National Taxpayer Advocate Nina Olson issued her required mid-year report to Congress on Wednesday and fleshed out one policy prescription that might head off any future scandal involving the Internal Revenue Service’s efforts to determine which quasi-political groups deserve tax-exempt status.
In addition to her perennial pleas for greater funding is a separate "special report." Here Olson reiterated her call for enactment of a Taxpayer Bill of Rights, noting that if her version were in force, eight of its 10 tenets were violated by the delayed and improper screening of applications.
She then repeated what policy wonks have heard from lawmakers looking into how the IRS Exempt Organizations division came to single out mostly conservative nonprofit groups for extra scrutiny in their applications. In a nutshell, the IRS lacks a clear criteria for making the calls, both in the law and in regulations going back to the 1950s.
Section 501(c)(4) of the tax code provides that an organization may qualify for tax-exempt status if it is “operated exclusively for the promotion of social welfare,” Olson notes. Treasury regulations provide that an “organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community.”
Leaving aside the question of how “exclusively” came to be defined as “primarily” (which is viewed by some commentators as merely 51 percent), the report says, there is very little guidance to guide IRS employees in determining whether an organization is operating “primarily” for social welfare purposes or what level of political campaign activity is permissible, she said. Among the open questions for Congress or the Treasury Department are the following:
- Is there a fixed percentage that should be used to measure whether an entity is “primarily” engaged in social welfare activities (e.g., 51 percent)?
- What factor or factors are controlling? In seeking to measure whether an entity is “primarily” engaged in social welfare activities, one could focus on the percentage of the entity’s expenditures, the percentage of the entity’s time, the percentage of the entity’s email blasts or advertisements or other factors.
- If the IRS considers multiple factors, should all factors receive equal weight, and if not, how should the relative weighting be determined?
Makes one yearn to work for the IRS.