Thursday, May 16, 2013

The IRS Mess Is Already Badly Misunderstood -- And the Distorted Narrative Will Only Get Worse

-- Posted by Neil H. Buchanan

Last Friday, a news story broke that quickly came to be known as "the IRS scandal."  Even the just-the-facts-ma'am TaxProf Blog has taken to posting daily collections of news stories under that title, accompanied by the number of days since the story broke, e.g., "The IRS Scandal, Day 7" today.  Move over, Iranian Hostage Crisis!  (Who will be the new Ted Koppel, to emerge from this media frenzy?)

This is not to criticize TaxProf, or anyone else who is calling this a scandal.  It is certainly being treated as one, by almost everyone, and it is difficult to resist a powerful narrative.  Something did go wrong at the IRS, and it should be investigated and put right.  There really are good reasons why everyone should worry about what happened.  Based on what we know, however, this is either a medium-sized story that is being blown up into a huge story for partisan (and media-driven) reasons, or it is a big story that is big for a completely different set of reasons that are only mildly connected to the hyped-up story that is already being taken for granted.

What do we know?  Not long after President Obama took office, the IRS was hit with a wave of applications by newly-formed political organizations, asking for the legal status known as 501(c)(4) organizations.  Such organizations are not eligible to receive tax-deductible donations, but the organizations can run their operations exempt from taxation.  (That is, they do not have to determine their revenues minus their deductible expenses, and then pay income tax on the difference.)  That is, they are presumptively nonprofit, in the sense that they use their net proceeds to engage in "charitable, educational, or recreational purposes."  501(c)(4)'s can engage in political campaign activity, so long as that is not the organization’s "primary activity."  What is such an organization's primary purpose supposed to be?  Why, "the promotion of social welfare," of course.

The IRS is the government agency that Congress has designated to police this extremely vague set of rules.  The IRS field office in Cincinnati is where 501(c)(4) applications are processed.  The job of the IRS employees in that office is to try to figure out which of these organizations are really just political lobbying operations that do not meet the requirements for operating tax free.  When hit with a wave of applications, all of which claim to be "social welfare organizations," the staff decided that they needed to set up a triage operation, figuring out short-cuts to find the groups that were likely to be pure political lobbying operations masquerading as something else.

When the wave of applications became overwhelming in 2010, some of the career staff (not political appointees, and as far as we know not even legal staff) looked out at the world and concluded that the sudden increase in applications was likely to be driven by the major new political movement that had emerged in 2009 and 2010.  The staff then used keywords like "tea party" and "patriot" to sift through the applications.  This led to a higher percentage of administrative inquiries -- not even close to half of the total, but still more than would otherwise have been the case -- being directed toward tea party-like groups.

Even though that strategy had its own internal logic, it was clearly wrong for IRS staff to adopt such a sorting rule.  It was a big mistake, and it should not have happened.  When higher-level career IRS people found out about it, they immediately declared that it was a mistake and must stop.  Those higher-level people then made another big mistake, by not checking to make sure that it had really stopped.  It apparently took about 18 months before they finally shut it down.

There are plenty of accusations and insinuations now flying around, along with newly emerging facts.  The White House has forced out the acting commissioner of the IRS, and the Justice Department is investigating whether any crimes were committed.  Even so, the facts at this point show that the IRS as an organization made two mistakes: (1) Using a decision rule that disadvantaged political groups with a common (in this case arch-conservative) political ideology, and (2) Failing to correct the error quickly and completely.

And now we are off to the races.  Some politicians are likening this to Nixon's enemies list, in which the White House directly ordered the IRS to conduct audits of the personal taxes of Americans who were critical of the President.  That is obviously not what happened here.  Indeed, if there were a political cabal that wanted to use the IRS to harm the President's opponents, they could hardly have chosen a less effective method.  Most Tea Party groups, by their very nature, are shoe-string organizations that would have virtually no money to tax, even if they were denied nonprofit status.  And if the cabal really thought that this was a great idea, it is hardly clear why they would have shut it down over a year ago.  Watergate, this is not.  (And why would the imaginary cabal let big 501(c)(4)'s like Karl Rove's -- which clearly are not social welfare organizations -- continue untouched?)

No matter.  The White House (and Democrats in general) are running scared.  Even before dumping the IRS commissioner, the President contrasted the anger from Republicans over Benghazi with their reaction to the revelations about the IRS's stupidity, saying that the former is nonsense but the latter is a legitimate cause of public outrage.

