Skip to main content

IRS scandal is about donors, not tax

By Roger Colinvaux, Special to CNN
updated 3:22 PM EDT, Fri May 17, 2013
STORY HIGHLIGHTS
  • Roger Colinvaux: The outrage over the IRS's conduct is based on a misunderstanding
  • Colinvaux: The issue is fundamentally about disclosure of donors, not tax-exempt status
  • He says that after ruling, political groups can use the tax law to hide identity of donors
  • Colinvaux: The IRS should not be put in the position of deciding whether a group is political

Editor's note: Roger Colinvaux is associate professor of law at Catholic University of America. He was counsel to the U.S. Joint Committee on Taxation from 2001 to 2008 on tax-exempt organization issues and recently testified before the House and Senate on tax reform and 501(c)(3) organizations.

(CNN) -- The outrage over the IRS's conduct in targeting certain tax-exempt groups is based on a misunderstanding. Obviously, mistakes were made in how the IRS examined the groups, but what should not get lost amid the resulting hue and cry is that this is fundamentally about disclosure of donors, not tax-exempt status.

First of all, the IRS is to a certain extent in the "targeting" business. The agency's job -- like it or not -- is as an enforcer. It is supposed to go after tax scofflaws. It has to look for clues in tax returns and other materials to find the cheaters and dodgers.

In the current scandal, the method of the "targeting" -- searching returns for names like "tea party" as indicators of possible misfeasance -- was a mistake. But it does not follow that the IRS should not have been looking at these and other groups as a class, without regard to political affiliation.

Roger Colinvaux
Roger Colinvaux

Second is the question of what the IRS is looking for. Because the IRS is the cop guarding tax-exempt status, we think that the IRS is supposed to be deciding whether a group should be granted the "privilege" of tax exemption. It follows that we would and should be outraged if the IRS grants or denies the "privilege" because of an organization's political beliefs.

But this is wrong. This is not really what the IRS is doing when enforcing the tax laws in this context. To be clear: Tax exemption here is not much of a privilege and is not the main issue.

IRS commissioner: I did not mislead
Penn Jillette on IRS: Breaks my heart

Tax-exempt status is offered by many parts of the tax code and not primarily to bestow some special tax break on an organization because of its function. Here's a breakdown:

501(c)(3) charity

Process for Exemption: Must apply to IRS. Scrutiny required because of other tax benefits charities receive.

Reason for Exemption: Performs a public benefit, lessens burdens of government.

501(c)(4) social welfare, 501(c)(5) labor union, 501(c)(6)

Process for Exemption: Not required to apply to IRS but can self-declare exempt status.

Reason for Exemption: Administrative convenience. Not much taxable income. Generally for a nonprofit purpose.

527 political organization

Process for Exemption: Must notify IRS (but approval not required).

Reason for Exemption: Historically always exempt on contributions -- seen as a pass-thru entity.

The exception is for charitable organizations, i.e., 501(c)(3)s, which do have heightened standards for tax exemption. But the extra scrutiny here is less because of tax exemption and more because of other tax benefits that flow from tax-exempt status, such as the ability to receive tax-deductible contributions. Importantly, charitable organizations are not allowed to engage in any political activity, because Congress long ago decided that charity and politics are incompatible.

For noncharitable groups like the tea party groups, organized on a not-for-profit basis, tax exemption flows almost as a matter of course. Tax exemption is not viewed primarily as a subsidy of the federal government but more as a matter of administrative convenience.

Many nonprofit groups do not have much income, would not owe much tax, and so tax exemption is not that much of a "benefit." This is why such groups are not even required to apply for tax-exempt status but rather can just hold themselves out as tax exempt and simply start filing annual returns as an exempt group.

If this is true, however, then why does the IRS care about any group applying for exemption as other than a charity?

Well, the question for the IRS here is not really one of whether a group is tax exempt but under which part of the code the exemption will come from. Will a group be "tax exempt" under one part of the tax code, e.g., as a section 501(c)(4) "social welfare" organization, or under another part, e.g., as a section 527 political organization?

Both sections offer a form of tax exemption. But the big difference between the two has nothing to do with taxes. Rather, it has to do with the disclosure of donors.

For reasons of campaign finance law (not tax law), public disclosure of donors is required for political organizations but not for social welfare organizations. And this brings us to the current scandal.

After the Supreme Court's Citizens United decision, it became possible for a 501(c)(4) organization to engage in unlimited amounts of political spending. It thus also became possible for a political organization to use the tax law to hide the identity of donors. After Citizens United, the abuse the IRS is tasked with policing is whether an organization that claims to be a "social welfare" organization is in reality a political organization in disguise.

