Fallout from allegations of tea party targeting hamper IRS oversight of nonprofits

The following article by Robert O’Harrow, Jr., was posted on the Washington Post website December 17, 2017:

Years of conservative attacks on the Internal Revenue Service have greatly diminished the ability of agency regulators to oversee political activity by charities and other nonprofits, documents and interviews show.

The fall in oversight, a byproduct of repeated cuts to the IRS budget, comes at a time when the number of charities is reaching a historic high and they are becoming more partisan and financially complex.

It represents a success for conservatives who have long sought to scale back the IRS and shrink the federal government. They capitalized on revelations in 2013 that IRS officials focused inappropriately on tea party and other conservative groups based on their names and policy positions, rather than on their political activity, in assessing their applications for tax-exempt status. Among conservatives, the episode has come to be known as the “IRS targeting scandal.”

Under the federal tax code, charities may not directly or indirectly support a political candidate, but they are allowed to participate in educational debates about the issues. Other nonprofits known as social welfare groups may be involved in politics, but only as long as it is not their primary purpose.

The main part of government tasked with policing those lines, the IRS’s Exempt Organizations division, has seen its budget decline from a peak of $102 million in 2011 to $82 million last year. At the same time, division employees have fallen from 889 to 642.

The division now lacks expertise, resources and the will needed to effectively oversee more than 1.2 million charities and tens of thousands of social welfare groups, according to interviews with two dozen nonprofit specialists and current and former IRS officials.

“This completely neutered them,” said Philip Hackney, a tax law professor at Louisiana State University and former Exempt Organizations lawyer at the IRS. “The will is totally gone.”

In an interview before he stepped down in November, then-IRS Commissioner John Koskinen told The Washington Post that the division is still enforcing the tax code and pursuing audits and examinations. But he acknowledged the effect of the budget cuts.

“The Exempt Organizations division, along with the entire IRS, is hampered significantly in its operations,” he said.

Conservatives have likened the IRS’s extra scrutiny of the tea party groups to Watergate and called it a political witch hunt. Among the leading critics was Cleta Mitchell, a veteran Republican activist and nonprofit lawyer. In 2014, she told a House oversight panel that Congress ought to abolish the IRS, saying the agency “is so corrupt and so rotten to the core that it cannot be salvaged.”

But while investigations by Congress and federal agencies found that IRS officials selected tea party groups for added attention, the investigators concluded there was no proof of political intent, a liberal conspiracy or White House involvement.

In recent years, division leaders compounded their challenges by ordering expedited approval of tens of thousands of groups seeking tax-exempt status, documents and interviews show. Last year, the division rejected just 37 of the 79,582 applications on which it made a final determination, according to agency data and interviews.

The Post this year has reported on a sprawling network of conservative charities, funded by wealthy contributors such as the Koch brothers, the Mercer family and the Lynde and Harry Bradley Foundation, that worked closely with Stephen K. Bannon, Breitbart News and other conservative media outlets to amplify President Trump’s messages.

Among them was the David Horowitz Freedom Center, which describes itself as a “school for political warfare” and openly supported Trump. The charity’s president, David Horowitz, told The Post that both the right and left routinely use charities in a political war by proxy.

“The entire [charity] universe is political,” Horowitz said.

Another member of that universe of charities is the Government Accountability Institute, which was started by Bannon, among others, and funded by the Mercer family. It helped produce “Clinton Cash,” a book that presented a stinging critique of Hillary Clinton and the Clinton Foundation.

On the left are groups like Media Matters For America, which has described its core mission as “disarming right-wing misinformation.” Media Matters has received funding from left-leaning members of an organization called Democracy Alliance, whose members were required to donate at least $200,000 a year to organizations endorsed by the group, according to documents that became public in 2014. Democracy Alliance members — including George Soros — have donated more than $500 million to liberal organizations over more than a decade.

Media Matters spokeswoman Laura Keiter said the group observes IRS rules against direct or indirect involvement in political campaigns.

“We are partisan but not political,” she said.

Such activity is effectively subsidized by American taxpayers, because contributors to charities — known as 501(c)(3) groups under the tax code — can deduct donations from their personal taxes.

More charities have now begun to recognize they face little chance of an examination or sanction, which can involve terminating a group’s tax-exempt status and the ability of its donors to deduct their contributions, specialists said.

“More and more groups are going to discover that they get away with doing politics,” said Lloyd Hitoshi Mayer, a law professor at Notre Dame and a former nonprofit lawyer.

Tim Delaney, president and chief executive of the National Council of Nonprofits, said his 25,000 members rely on federal regulators to look out for abusive practices and maintain the public’s trust in nonprofits. Many of them worry about the weakening of the division, he said.

“If bad actors are allowed into the sector or if even just a few charitable nonprofits are turned into partisan pawns, that erases the trust that charitable nonprofits need to advance nonpartisan public policy solutions,” Delaney said.

Effect of Citizens United

In 1970, the Exempt Organizations division at the IRS created an examinations branch to bolster oversight of charities, private foundations and other nonprofits.

The division was something of an anomaly at an agency whose central mission is to collect taxes. For decades, it had steady leadership and an experienced force of lawyers, auditors and others who understood the nuances and political sensitivities of the nonprofit world, according to former IRS officials.

The number of charities soared from 366,000 in 1985 to more than 1.2 million last year, and regulators struggled to keep up.