This is understandable.  Even though the net result of being tagged for extra scrutiny does not actually mean that the merits of your application are viewed unfairly -- your organization can still show that it is truly a social welfare organization, using the same facts and law that should legitimately be applied to your case -- being tagged itself is time-consuming and stressful, and it seems unfair.  Although the analogy is hardly perfect, one can liken this to being in a group of people who are much more likely to be pulled over on the highway to have their cars searched.  Even if a member of such a group is actually doing things that raise probable cause, and even if they are then given a fair chance to prove their innocence, it is still hardly a minor matter that being in the disfavored group increased the likelihood of having to deal with law enforcement officers.

Everyone, no matter their political ideologies, can understand why we would not want the IRS -- or any other law enforcement organization -- to use political criteria to determine enforcement patterns.  No one, in fact, is defending this bone-headed plan.

What we have here, however, is an agency that is chronically underfunded by Congress (the IRS hardly being a historical favorite among the public or their representatives, especially the very Republicans who are now screaming the loudest), an agency that was faced with a wave of applications from politically-oriented groups, and an agency that had to decide how to apply a very vague law passed by Congress (and to do so without undue delay).

What these IRS employees did not only falls far short of Nixon's enemies list, it does not even come close to "targeting political enemies."  As far as we can tell, the stupid plan was based not on any hostility to the ideological goals of the groups.  It was based on the guess that such groups (which were being formed in response to a nationwide political movement) were more likely to be pure lobbying operations than "social welfare organizations."

This, of course, has not stopped the inevitable media and political firestorm from quickly distorting this into a scandal that is political with a capital "P."  On "The Daily Show With Jon Stewart," for example, Stewart is freely describing this as "targeting political enemies."  In fact, his nightly tirades on this topic have taken on their own narrative arc, to the point where he is now saying that this situation gives paranoid right-wing groups legitimate reason to believe that their worst fears are true.

Stewart has even complained that "the government" is terribly incompetent when it is supposed to do good things, but it is suddenly a well-oiled machine when it comes to doing things that we do not want it to do.  That is clearly wrong.  Whatever else might be going on, what started all this at the IRS was incompetence, not sinister proficiency.

Stewart, of course, is hardly alone.  We now have the spectacle of a story that is completely misunderstood, a bad mistake that took too long to fix being recast as a political spy thriller.  And with Democrats giving ground, saying (correctly) that what happened here is indefensible, they are being misinterpreted as agreeing that this was all motivated by partisanship.  The facts say otherwise.

Even so, this will now spin into its own version of political reality.  Certain events simply become emblems and political rallying points, completely disconnected from actual events.  We can count on this story becoming less and less recognizable, and more and more politicized, for years to come.  Look for "The IRS Scandal, Day 5349."  Yippee.

14 comments:

Searching For Rule Of Law In America said...

yes... distortions from all sides...

--Mike

The Dismal Political Economist said...

Mr. Buchanan has one of the best analysis of the IRS issue, and is correct on every point. This IRS issue is a problem though not so much because of the issue itself, but because Republicans are always looking for a story, and in this case with few big news stories around the media is playing the Republican talking points.

But the problem here is not so much the IRS story, but the collection of issues that have all come at once. There are current four issues being furiously whipped by the Press.

1. The IRS story – already explained here.
2. The Libya issue- a totally non event, manufactured by Republicans looking to take a shot a Ms. Clinton prior to 2016.
3. The Justice Department intrusion in the AP phone records – A worrisome insensitivity on the part of Justice
4. The sexual abuse in the military – A very important issue and one which leaves all of us wondering how this can happen.

The overall point is that the Obama Administration is looking incompetent, not able to manage government. And details are dribbling out, which also keeps a story alive. The American voter will not stand for an inability to operate government even if they disagree with the politics of those elected to do so. Even worse Mr. Obama comes across as disengaged and unable to do much, and certainly unable to appoint the right people to manage their departments.

James Carville says this will be over in 30 days. He is wrong. Republicans will be on all of these stories through next year, and willing and compliant press will be right there along with them.

Michael C. Dorf said...

TDPE has it right. In modern times, second-term presidencies get mired in scandals: Watergate; Iran-Contra; Whitewater/Lewinsky; prosecutor firings/dissipation of support for the Iraq War. Some of these were real, others manufactured, but Congress--especially hardball players in Congress, who are more likely to be Republicans--have learned that it almost doesn't matter whether the scandal is real. Anything will do to derail a second-term president, so long as the party that doesn't have the White House has at least one house of Congress, and so can schedule hearings.

Kevin Jon Heller said...

It's worth noting that progressive groups were targeted as well, though apparently not through the kind of problematic sorting rule that Prof. Buchanan mentions.More importantly, three of the progressive group were actually denied tax-exempt status -- unlike the right-wing groups, whose applications were all approved despite the additional scrutiny.

