The whirlwind of controversy surrounding the disclosure that the Internal Revenue Service had singled out applications from conservative advocacy groups seeking tax-exempt status for extra scrutiny could damage the agency’s ability to regulate charities, hinder needed efforts to update IRS rules, and deter nonprofits from expanding their advocacy efforts, say nonprofit experts.
They fear that the political fallout, including plans for Congressional hearings, will delay even further some of the issues that the nonprofit world has wanted lawmakers and the IRS to tackle for many years, including beefing up oversight of tax-exempt organizations and giving clearer guidance about what constitutes political activities for both charities and advocacy groups.
“I am horrified and really almost angry that a government agency would operate in this way,” said Frances Hill, a law professor at the University of Miami who has argued for many years that the rules governing 501(c)(4) “social welfare” groups like the ones involved in the current controversy are an “incoherent, indefensible mess” and need to be rewritten.
She says she doesn’t expect Washington to examine nonprofit issues like that anytime soon.
“Who in Congress wants to look at this when it’s vitally important to figure out how the current outrage happened and who bore what kind of responsibility over time?” she says.
Effort to Streamline
The controversy began at a tax conference in Washington last week hosted by the American Bar Association. Lois Lerner, director of the IRS division that oversees tax-exempt groups, was asked about charges that nonprofits affiliated with the small-government Tea Party were subject to intensive scrutiny by IRS agents reviewing their applications to be recognized as advocacy groups, including requests from government officials to turn over donor lists.
Ms. Lerner said the Cincinnati office that handles applications was trying to streamline its examinations of groups seeking status under Section 501(c)(4) of the Internal Revenue Code after noticing that the number of such had started to spike after 2010, but it had improperly searched for names like “tea party” or “patriots.” That led to accusations of political bias, which was roundly condemned by both Republicans and Democrats including President Obama.
Nonprofit leaders worry that the dispute will further confuse the public, which has trouble distinguishing between 501(c)(3) charities, which are not allowed to engage in any kind of partisan activities, and 501(c)(4) advocacy groups, which can do so, as long as it is not their primary activity. The latter tend to run into more controversy because they sometimes face accusations that they are arms of political candidates or parties.
“All nonprofits are being smeared as though we are engaging in political activity,” said Tim Delaney, president of the National Council of Nonprofits.
He worries that tens of thousands of charities that are navigating the slow process of getting their tax-exempt status approved could now face delays as Congress reviews how the IRS handled applications from the much smaller universe of 501(c)(4) groups. Charities make up the vast majority of the 60,000 applications for tax-exempt status the IRS manages each year, with about 3,500 applications coming from advocacy groups in 2012.
If the IRS is distracted, both charitable and advocacy groups could also operate outside of regulations with less oversight, Mr. Delaney added. “We depend on the IRS. We need a tough cop on the beat.”
Flagging Advocacy Groups
A recent audit by the Treasury Department’s inspector general found that the IRS used screening criteria of “tea party,” “patriots,” and “9/12 project” to flag mostly advocacy groups for intensive scrutiny in 2010. The criteria were broadened over the past two years to include groups whose missions included “social economic reform,” “educating on the Constitution and Bill of Rights,” and making America “a better place to live.”
Diana Aviv, president of Independent Sector, a coalition of nonprofits and foundations, said all nonprofits—charities and advocacy organizations alike—should be troubled by those actions.
“There are government officials using search terms that relate to the mission of an organization,” she said. “If we go down that road, it’s pretty dangerous whether you’re on the left or the right.”
Other Nonprofits Scrutinized
Although much of the attention has focused on advocacy groups, the audit shows that the IRS was also flagging 501(c)(3) groups for review. Some lawyers said they were aware of charities that have been scrutinized.
Heidi Abegg, a lawyer who represents nonprofits, said she has a client in that category, but she is not authorized to reveal its identity except to say it is an educational group whose application for tax-exempt status has been delayed for nearly two years.
The problem with such delays are numerous for charities.
Without tax-exempt status, charities may not solicit donations in several states and they are not eligible for lower postal rates or most foundation grants. “It affects their fundraising and getting their message out,” Ms. Abegg said.
Some nonprofit experts worry that the controversy will make charities even more shy about advocacy than they already are. Many groups are reluctant to lobby Congress about budget issues because the debate is so partisan, Patrick Lester, director of federal fiscal policy at the Center for Effective Government, said in an e-mail. “IRS investigations, even if they are rebuffed, will make those organizations even less likely to become involved in those issues.”
Both charities and advocacy groups are also hindered by the IRS’s vague definition of “political activities,” several experts said, noting that lawyers and others have proposed clarifying that issue many times over the years.
“Without those standards, you’re far more likely to get haphazard attempts to identify activity that is either thought to be political or over the line or too much activity of one kind or another,” said Holly Schadler, a lawyer who represents nonprofits. “If you don’t have clear standards for people to evaluate either organizations applying for tax-exempt status or people attempting to evaluate these applications, it’s very difficult to avoid situations like this.”
Listen to Lois Lerner, head of the Internal Revenue Service's tax-exempt division, discuss the agency's audits during a meeting of the American Bar Association in Washington.