Senators criticize IRS for handling of tax-exempts

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WASHINGTON -- The IRS has been misapplying the law on tax-exempt status for years, several senators said Tuesday morning during a Finance Committee hearing on the scandal over the agency's handling of applications from Tea Party groups and other groups based on their names and conservative ideologies.

There is widespread agreement that the Internal Revenue Service was wrong to single out conservative groups without applying similar scrutiny to liberal organizations, but some say the IRS shouldn't have given tax-exempt status to any political groups.

Enacted in 1956, the law allows 501(c)(4) tax-exempt status for groups that operate "exclusively for the promotion of social welfare," but the IRS's interpretation since 1960 has granted that status to groups that engage in politicking, as long as political activity is not their primary function.

The distinction made little difference until 2001 when Congress began requiring political committees -- known as 527 groups -- to disclose their contributor lists. Groups that didn't want to disclose their donors began applying for 501(c)(4) status because that would allow them to conceal their funding sources. Those funding sources grew exponentially after the 2010 Supreme Court decision in the Citizens United case opened the doors to unlimited campaign spending by corporations.

It came to a head when the IRS, citing an influx of exemption applications after Citizens United, began applying extra scrutiny to groups that had words like "Tea Party" in their name, that lobbied to "make America a better place to live," or that criticized government. Some senators said the underlying problem was the IRS's failure to do its job on all tax-exempts.

"These entities are clearly not exclusively for social welfare. A lot of what they're about is affecting elections and weighing in on elections," Sen. Thomas R. Carper, D-Del., said during Tuesday's hearing, which took place amid Tea Party groups' protests against the IRS.

The IRS has created "an incentive for people to choose their tax status based on whether they want to hide their donors," said Sen. Ron Wyden, D-Ore.

"Why is this problem not corrected? The lines are blurred and you don't seem to have done anything about it, and I want to know why," he asked recently ousted IRS Commissioner Steven Miller and his predecessor Douglas Shulman, who testified Tuesday. "In the absence of clear guidelines the public is, in effect, left to the whims of bureaucracy."

Mr. Shulman said the law is complex and IRS employees wrestled with it as they processed 501(c)(4) applications.

"If Congress could help clarify the law, that would be a very helpful thing," he said.

That response drew the ire of Sen. Bill Nelson, D-Fla., who said political organizations are undermining the intent of the law and the IRS is allowing such abuses.

"Why do you need clarification from Congress?" he asked. "The law is very clear. It says you can't involve yourself in electioneering if you want this kind of tax-exempt status. ... Isn't it a matter of administrative implementation?"

Senators are not the only ones taking the IRS to task.

On Tuesday, Citizens for Responsibility and Ethics in Washington -- known by the acronym CREW -- asked U.S. District Court for the District of Columbia to compel the IRS to address conflicts between the tax code and IRS regulations.

"The 501(c)(4) regulation is unmanageable. It clearly conflicts with the tax code, and employees are simply at a loss as to how to apply it," CREW executive director Melanie Sloan said in a written statement Monday.

"The current IRS scandal directly stems from the problematic regulation. Only by changing it can we be sure we won't see a repeat of the current debacle," she said.

Tuesday was Mr. Shulman's first appearance since the scandal broke. He told senators that while he was commissioner he didn't know the details of how applications were being screened and that he was "saddened and dismayed" when he learned the details in results of an audit released two weeks ago.

He apologized but said he was not personally responsible for creating the improper screening system that targeted conservative groups and asked them questions about their donors, the content of their Facebook pages and what books members read. He assured, though, that employees were not motivated by partisanship but by the need to efficiently handle large numbers of applications. Meanwhile on Tuesday, several senators blasted Mr. Shulman for not being forthcoming when they inquired last year about allegations the IRS was improperly targeting conservative groups.

"Why did you not come forward before today?" Sen. Orrin Hatch, R-Utah, asked. "You knew this was going on. Why didn't you let us know?"

Mr. Shulman said Tuesday that he didn't have all the facts at the time.

"What I knew, sometime in the spring of 2012, was that there was a list that was being used. I knew that the word 'Tea Party' was on the list. I didn't know what else was on the list. I didn't know the scope and severity of this," Mr. Shulman said.

"I think I made the right decision, which is to let the inspector general get to the bottom of it, chase down the facts and then make his findings public," he said.

Senators including Pat Toomey, R-Pa., want to know who is responsible and were incredulous when Mr. Miller and Mr. Shulman couldn't give them any names.

"We are still sitting here today and don't even know who was responsible. ... I don't know how we could come to the conclusion that this was not politically motivated," Mr. Toomey said.

"What we need to do is bring before this committee some people who might actually know the answers to these questions about who actually decided this was a good idea," he said. "It's frustrating to have no answers."

Sen. Bob Casey, D-Pa., left the hearing frustrated, too.

"It is apparent that there were stunning issues of mismanagement at the IRS. Frankly, I was struck by the lack of responsibility and contrition on the part of those testifying," he said after the hearing. "Pennsylvanians and Americans across the country deserve to know that the IRS and all government agencies do their jobs without any prejudice or political agenda."

J. Russell George, the Treasury Departments' inspector general for tax administration, said his office's audit is just a beginning.

"There is no question that as a result of some of the findings subsequent action will be taken," he told the Senate Finance Committee.

Today the House will take up the IRS matter and the official who oversaw the IRS nonprofit department will appear. However, lawmakers aren't likely to learn much from her.

Lois Lerner will invoke her Fifth Amendment right not to incriminate herself when she appears before the House Oversight Committee. In a letter to Oversight Chairman Darrell Issa, R-Calif., Ms. Lerner's attorney, William W. Taylor III, cites the Justice Department's criminal investigation into the issue of whether the IRS singled out Tea Party and other conservative groups for extra scrutiny.

Ms. Lerner will be the first person involved with the IRS scandal to publicly invoke the Fifth Amendment.

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Bureau chief Tracie Mauriello:, 1-703-996-9292 or on Twitter @pgPoliTweets.


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