Tax

The IRS Scandal

How can you tell a charity from a political front?
Economist StaffMay 23, 2013

The New York Times had a nice discussion group the other day between legal experts on how to solve the problem of 501(c)(4)s. Basically, this category of non-profits is supposed to cover groups like the Sierra Club, the NRA, and the AARP, which have clear public-benefit programmes (environmental defence and research, gun-use education, and support and social organisation for seniors) but also naturally want to engage in lobbying and some political activity in pursuit of their causes. However, after the Citizens’ United ruling in January 2010, the IRS saw an explosion in applications for 501(c)(4) status; as the tea-party movement gathered strength, applications went from 1,751 in 2009 to 3,357 in 2012.

Some of those applications, such as that of Karl Rove’s Crossroads GPS, set off alarm bells at the IRS, because they clearly seemed aimed at allowing purely political groups to benefit from the perks of 501(c)(4) status, especially freedom from having to disclose who your donors are. To figure out which 501(c)(4)s were actually political front groups, the IRS started singling out for extra scrutiny conservative names like “tea party” and “patriot”, without also looking for corresponding liberal names like “progressive” or “rainbow”. That created effective political discrimination against conservatives—not that a pseudo-ideologically-balanced checklist of names would have been much better. But if the IRS isn’t allowed to use organisational names that suggest a primarily political purpose as a guide, how is it supposed to figure out which groups deserve more scrutiny?

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It can’t, argues John Colombo, a law professor at the University of Illinois. He thinks we should scrap 501(c)(4)s entirely:

“[T]he Internal Revenue Service will never be able to satisfactorily police the line at which political activity becomes “primary.” Since “issue advocacy” (for example, lobbying) is permitted in any amount, the problem isn’t just one of identifying when political campaign activity becomes primary; it is also identifying the line between permissible issue advocacy and political campaign activity.