The real IRS scandal, and a way to fix it

Washington Watch: There is much more at stake than the vetting of applications for special treatment as “social welfare organizations.”

June 5, 2013 22:21
4 minute read.
Karl Rove

Karl Rove 370. (photo credit: REUTERS)

If you think Karl Rove is a social worker, you don’t understand the real IRS scandal. It’s not just about discriminating against some right-wing groups applying for tax-exempt status. That problem needs a serious investigation – not a partisan witch hunt – to find out what went wrong, hold accountable those responsible and make certain it doesn’t happen again.

But there is much more at stake than the vetting of applications for special treatment as “social welfare organizations.”

Better known as 501(c)(4), it is one of the most gaping loopholes in the entire tax code because it has become a tool for concealing the identities of those spending millions of dollars to manipulate and subvert out political system.

Under this provision groups are exempted from paying income taxes and are free to spend the unlimited amounts of money they raise on lobbying and influencing political campaigns and elections. That wouldn’t be so bad if they didn’t operate under the political equivalent of Harry Potter’s cloak of invisibility.

Making matters worse, many of these are not engaged in social welfare in any way, shape or form. The Jewish community is deeply involved, as are so many other segments of our society.

The Republican Jewish Coalition, the National Jewish Democratic Council, the American Israel Public Affairs Committee and J Street are 501(c)(4) organizations. Contributions are not tax deductible but the groups are exempt from paying federal income taxes on any profits they make. But they’re not in business to make profit and don’t. They spend their money trying to influence legislation on Capitol Hill and elections.

Other 501(c)(4)’s include the Sierra Club, AARP and the National Rifle Association.

Their names reveal their purpose, but many others intentionally conceal their real identity with benign-sounding names. To make the point, the Center for Responsive Politics listed four groups, two liberal and two conservative, but the names won’t help you tell which is which: Patriot Majority USA, Crossroads GPS, American Future Fund and the Citizens for Strength and Security Fund.

(Nos. 1 and 4 are liberal, 2 and 3 are conservative.) IRS regulations permit a 501(c)(4) to make lobbying its primary activity and it can engage in political activities so long as they are not its primary function. The definition of a 501(c)(4) is very vague – and has gotten worse as Congress and the agency have revised the guidelines over the years. To be tax exempt “an organization must operate primarily to further the common good and general welfare of the people of the community,” and for examples it offers “civil betterment and social improvements.”

Does anyone really think that Karl Rove’s Crossroads GPS, the NRA, AIPAC and Organizing for Action are really doing that? By the way, if you never heard of Organizing for Action, it is a new 501(c)(4) that is an outgrowth of the 2012 Obama campaign intended to promote support for the administration’s agenda.

Some 501(c)(4)s are spinoffs of 501(c)(3) organizations, which are non-profit groups engaged in religious, charitable or educational activity, all contributions to which are tax deductible. But they are limited in the amount of lobbying they can do, so many will spin off a 501(c)(4) to do most of their political work.

Conversely, sometimes a 501(c)(4) will spin off a c3 so it can raise tax-deductible donations for research or other seemingly non-political activities.

This is not a partisan issue. Republicans and Democrats, liberals and conservatives use and abuse the 501(c)(4) status equally and share responsibility for the present mess.

It would be best if Congress and the IRS rewrote the rules to make sure social welfare groups really do engage in social welfare, but until that happens, there is a clear and simple solution to the problem of mystery money and manipulation: Sunshine.

These organizations raise millions from unknown donors, mostly very wealthy people and corporations that want to conceal their identity, and there is virtually no control on how they spend their money.

One organization official I spoke to had a typical reason for opposing disclosure. “I don’t want my donor list open to poaching by others, and my donors don’t want it, either.”

That is understandable, but there is an overriding public interest in full disclosure. The public has not only a right but also a need to know who is paying, how much and how it is spent to shape public policy. If sunshine discourages some of the more secretive players who may be ashamed of what they’re doing or don’t want anyone to know what they’re up to, all the better.

Tom Dine, the former executive director of AIPAC, the American Israel Public Affairs Committee, one of the biggest, most influential and best funded 501(c)(4)s, said, “It would not have hurt AIPAC if it had to go public with full disclosure of contributors and their amounts. No harm is going to be done by letting the sun shine in.”

©2013 DouglasMBloomfield

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