division would intervene, since it's supposed to ensure 501(c) nonprofit organizations don't become more political than the law allows.

There’s more to this story. Click here to read the rest at the Center for Public Integrity.

This story is part of Consider the Source. Seeking to ‘out’ shadowy political organizations flourishing in the wake of the Supreme Court’s Citizens United ruling. Click here to read more stories in this investigation.

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Copyright 2014 The Center for Public Integrity. This story was published by The Center for Public Integrity, a nonprofit, nonpartisan investigative news organization in Washington, D.C.

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