By Ted Braun
National news these past several weeks has focused on a scandal in the Internal Revenue Service. IRS agents have been targeting Tea Party and other conservative groups for additional scrutiny when they applied for tax-exempt status. As this story developed over the past several weeks, however, it has become apparent that the IRS problem is much greater than the complaints raised by the Tea Party.
In this case as in many others, the devil is in the details. In its Revenue Act of 1913 Congress created a tax-exempt status for nonprofit organizations that were not charities but nevertheless operated exclusively for the promotion of social welfare (defined as promoting the common good and general welfare of the community). These were given a 501(c)(4) classification.
In 1959 during President Eisenhower's administration, however, tax code regulators gave this designation a confusing new interpretation: "An organization is operated exclusively for the social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community." 501(c)(4)1(a)(2)ii This, in essence, gave such groups permission to devote up to 49 percent of their work to non-social welfare activities.
This tax designation had several additional flaws. Such social welfare nonprofits do not have to apply to the IRS for recognition as tax-exempt organizations, but only need to declare themselves as such. Furthermore, donors who give to social welfare nonprofits can remain secret. This has opened access to tax exemption for such "social welfare" groups as Karl Rove's Crossroads GPS that spent more than $70 million in federal races in 2012, Charles and David Koch's Americans for Prosperity that spent more than $36 million in 2012, plus a host of new ones.
According to the guidelines for these social welfare groups, their tax-exempt status does not permit political spending but does allow money spent for education, lobbying, and issue advocacy. According to the investigative journalism organization ProPublica, many of these groups manage to use their status for wrong purposes, hiding these purposes in their reports to the Federal Election Commission and IRS.
Another serious problem is the lack of IRS staff in this part of its operations. Of the 90,000 employees at the agency in 2012, only 876 worked in its Exempt Organizations Division in Cincinnati. 200 of these were responsible for sifting through the applications of nonprofits and making determinations as to whether a nonprofit should be recognized as tax-exempt. In 2012 these employees received 60,780 applications. 51,748 were from groups that wanted to be recognized as charities. The number of social welfare nonprofit applications came to 2,774, an increase from 1,777 in 2011.
So far, efforts to require more transparency from social welfare groups and strengthen disclosure requirements have failed in the House and Senate. The devil in the details is still alive and well.