The Sec. 501(c)(4) Story: Program Notes – Part 2 – Plot and Controversy #1

iStock_Q and AXSmallThis blog post is written in five parts:

1.  The Sec. 501(c)(4) Story: Program Notes – Part 1
2.  The Sec. 501(c)(4) Story: Program Notes – Part 2-Plot and Controversy #1
3.  The Sec. 501(c)(4) Story: Program Notes – Part 3-Controversy #2
4.  The Sec. 501(c)(4) Story: Program Notes – Part 4-Controversy #3
5.  The Sec. 501(c)(4) Story: Program Notes – Part 5-Controversy #4 & Resolution

The Plot

The plot of the Sec. 501(c)(4) story revolves around four controversial areas in need of resolution. According to timelines prepared by the House Ways and Means Committee and TIGTA (see TIGTA Rep’t No. 2013-10-053, Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review, pages 30–42), the actions that generated the title for the May 2013 TIGTA report began in March 2010. The plot’s climax was a Q&A at an ABA Tax Section meeting involving Lois G. Lerner, IRS director, Exempt Organizations, that preceded the May 14 release of the TIGTA report. Within days, congressional hearings and additional investigations began, two IRS officials resigned (Acting Commissioner Steven Miller and commissioner of the Tax Exempt and Government Entities Division, Joseph Grant). Daniel Werfel was appointed acting IRS commissioner effective May 22 (see Schreiber, “Acting IRS Commissioner out in Tea Party Scandal,” JofA (5/15/13); and White House release of May 16).

Controversy #1

What was going on and which IRS units were involved in the review process for Sec. 501(c)(4) applications? Was there political targeting?

The TIGTA report states that the audit was performed due to concerns raised by members of Congress and some news reports. The allegations reviewed were whether the IRS:

•  Targeted specific groups applying for tax-exempt status;
•  Delayed processing of targeted groups’ applications for tax-exempt status; and
•  Requested unnecessary information from targeted groups.

TIGTA’s findings include (page references are to the report):

•  Applications for Sec. 501(c)(4) status increased from 1,735 in FY 2010 to 2,265 in FY 2011 and 3,357 in FY 2012 (page 3).
•  In May 2010, the IRS Determinations Unit developed criteria to help find applications involving improper level of political activity. Rather than using terminology from the Code and regulations, the criteria used actual names, such as “tea party” or specific policy positions, such as “taxes” (pages 5–6). See Exhibit 1 for the IRS Exempt Organizations (EO) organizational chart.
•  The tea party criterion was approved by first-line management in the unit and was used for more than 18 months. Employees in the unit indicated they viewed “the Tea Party criterion as a shorthand term for all potential political cases.” Per TIGTA, the criteria indicated the unit’s lack of knowledge as to allowable activities of Sec. 501(c)(4) organizations (page 7).
•  Some applications were in the review process for more than two years due to “ineffective oversight by management” (pages 11–13).
•  Some applicants were sent letters requesting information such as the names of donors and whether any officer or director had run for or would be running for public office. Some were also asked for a list of their important issues and their position on them (pages 18–20).
•  TIGTA made nine specific recommendations to the IRS.

On May 22, 2013, the House Committee on Oversight and Government Reform held a hearing titled: The IRS: Targeting Americans for Their Political Beliefs.

Tomorrow Controversy #2 will be published.

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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3 comments on “The Sec. 501(c)(4) Story: Program Notes – Part 2 – Plot and Controversy #1

  • cpa in California

    Well IRS has surely targeted specific groups applying for tax-exempt status and the policies are not going to favor anyone.

  • Thanks for the comment. The saga continues. In a news release of June 24 on this topic (IR-2013-62), the IRS stated: “Importantly, the initial IRS review shows no signs of intentional wrongdoing by IRS personnel or involvement by parties outside the IRS in the activities described in the recent TIGTA report. However, the report notes that investigations are ongoing, and that the IRS is committed to a full fact-finding effort to provide the public answers to these and other important questions.

    “The IRS is committed to correcting its mistakes, holding people accountable, and establishing control elements that will help us mitigate the risks we face,” Werfel said. “This report is a critical first step in the process of restoring trust in this critical institution. We have more work in front of us, but we believe we are on the right track to move forward.””

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