So the IRS, when faced with a deluge of new applications for 501(c)(4) status, rightly had to decide whether some or many of these groups were actually political organizations, tax-exempt under section 527, and so subject to disclosure rules.

Primarily for reasons of campaign finance law, the IRS has been put in the position of deciding whether a group is primarily political. This is not a job the IRS is good at or ever will be good at. And as we have seen, it is not a job that we want the IRS to have.

The solution is disclosure. Congress has the power to level the playing field on disclosure and should take action to do so. This will allow legitimate nonpolitical social welfare organizations to enjoy their appropriate tax status and return section 501(c)(4) to the backwater of exempt law it once was.

Follow us on Twitter @CNNOpinion.

Join us on Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of Roger Colinvaux.

ADVERTISEMENT
Part of complete coverage on
updated 5:01 PM EDT, Wed October 22, 2014
Paul Callan says the grand jury is the right process to use to decide if charges should be brought against the police officer
updated 12:19 PM EDT, Thu October 23, 2014
Theresa Brown says the Ebola crisis brought nurses into the national conversation on health care. They need to stay there.
updated 6:35 PM EDT, Tue October 21, 2014
Patrick Hornbeck says don't buy the hype: The arguments the Vatican used in its interim report would have virtually guaranteed that same-sex couples remained second class citizens
updated 9:36 AM EDT, Fri October 24, 2014
Paul Begala says Iowa's U.S. Senate candidate, Joni Ernst, told NRA she has right to use gun to defend herself--even from the government. But shooting at officials is not what the Founders had in mind
updated 6:08 PM EDT, Thu October 23, 2014
John Sutter: Why are we so surprised the head of a major international corporation learned another language?
updated 5:54 PM EDT, Thu October 23, 2014
Jason Johnson says Ferguson isn't a downtrodden community rising up against the white oppressor, but it is looking for justice
updated 12:21 PM EDT, Fri October 24, 2014
Sally Kohn says a video of little girls dressed as princesses using the F-word very loudly to condemn sexism is provocative. But is it exploitative?
updated 4:06 PM EDT, Tue October 21, 2014
Timothy Stanley says Lewinsky is shamelessly playing the victim in her affair with Bill Clinton, humiliating Hillary Clinton again and aiding her critics
updated 10:14 AM EDT, Thu October 23, 2014
Imagine being rescued from modern slavery, only to be charged with a crime, writes John Sutter
updated 12:00 PM EDT, Tue October 21, 2014
Tidal flooding used to be a relatively rare occurrence along the East Coast. Not anymore, write Melanie Fitzpatrick and Erika Spanger-Siegfried.
updated 7:35 AM EDT, Tue October 21, 2014
Carol Costello says activists, writers, politicians have begun discussing their abortions. But will that new approach make a difference on an old battleground?
updated 9:12 AM EDT, Tue October 21, 2014
Sigrid Fry-Revere says the National Organ Transplant Act has caused more Americans to die waiting for an organ than died in both World Wars, Korea, Vietnam, Afghanistan and Iraq
updated 2:51 PM EDT, Tue October 21, 2014
Crystal Wright says racist remarks like those made by black Republican actress Stacey Dash do nothing to get blacks to join the GOP
updated 6:07 PM EDT, Tue October 21, 2014
Mel Robbins says by telling her story, Monica Lewinsky offers a lesson in confronting humiliating mistakes while keeping her head held high
updated 9:29 AM EDT, Mon October 20, 2014
Cornell Belcher says the story of the "tea party wave" in 2010 was bogus; it was an election determined by ebbing Democratic turnout
updated 4:12 PM EDT, Mon October 20, 2014
Les Abend says pilots want protocols, preparation and checklists for all contingencies; at the moment, controlling a deadly disease is out of their comfort zone
updated 11:36 PM EDT, Sun October 19, 2014
David Weinberger says an online controversy that snowballed from a misogynist attack by gamers into a culture war is a preview of the way news is handled in a world of hashtag-fueled scandal
updated 8:23 AM EDT, Mon October 20, 2014
Julian Zelizer says Paul Krugman makes some good points in his defense of President Obama but is premature in calling him one of the most successful presidents.
updated 10:21 PM EDT, Sun October 19, 2014
Conservatives can't bash and slash government and then suddenly act surprised if government isn't there when we need it, writes Sally Kohn
updated 8:05 AM EDT, Wed October 22, 2014
