Auditing the IRS

Toby Marie Walker, the spry grandmother who heads the Waco Tea Party, had big plans for the 2012 election year: a blogging boot camp for local Texas activists and the purchase of the state voter file to get voters to the polls. But as the year dawned, she found her organization hobbled by a faceless foe: the Internal Revenue Service, which had been sitting on her group’s application for nonprofit status since July 2010.

As a result, the group was forced to set aside money for a possible tax bill if its application was denied. And donors became skittish after a rumor had gone around that the feds were investigating anyone who gave to Tea Party groups. “Donors didn’t want to be associated with us,” Walker said. “They didn’t want the IRS to start investigating them too.”

Paranoia about the IRS is common, but in this case it was justified. The feds were intensifying their scrutiny of Tea Party groups nationwide and collecting lists of donors (although the donors themselves were not pursued). Dozens of conservative nonprofit groups, often small organizations without money for lawyers, found themselves caught in a maze of bureaucratic delay and stymied by demands for seemingly unnecessary paperwork.

The IRS’s questions, asked under penalty of perjury, bordered on the absurd: Would officers of the organization run for public office one day? What were the conversations at meetings? What was being said on the group’s Facebook and Twitter accounts? One Ohio-based group, American Patriots Against Government Excess, says the IRS asked for a list of readings from its book club, a synopsis of each text and any materials handed out at meetings.

The IRS has a legal responsibility to ensure that groups that earn tax-free status by claiming to promote “social welfare” don’t actually exist with the “primary” goal of influencing elections. Under its vague rules, such groups can promote a broad ideological agenda as long as they don’t spend most of their time and money trying to elect and defeat specific candidates. That line has long been notoriously blurry. But outside lawyers who had processed political nonprofit applications for decades noticed a change at the IRS in 2010 and 2011. “They weren’t just trying to figure out if [nonprofit groups] were involved in politics,” says Cleta Mitchell, a longtime conservative lawyer who represented several groups stonewalled by the IRS. “I think they were trying to bury them in paperwork and hope they would go away, and a lot of them have.”

As questions swirled, the IRS repeatedly denied that anything was amiss. “I can give you assurances,” former IRS commissioner Douglas Shulman told a House committee in March 2012 when asked about claims of political bias. He was an appointee of George W. Bush and spoke of his agency’s pride in “being a nonpolitical, nonpartisan organization.” He said, “What’s been happening has been the normal back and forth that happens with the IRS.”

Shulman was wrong, and his words helped conceal the largest political scandal at the IRS since the Nixon era. An explosive inspector general report released May 14 revealed that the agency had, starting in March 2010, systematically flagged nonprofit applications from groups whose names included words like Tea Party and Patriots. By June 2011, groups that addressed “government spending, government debt and taxes” were flagged, along with groups that criticized “how the country is being run.” (Liberal-leaning groups, by contrast, were sometimes identified for further investigation but less systematically.) An IRS supervisor tried to correct the problem in July 2011 by mandating equal treatment for all potentially political groups, but the trouble persisted: more junior officials went rogue last year, returning to the narrower guidelines in the name of efficiency.

The flagged applications landed in a Kafkaesque netherworld of inaction. The IRS lacked a clear process for handling them, leading to a near parody of bureaucratic confusion. In October 2010, the IRS determinations unit in Cincinnati requested guidance on how to proceed with reviewing the groups from the technical unit in Washington, which was supposed to coordinate with the guidance unit. It took 13 months for these obscure units to devise a response, a delay the director of yet another division in Washington, called rulings and agreements, later explained away as a “miscommunication.” By February 2013, after 27 months and two election cycles, the guidance had still not been finalized. In the meantime, dozens of groups had been forced to function without official approval while juggling inappropriate requests for more information.

All the while, the American principle of equal protection was distorted in an election year. The question now is not if an injustice was committed but whether the motivations were malicious. The IRS claims the story is not about political persecution but mismanagement and poor judgment. “We believe the front-line career employees that made the decisions acted out of a desire for efficiency and not out of any political or partisan viewpoint,” wrote Joseph Grant, acting commissioner of the IRS tax-exempt division. IRS officials told the inspector general that no one outside the agency, including at the White House, had any role in deciding the criteria for investigating applications.

Those statements will not be the final word. Four congressional committees have announced investigations, promising months of sworn testimony and subpoenas. The FBI has also launched its own criminal investigation. On May 15, President Obama forced the resignation of the IRS’s acting commissioner, Steven Miller. “I am angry about it,” Obama said. “I will not tolerate this kind of behavior.” Republicans want more. “My question isn’t about who is going to resign,” said House Speaker John Boehner. “My question is ‘Who is going to jail over this scandal?’ ” Probably no one, as it’s not clear that any specific laws were broken.

At issue is the core credibility of the IRS at a moment when it has a more central role than ever in regulating tax-exempt political activity in electoral politics. Unfortunately, the IRS also brings a sordid legacy of doing political dirty work. President John F. Kennedy’s Administration encouraged an IRS “ideological organizations project” that investigated conservative groups. For years, the FBI used illegal IRS snooping to help “neutralize” civil rights and anti-war activists and supporters of other liberal causes. A 1968 FBI memo urged the IRS to audit a political activist in the hopes that the paperwork would be a “distraction … during the critical period when he is engaged in meetings and plans for disruption of the Democratic National Convention.” Richard Nixon used tax audits as part of his massive effort to harass political opponents.

More recently, politics has been thrust on the IRS in a different way. A recent explosion in campaign spending by nonprofit groups, fueled in part by the Supreme Court’s 2010 Citizens United decision, has created new oversight demands as complex as they are sensitive. So-called social-welfare groups have multiplied–annual applications for the designation have nearly doubled since 2009–with many spending nearly 50% of their money on campaign advertising, almost daring the IRS to challenge their activities. Of the more than $1.2 billion spent by outside groups in the 2012 federal election cycle, at least $254 million came from “social welfare” nonprofits.

But even ostensibly educational nonprofits have been snared. For nearly three years, Catherine Engelbrecht has sought tax-free nonprofit status for her group, True the Vote, a right-leaning outfit devoted to raising awareness about potential election fraud. Instead she has found herself answering voluminous questions, including a request to describe every speech she planned to give through 2013. “It just felt like intimidation,” she says, adding that it hurt her fundraising. Some foundations, she says, wouldn’t donate to her group without IRS recognition, and other donors fretted that their checks might retroactively lose tax-deductible status.

Other groups simply gave up on the application process. “I was about to file with the IRS when other Tea Party groups started to get harassed, so I shut it down before it even started,” says Jennifer Stefano, a Pennsylvania activist. “I remember checking with the IRS to see if they wanted the group [Facebook] page or my personal page, and they said, All of it.”

Dan Backer, a lawyer for TheTeaParty net which was subjected to extra IRS review, says he saw the same pattern with several of his clients. “When you make it burdensome to speak, people don’t speak,” he says. “When you make it burdensome to associate, people don’t associate.”