IRS scandal tied to change that created tax loophole

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WASHINGTON -- The Internal Revenue Service is under fire for giving extra scrutiny to conservative organizations that asked for tax-exempt status. But the scandal begs a broader question: Why are political organizations getting this government subsidy anyway?

On Thursday, amid the uproar, President Barack Obama appointed Danny Werfel, controller of the White House budget office, as acting commissioner of the Internal Revenue Service.

Mr. Werfel on Wednesday will replace Steven Miller, who was forced to resign Wednesday following disclosure of the agency's selective scrutiny of small-government groups seeking tax-exempt status, although he is still scheduled to testify today at a congressional hearing.

"As we work to get to the bottom of what happened and restore confidence in the IRS, Danny has the experience and management ability necessary to lead the agency at this important time," Mr. Obama said in a statement.

Mr. Werfel, 42, will serve until the fiscal year ends Sept. 30, the White House said. The acting IRS commissioner position doesn't require Senate confirmation.

Mr. Obama hasn't nominated a permanent commission since the term of Douglas Shulman, a George W. Bush appointee, ended in November.

The IRS also announced Thursday that Joseph Grant, who oversees tax-exempt organizations and government entities, will retire June 3.

Looking more closely at the controversy, the tax code section sought by the Tea Party groups was established to benefit groups that promote social welfare, generally nonprofit operations. Examples on the IRS website involve community service and groups that provide a certain local benefit.

Somewhere along the line, apparently in 1959, the IRS modified its regulations regarding the statute establishing this longstanding classification, creating a loophole exploited by groups seeking to elect Democrats, Republicans and most recently Tea Party candidates and like-minded groups.

Search the membership of state associations of nonprofit organizations and you'll have to work to find any that are political in nature. The California Association of Nonprofits in San Francisco lists online more than 1,400 members, yet none have patriot, Tea Party, progressive or similarly political names.

Yet compare that against applications to the IRS in recent years for this special tax-exempt status, and a good percentage appear to be organizations that are decidedly political in nature.

The IRS late Wednesday released the names of 176 applications it had approved through May 9 in its controversial specialized review process. That process is at the heart of the controversy, since specialists were flagging applications that had Tea Party, patriot and other politically charged conservative names.

The 176 approved applications include dozens of Tea Party groups. Some appear overtly political, such as Progressives United Inc. and two Colorado chapters of the Coalition for a Conservative Majority.

All were applying for a tax-exempt designation under section 501(c) of the tax code. This section has at least 25 tax-exempt designations, and the Tea Party groups were applying under a provision -- 501(c) 4 -- that would treat them as social welfare organizations. This allows the groups to raise money from donors and get involved in politics, as long as that is not their primary activity. Importantly, their donors are not disclosed publicly.

Among the existing 501(c) 4 organizations are giant election-influencing political entities such as Crossroads GPS and Americans for Prosperity on the right, and the pro-Obama Organizing for America and Priorities USA on the left.

"There are two IRS scandals. The other is the IRS allowing big shadowy forces to meddle in elections anonymously through front groups that file false statements with the IRS," Sen. Sheldon Whitehouse, D-R.I., said on the Senate floor Wednesday.

House Minority Leader Nancy Pelosi, D-Calif., on Thursday said she will push for a legal change that returns the 501 (c) 4 to its original intention of promoting social welfare. "So from my standpoint, I think that they should not have any political purpose," Ms. Pelosi said. "And I would hope that we could change the law on that."


Bloomberg News contributed.


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