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The Failings of the IRS Go Far Beyond Targeting Conservative Groups

What’s the good news that might come out of the current IRS scandal? It might rip the veil off of entities that, since the Citizens United decision, wrap themselves in the protective layer of the IRS code only to operate in the shadows.


Public outcry regarding the Internal Revenue Service’s apparent targeting of conservative groups has been swift but largely misguided. The so-called “IRS scandal” essentially boils down the following: conservative groups that applied for 501(c)4 status were subject to more rigorous vetting by IRS employees than liberal groups.

At first blush this is no doubt problematic. The IRS, a vitally important government agency, must function in a neutral and non-partisan manner. However, the true scandal behind the IRS’s actions stretches far beyond this incident targeting conservative groups.

Our tale begins with the U.S. Supreme Court’s January 2010 decision in Citizens United v. FEC. There, the court held that corporations have a First Amendment right to spend unlimited amounts of money to support the election (or defeat) of candidates. Thanks to a lower court decision and an opinion by the Federal Election Commission, corporations, including non-profit ones, can now raise and spend unlimited sums of money to elect or defeat candidates—as long as that spending is made independently of candidates.

A funny thing happened on the way to this world of full disclosure. The IRS happened.

One important and often overlooked portion of the court’s decision is that it assumed that the public would be able to obtain full disclosure about the amount of money spent in an attempt to sway our votes. Indeed, the world envisioned by Justice Anthony Kennedy, the author of the majority opinion in Citizens Untied (PDF), is one in which voters can easily and readily obtain information concerning the source of funds spent in an attempt to influence their ballot box decisions. Justice Kennedy’s opinion provided that while corporations cannot be limited in the amount of money they can spend, they will be regulated by disclosing the source of their contributions. In the first few paragraphs of the opinion Kennedy proclaimed, “[t]he Government may regulate corporate political speech through disclaimer and disclosure requirements, but it may not suppress that speech altogether.”

But a funny thing happened on the way to this world of full disclosure. The IRS happened.

Leaders of groups wanting to spend unlimited sums in political campaigns found a way around disclosure. These leaders quickly realized that tax laws could be used to their advantage. By applying for and obtaining tax exempt status under 501(c)4 of the IRS code, entities could cloak themselves in a cloud of secrecy.

Why are 501(c)4 non-profit corporations permitted not to disclose their donors? The answer is that these organizations are supposed to be so-called social welfare organizations, not political committees. And while the public undoubtedly has an interest in the entity of contributors to political committees, the same is not true of social welfare organizations. The code states that these social welfare organizations operate “exclusively” for the purpose of promoting social welfare.

Here’s the rub. "Exclusively" doesn’t actually mean "exclusively." The IRS wrote the regulations to allow 501(c)4s to engage in campaign activity, as long as their primary purpose is to promote social welfare. Certainly that clear-as-mud rule leaves some room for abuse, from both sides of the aisle.

Groups like Crossroads GPS, the American Action Network, Americans for Prosperity, and Freedomworks have utilized this situation to their advantage. And it is not their fault. It is ours for not doing anything about it.

Granted, it may be difficult to parse through an entity’s activities to determine when that entity is spending to promote the social welfare and when it is spending to promote the election or defeat of a candidate. Some groups, no doubt, believe that certain candidates would help to promote their social cause.

But we are not at that level of parsing. We are faced with 501(c)4 organizations that act and spend like political committees, in which case they should be treated as political committees and should have to disclose their donors to the public.

So while it's politically necessary for politicians on both sides of the aisle to proclaim that the IRS’s actions are “outrageous” and “disgraceful,” those condemnations miss the larger problem. The true disgrace is not that the IRS improperly targeted conservative groups by requiring additional information from those groups. The problem is that it operates in a world of uneven application of disastrously vague rules.

One solution is that “exclusively” should really mean "exclusively," so that far fewer entities would be able to claim 501(c)4 status. Another is that 501(c)4 non-profit corporations could be required to disclose their donors. So here is why the scandal is great news. It provides us with the impetus we need to clarify the law and ensure that the public obtains the information it needs to evaluate campaign advertisements.