By now, everyone should know about the IRS and the tax exempt status “scandal”. For those hiding in the attic the last few weeks, the IRS used key words like: tea party” and “patriot” to give some applications for 501(c)(4) status extra attention.
A 501(c)(4) organization is an organization which is set up to promote social welfare or a local association of employees which has a charitable, educational or recreational purpose. They have become very popular in recent years as a way for an organization to do some limited political activity without having to publish their donors. This is different from a Section 527 political organization. A section 527 group also has tax exempt status but tighter information reporting requirements.
The Treasury Inspector General for Tax Administration TIGTA) has issued their report on the subject and found that the IRS did select some 501(c)(4) applications for more attention. This action was not politically motivated but based on lack of clear vetting criteria to screen applications for organizations which will be too political.
As with any political scandal there has been much finger pointing, calls for resignations and Congressional hearings. In Friday’s hearing (May17, 2013), Rep. Lloyd Doggett (D-TX) introduced a new twist when he asked TIGTA’s J. Russell George if the scandal would have been avoided if the IRS had followed the actual Internal Revenue Code wording for a 501(c)(4) organization. It turns out that the IRC specifically states that to qualify for tax exempt status under section501(c)(4) an organization must be operated exclusively for social welfare. The regulations the IRS wrote to carry out that section, however, say that the organization only needs to operate primarily for social welfare. Primarily isn’t exclusive.
This isn’t a new argument. Citizens for Responsible Ethics in Washington (CREW) filed a brief on Friday in the Gill v. Department of the Treasury court case. (The IRS had filed to have the case dismissed.) Dr. David Gill is challenging the IRS about their 50 year old regulation defining 501(c)(4) as primarily for social welfare and not following the IRC’s exclusive definition. While a candidate for Congress, he alleges that he was targeted by a 501(c)(4) organization which would not meet the exclusive test.
In an already bad year for the IRS, they are now in the spotlight for handling a sensitive subject badly and that they might have been doing it wrong for 50 years.
Thanks to Accounting Today for the head's up.