"Unacceptable." "Intolerable." "Almost unbelievable."
Both Democrat and Republican members of the U.S. Senate Finance Committee in a hearing today piled on the Internal Revenue Service for subjecting conservative groups seeking tax-exempt status to heightened scrutiny.
But some committee members also suggested that the root of the problem lies in the wording of a 54-year old Treasury Department regulation that allows ostensibly charitable groups to engage in political activity while keeping their donors anonymous.
"This is a clarion call to Congress," said Senator John Cornyn (R-Tex.). “We’ve asked the IRS to do much more than its core function….It’s not surprising all these problems have arisen.”
The hearing was also not good news for IRS chief counsel William Wilkins, a former partner at Wilmer Cutler Pickering Hale and Dorr who was appointed by President Barack Obama in 2009.
Senator Richard Burr (R-N.C.) questioned ex-IRS Commissioner Douglas Shulman, who headed the agency from March 2008 until November 2012, and Steven Miller, who was acting head until he resigned last week, about Wilkins’ role in the scandal.
Both officials were vague about what Wilkins or lawyers from his office might have told them about activities involving the IRS office in Cincinnati, which targeted the right-wing groups. “We need to get chief counsel William Wilkins in to testify, to see if he signed off on it,” Burr said. “That’s absolutely critical.”
J. Russell George, the treasury inspector general for tax administration, found in an audit published on May 14 that employees in the Cincinnati office flagged applicants that had the terms “Tea Party,” “Patriot” or “9/12” for extra review when seeking tax-exempt status.
The NorCal Tea Party Patriots on Monday filed the first lawsuit against the IRS based on the practice, alleging that the group’s constitutional rights were violated. The group True The Vote today filed suit in Washington federal district court over the increased scrutiny IRS put on conservative groups.
Members of the Finance Committee drilled down into a 1959 regulation covering these so-called 501 (c) (4) organizations. Such groups have become increasingly popular in the wake of the U.S. Supreme Court’s 2010 decision Citizens United v. Federal Election Commission , spending a combined $254 million in the 2012 election, according to committee chair Senator Max Baucus (D-Mont.).
The original statute grants tax-exempt status for organizations “operated exclusively for the promotion of social welfare.” But long-standing Treasury Department regulations implementing the law changed the wording to “primarily engaged in promoting in some way the common good and general welfare of the community” – a modification which leaves room for political activity.
“How do you jump from ‘exclusively’ to ‘primarily?’” asked Senator Robert Menendez (D-N.J.). “If there had been a more literal reading of the statutory language…it might have avoided or mitigated the problems.”
Shulman responded that the regulation had “been in effect for many years. It was in place when we got there,” he said. “The IRS is given a very difficult task. You can do some political activity, but you can’t do too much.”
“The rule says ‘promotion of social welfare,’” said Bill Nelson (D-Fla.), who argued that this should “not include intervention in political campaigns. How you interpret it to say that it does is beyond me.”
Overtly political groups may also seek tax-exempt status under Section 527 of the tax code, but they are then required to disclose their donors. The 501(c)(4) organizations do not have to do so.
“Clearly a truck was being driven through the 501(c)(4) loophole,” said Baucus. “You were on notice but nobody did anything about it.”
But ex-Commissioner Miller said that even if the regulation did state that a group’s activities must “exclusively” promote social welfare rather than just “primarily” doing so, the IRS “might still be in the same place,” he said. “Even then, we’d have a hard time parsing what’s political and what’s not, what’s an issue ad versus an educational ad.”
To Senator Maria Cantwell (D-Wash.) the “bright line wasn’t bright enough. The 501(c)(4 ) status needs to be resolved as quickly as possible.”
Still, Senator Pat Toomey (R-Pa.) pointed out that regardless of the ambiguity of the statute, “The Treasury rule has absolutely nothing to do with the IRS’s decision to use ideology as a basis for imposing inappropriate, unnecessary screening,” he said. “There was no criteria identifying left-of-center organizations for scrutiny. It was obviously one-sided in nature.”