Among the challenges was assessing whether new groups seeking tax-exempt status complied with restrictions on political activity. The Johnson Amendment of 1954 prohibited 501(c)(3) charities from getting involved in campaigns. Other nonprofits designated as social welfare organizations under 501(c)(4) in the tax code are allowed to engage in a limited amount of political activity, as long as that is not its primary purpose. But the law is vaguely written and hard to enforce, according to tax lawyers and current and former IRS officials.

The division’s burden became heavier in 2010, after the Supreme Court’s Citizens United decision, which removed limits on spending by corporations and labor unions on political communication. That opened the way for a flood of donations to nonprofits.

Hundreds of tea party social welfare groups and other conservative organizations that opposed Obama administration policies submitted applications to be recognized as tax-exempt. Democrats complained that new 501(c)(3) and 501(c)(4) groups were more involved in political campaigns than the law allowed.

With the backlog of applications growing, the Exempt Organizations division’s regulators — most of them in IRS offices in Cincinnati — scrambled behind the scenes to assess the groups’ qualifications. The IRS officials there took shortcuts, such as flagging groups because of their names rather than focusing on their activities, according to investigations by the Treasury Inspector General for Tax Administration and the Senate Finance Committee. Division leaders in Washington failed to manage the process properly and offered conflicting directions on how to fairly address the surge in applications, according to the investigative reports.

By early 2012, tea party groups across the country were growing frustrated by the delays, some stretching to two years or more. Some activists bristled that IRS officials had sent them intrusive, wide-ranging requests for more information about political affiliations, social media posts and other details.

Toby Marie Walker, organizer of a tea party group in Waco, Tex., arranged a conference call for tea party activists across the country to discuss how to respond. Walker told The Post that more than 100 activists participated. Among them was Mitchell. A second conference call included Jay Sekulow, chief counsel for the American Center for Law and Justice, now a private attorney for President Trump, Mitchell said.

“We wanted to follow all the rules,” Walker said. “We didn’t want to get hammered.”

On March 5, 2012, Sekulow sent the Exempt Organizations division a letter saying he represented an applicant for tax-exempt status. The next day, the New York Times reported that Sekulow was representing 16 tea party nonprofits in a burgeoning fight with the IRS.

“This is obviously a coordinated effort by the IRS to stifle these Tea Party and Tea Party-affiliated groups, and to stifle free speech activities,” Sekulow told The Times. Sekulow declined to comment for this article.

Congress pressed the IRS about the allegations, and the Treasury Inspector General for Tax Administration launched an investigation.

The IG’s report was released in May 2013, triggering an uproar. It concluded that IRS officials “used inappropriate criteria that identified for review Tea Party and other organizations,” based on names or policy positions rather than an assessment of the groups’ political activity.

Conservatives set the tone of media coverage, claiming that the report showed the White House tried to use the agency to silence critics and calling the episode the “IRS targeting scandal.” But nowhere in the IG report did investigators assert that IRS officials “targeted” conservatives.

“As an initial concern, ‘targeted’ has a connotation of improper motivation that does not seem to be supported by the information presented in the audit report,” according to an internal email by the inspector general’s chief counsel, Michael McCarthy, that was later included in an investigative report by the Senate Finance Committee. “I think ‘selected’ or even ‘singled out’ would be accurate.”

Conservatives continued pushing the issue. On April 9, 2014, Republicans on the House Ways and Means Committee asked the Justice Department to pursue criminal charges against former Exempt Organization division leader Lois Lerner, who had left the agency under fire after the tea party scandal erupted.

Rep. Hal Rogers (R-Ky.), chairman of the powerful House Appropriations Committee, blasted the IRS for “impropriety and abuse” in a news release announcing $346 million in planned cuts to the agency’s budget.

Eager to avoid more congressional criticism, Exempt Organizations division leaders took extraordinary steps to streamline the review of nonprofits and clear out the backlog. Pending applications began sailing through the approval process at a pace that would cut the backlog from 32,713 in April 2014 to 205 by December 2016, an average of about 50 each working day.

At the same time, the division adopted an expedited 1023 EZ application form for small charities claiming to have less than $50,000 in donations. It required no supporting documentation. In less than six months in 2014 — even as the Exempt Organizations division was shedding oversight employees — the IRS received more than 100,000 applications, more than double the number for the entire previous year.

A study by the Taxpayer Advocate Service at the IRS later found that more than a third of the groups surveyed were not qualified to use the EZ form and should not have been approved. The advocate service said there was “a disturbing lack of information” about the new groups that threatened to undermine “the public’s and the IRS’s ability to effectively monitor this segment of the exempt organization population.”

Meanwhile, some IRS critics were intensifying their rhetoric.

“I believe that we are in the most serious constitutional crisis in our nation’s history, worse than the Civil War . . . and worse than Nixon,” Mitchell said in November 2014, while receiving an award from Horowitz’s Freedom Center.

In December 2014, Rep. Darrell Issa (R-Calif.), chairman of the House Committee on Oversight and Government Reform, released a report that asserted collusion between the White House and the IRS. “The Administration is using the targeting as pretext to support its proposed regulation to limit political speech of conservative nonprofits,” the report said.

Mismanagement, not criminal intent

Repercussions from the tea party scandal continue to echo through Washington.

This spring, Rep. Kevin Brady (R-Tex.), chairman of the House Ways and Means Committee, asked Justice to reexamine the request for a criminal prosecution of Lerner. The department declined in a Sept. 8 letter, saying that although an FBI investigation found “substantial evidence of mismanagement” that disproportionately affected conservative groups, it “had not uncovered evidence of criminal intent by any IRS official.”