Neil H. Buchanan said...

Thanks to all for excellent comments. Thanks especially to Kevin Jon Heller, for providing extremely important additional facts. Not that the facts matter anymore ...

Joel King said...

I would ask that you reconsider your conclusions. The focus upon tea party groups began before the sharp rise in tax exempt applications. The questions asked of the tea party and other organizations went far beyond any previous set used for determination of eligibility. The proper way to determine if a population of applications has an unacceptable amount of political focus is a random sample, not a targeted sample.

And for God's sake, have you never heard of Media Matters? Or any other of the Soros organizations? Or the Barrack Obama foundation set up by Barrack's brother and granted RETROACTIVE APPROVAL???

This was a political attach upon the American people, and you are blind to it.

Jamie McMillin said...

Bernstein must be on the edge of Alzheimers. He's confusing a lack of Republican funding for U.S. Foreign offices' security and ignoring the actual crimes of drone warfare.

Unknown said...

Neil:

Terrific analysis, but recent news reports cast doubt on the "facts" that undergird it.

You write: "When hit with a wave of applications, all of which claim to be 'social welfare organizations,' [IRS] staff decided that they needed to set up a triage operation, figuring out short-cuts to find the groups that were likely to be pure political lobbying operations masquerading as something else."

The IRS' own data, according to Reason and other news outlets, contradict the claim that the IRS targeting was a response to a wave of new applications.
It appears 501c4 applications were actually in decline when the troubling IRS conduct began.

"http://reason.com/24-7/2013/05/15/data-doesnt-support-irs-explanation-forthe data"

"Applications for tax exemption from advocacy nonprofits had not yet spiked when the Internal Revenue Service began using what it admits was inappropriate scrutiny of conservative groups in 2010.

In fact, applications were declining, data show.

Top IRS officials have been saying that a “significant increase” in applications from advocacy groups seeking tax-exempt status spurred its Cincinnati office in 2010 to filter those requests by using such politically loaded phrases as “Tea Party,” “patriots,” and “9/12.”

Both Steven Miller, the agency’s acting commissioner until he stepped down Wednesday, and Lois Lerner, director of the agency’s exempt-organization division, have said over the past week that IRS officials started the scrutiny after observing a surge in applications for status as 501(c)(4) “social welfare” groups. Both officials cited an increase from about 1,500 applications in 2010 and to nearly 3,500 in 2012. President Obama ask Mr. Miller to resign on Wednesday.

The scrutiny began, however, in March 2010, before an uptick could have been observed, according to data contained in the audit released Tuesday from the Treasury Department’s inspector general for tax administration."

JohnSteele said...

I wonder if you might reconsider your opinions on this.

It was pretty obvious from the day of the revelation that the IRS had deliberately concealed the targeting from the Congress (who had repeatedly asked point blank about this issue and had received exculpatory no's) and from the public, and perhaps from the president himself (a developing story).

Deliberately concealing the bad facts while repeatedly denying them to Congress really is a big deal. And it was predictable that the facts would be getting much worse -- as they have. And it's not over yet.

For people who voted for Obama (as I did), it would be better not to reflexively blame others and instead see this development for what it is.

scf said...

You said:
"As far as we can tell, the stupid plan was based not on any hostility to the ideological goals of the groups. It was based on the guess that such groups (which were being formed in response to a nationwide political movement) were more likely to be pure lobbying operations than "social welfare organizations.""

The flaw in this argument is that you are ignoring the fact that only conservative groups were targeted. It seems that groups with the words "progressive", or other terms on the left have never received the same scrutiny, despite there being a large number of such groups as well.

Bob Hockett said...

Thanks, Neil - very helpful as ever. One quick possible correction: My understanding is that Sec. 501(c)(4) of the Revenue Code is actually quite clear, speaking in terms of organizations 'entirely' devoted to social welfare, while it is only an IRS interpretive rule adopted during the Eisenhower years that introduces vagueness via the word 'primarily.' Have I got that wrong?

Thanks again,
Bob

Brian Macker said...

There are accusations that the T-Party groups were being heavily harrassed for applying. It wasn't the taxible money involved that was so problematic. It was the fact that one woman had the FBI anti-terrorist group show up at her door, had both her personal and business audited, was harrassed by OSHA and some environmental agency, was visited by the ATF twice, and so on, and so forth. She still hasn't gotten an answer on the application so her group was in limbo while she was fighting off all this harrassment.

Brian Macker said...

Oh, and those accusations were brought by Brady during congressional hearings to Miller and he did not deny them. Acted like, no problem, and gave evasive answer about not being able to talk to a particular case

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