IRS decision to end gift audits not political, specialist says

The Internal Revenue Service's decision to discontinue audits of select 2010 political donations for possible application of the gift tax appears to have calmed some, but not all, concerns about politicization of the agency.

In February, the IRS opened audits on five 501(c)(4) organizations active in the 2010 elections, including those affiliated with George W. Bush's former campaign strategist Karl Rove and conservative business activist David Koch. In May, Republicans lawmakers such as Orrin Hatch of Utah and Rep. Dave Camp of Michigan complained to the agency about the audits.

On Thursday, Steven Miller, IRS deputy commissioner for services and enforcement, issued a statement noting that the agency "has little history to draw from in this area and the limited guidance we previously issued on this matter is almost 30 years old. While we review the need for additional guidance or legislation, we will not use resources to pursue examinations on this issue. Any future action we take will be prospective and after notice to the public," the statement said. "As we consider this issue, it is possible that Congress may choose to clearly articulate through legislation the applicability of the gift tax to contributions to 501(c)(4) organizations."

IRS spokesman Frank Keith told The New York Times the audits were actually suspended in March and that "all decisions to open, suspend and close the audits were made by career civil servants and were not the result of any outside influence."

Hatch, who is ranking member on the Senate Finance Committee, said the decision "ensures that the IRS remains free from even the hint of undue political influence. It cannot be turned into an arm of political retribution or payback."

Camp, who chairs the House Ways and Means Committee, welcomed the move, but said in a statement, "I remain troubled that the IRS has failed to explain what prompted these audits in the first place. It has yet to adequately address why taxpayers were given no warning prior to the launching of these investigations."

Camp said the IRS failed to clarify that the gift tax will not apply to future political donations.

"Especially troubling is that the directive explicitly leaves open the possibility of future audits," he said. "Given the lack of transparency, I will continue my investigation until the complete story behind the actions of the IRS has been told."

A specialist in this area of tax law told Government Executive that the agency handled the issue properly. "Unfortunately, it looks like IRS caved into partisan political pressure," said Marcus Owens, an attorney with Caplin & Drysdale who was formerly director of the IRS' exempt organizations division. "The five audits were probably triggered by media coverage, and an IRS employee did an internal referral to the relevant department, which is what he's supposed to do."

Owens said the IRS has had a clear policy on how gift taxes apply to political organizations going back to a 1982 revenue ruling.

"The implementation was not very visible," he said, surmising that either the service did not go looking for violators or that few such gifts are given, the absence of a tax incentive. Given all the exclusions that Congress has enacted for charities and political organizations, Marcus said, "They'd have to be big gifts, in seven figures," to attract IRS attention.

The IRS maintains a "Chinese wall" between career staff and its two political appointees, he added, the two being Commissioner Douglas Shulman (a Bush appointee) and Chief Counsel William Wilkins (an Obama appointee). Steve Miller is a career employee, Marcus said, so he might give the commissioner advance notice of such a decision "but he doesn't ask his permission."

The decision was disappointing to Meredith McGehee, policy director for the Campaign Legal Center. "We already have a Federal Election Commission that is unwilling to enforce the law and is undermining the statutes at every turn," she said. "It sounds like an underling started [the auditing] but when an uproar arose on Capitol Hill, it got called off," she said. "That appearance sends a message to the groups that spend millions of dollars to decide who will have political power to go ahead and do so and no agency will even look at it."