Targeting tax-exempt groups

One of the great outrages of the Watergate scandal was President Nixon’s use of the Internal Revenue Service to harass his political opponents. Yet some IRS officials appear to have forgotten what happens when tax law enforcers pick their targets based on their politics. A forthcoming report from the agency’s inspector general is expected to describe how IRS employees inappropriately scrutinized grass-roots conservative groups that were seeking tax-exempt status. If that happened, it’s unacceptable, and Congress should find out what involvement, if any, the Obama administration had in the abuses.

But behind the immediate political controversy lies another story: the explosion in applications for tax-exempt status under Section 501(c)(4) of the federal tax code. The number of applications rose to 3,400 in 2012, more than double the level in 2010. At the same time, the biggest of these tax-exempt groups -- led by Crossroads GPS, which backed Republican candidates -- were raising and spending tens of millions of dollars on political campaigns, often using money from anonymous donors. Unlike the typical charity, these “social welfare” groups organized under 501(c)(4) are permitted to lobby extensively and to engage in campaigns, provided that campaigning doesn’t constitute the group’s “primary activity.”

Some campaign finance watchdogs have complained that the IRS is overlooking an obvious abuse of the law by powerful special interests on both sides of the political spectrum, including Crossroads GPS and Organizing for Action, which is closely affiliated with President Obama and the Democrats.

But what the IRS apparently did with 501(c)(4)s was to train a microscope on some smaller fry. From 2010 to 2012, the agency singled out close to 300 applications for further review based on certain words in their names -- for example, “tea party” -- or indications that they were political action-type organizations interested in such things as the Constitution and the Bill of Rights. Whether by design or happenstance, those filters focused the agency’s attention on just one side of the political spectrum.

Lois Lerner, who oversees the branch of the IRS that deals with tax-exempt groups, said last week that the targeting was the work of “low level” employees at the agency. The inspector general’s report, which is expected this week, includes a timeline that shows how Lerner tried to broaden the scrutiny in mid-2011 to make it politically neutral, although apparently without success.

Obama criticized the agency Monday, saying one-sided scrutiny was outrageous. Congressional leaders from both parties have pledged investigations, and it’s important to find out why the agency did what it did. The IRS cannot function if the public sees it as an arm of the party in the White House, not as an independent agency.

But lawmakers should also ask themselves whether they meant 501(c)(4)s to act as magnets for anonymous and unlimited campaign donations. If not, they have a choice. They could decide that social welfare groups should get out of the election business and leave it to non-tax-exempt organizations. That way, the IRS wouldn’t be stuck in the no-win position of judging whether a group’s political activities exceeded the ill-defined limits in the law. Failing that, the least lawmakers could do is require these tax-exempt groups to disclose not just how much they spend on campaigns but where the money comes from.