Scandal Shakes IRS, Has Implications for Tax Reform Debate

By: Chris Vest

Scrutiny of conservative groups could affect how lawmakers approach reforming the U.S. tax system

The revelation in May that the Internal Revenue Service (IRS) inappropriately targeted conservative groups that were seeking 501(c)(4) tax-exempt status increased lawmakers' resolve to clean house at the IRS–and not just in terms of disciplining the employees responsible.

Members of Congress working on comprehensive tax reform have pointed to the scandal as evidence that the U.S. tax system is broken. They have suggested that the IRS's processes for handling applications for tax exemption and policing the tax-exempt sector may need to be strengthened, which could have direct consequences for all types of tax-exempt organizations.

"What is now completely clear is that the management and oversight of the agency's handling of tax exemption applications have completely failed the American people," said House Ways and Means Committee ranking member Sandy Levin (D-MI) at a hearing in May.

A report from the Treasury inspector general for tax administration confirmed that the IRS used "inappropriate criteria" to identify organizations applying for tax-exempt status, resulting in substantial delays in processing certain applications. It also concluded that employees of the IRS's Determinations Unit lacked knowledge of what activities are allowed by 501(c)(3) and 501(c)(4) organizations. Ineffective management allowed unnecessary information requests to be issued by IRS employees, the inspector general's office said.

Numerous lawmakers have said the rules that govern social welfare organizations are too vague and are partly responsible for the IRS missteps.

"Neither the tax code nor the complex regulations that govern nonprofits provide clear standards for how much political activity a 501(c)(4) group can undertake," said Senate Finance Committee Chairman Max Baucus (D-MT). "The code does not even provide a clear definition of what qualifies as political activity."

Whether Congress will be satisfied with corrective actions taken by the IRS or initiate a broader examination of tax laws that apply to the tax-exempt community remains to be seen.

Chris Vest is director of public policy at ASAE. Email: [email protected]