ISIS is looking to take over a good chunk of the Middle East -- if not the entire Muslim world, write Peter Bergen and Emily Schneider.
updated 9:00 AM EDT, Mon October 20, 2014
The world's response to Ebola is its own sort of tragedy, writes John Sutter
updated 4:33 PM EDT, Fri October 17, 2014
Hidden away in Russian orphanages are thousands of children with disabilities who aren't orphans, whose harmful treatment has long been hidden from public view, writes Andrea Mazzarino
updated 1:22 PM EDT, Sat October 18, 2014
When you hear "trick or treat" this year, think "nudge," writes John Bare
updated 12:42 AM EDT, Sat October 18, 2014
The more than 200 kidnapped Nigerian schoolgirls have become pawns in a larger drama, writes Richard Joseph.
updated 9:45 AM EDT, Fri October 17, 2014
Peggy Drexler said Amal Alamuddin was accused of buying into the patriarchy when she changed her name to Clooney. But that was her choice.
updated 4:43 PM EDT, Thu October 16, 2014
Ford Vox says the CDC's Thomas Frieden is a good man with a stellar resume who has shown he lacks the unique talents and vision needed to confront the Ebola crisis
updated 4:58 AM EDT, Sat October 18, 2014
How can such a numerically small force as ISIS take control of vast swathes of Syria and Iraq?
updated 9:42 AM EDT, Fri October 17, 2014
How big a threat do foreign fighters in Syria and Iraq pose to the West? It's a question that has been much on the mind of policymakers and commentators.
updated 8:21 AM EDT, Fri October 17, 2014
More than a quarter-million American women served honorably in the Iraq and Afghanistan wars. Now they are home, we have an obligation to help them transition back to civilian life.
updated 4:27 PM EDT, Thu October 16, 2014
Paul Begala says Rick Scott's deeply weird refusal to begin a debate because rival Charlie Crist had a fan under his podium spells disaster for the Florida governor--delighting Crist
updated 12:07 AM EDT, Thu October 16, 2014
The longer we wait to engage on Ebola, the more limited our options will become, says Marco Rubio.
updated 7:53 AM EDT, Wed October 15, 2014
Democratic candidates who run from President Obama in red states where he is unpopular are making a big mistake, says Donna Brazile
updated 12:29 AM EDT, Thu October 16, 2014
At some 7 billion people, the world can sometimes seem like a crowded place. But if the latest estimates are to be believed, then in less than a century it is going to feel even more so -- about 50% more crowded, says Evan Fraser
updated 12:53 PM EDT, Mon October 20, 2014
Paul Callan says the Ebola situation is pointing up the need for better leadership
updated 6:45 PM EDT, Wed October 15, 2014
Nurses are the unsung heroes of the Ebola outbreak. Yet, there are troubling signs we're failing them, says John Sutter
updated 1:00 PM EDT, Wed October 15, 2014
Dean Obeidallah says it's a mistake to give up a business name you've invested energy in, just because of a new terrorist group
updated 7:01 PM EDT, Wed October 15, 2014
Fear of Ebola is contagious, writes Mel Robbins; but it's time to put the disease in perspective
updated 1:44 PM EDT, Tue October 14, 2014
Oliver Kershaw says that if Big Tobacco is given monopoly of e-cigarette products, public health will suffer.
updated 9:35 AM EDT, Sat October 18, 2014
Stop thinking your job will make you happy.
updated 10:08 PM EDT, Tue October 14, 2014
Ruben Navarrette says it's time to deal with another scandal involving the Secret Service — one that leads directly into the White House.
updated 7:25 AM EDT, Tue October 14, 2014
Americans who choose to fight for militant groups or support them are young and likely to be active in jihadist social media, says Peter Bergen
updated 9:03 AM EDT, Mon October 13, 2014
Stephanie Coontz says 11 years ago only one state allowed same sex marriage. Soon, some 60% of Americans will live where gays can marry. How did attitudes change so quickly?
updated 4:04 PM EDT, Tue October 14, 2014
Legalizing assisted suicide seems acceptable when focusing on individuals. But such laws would put many at risk of immense harm, writes Marilyn Golden.
updated 9:07 AM EDT, Mon October 13, 2014
Julian Zelizer says the issues are huge, but both parties are wrestling with problems that alienate voters
updated 6:50 PM EDT, Mon October 13, 2014
Mel Robbins says the town's school chief was right to cancel the season, but that's just the beginning of what needs to be done
updated 11:43 AM EDT, Sat October 11, 2014
He didn't discover that the world was round, David Perry writes. So what did he do?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT