In the wake of the Treasury Inspector General for Tax Administration (TIGTA)’s report on the Internal Revenue Service, there will be much discussion of where the system for reviewing tax-exempt applications went awry. The IRS’s actions, and the TIGTA report, raise key questions about IRS transparency. Any reforms should include a dramatic improvement in the access of the IRS’s standards and procedures in reviewing tax-exempt applications to the public and the regulated community. The good news is that unlike many proposals for reform, the IRS could correct these problems by simple force of will.
The IRS’s Exempt Organizations Division is tasked with reviewing activity of non-profit organizations that engage in a wide variety of activities protected by the First Amendment. These include direct and grassroots lobbying, education, and political speech. The duty of the IRS, broadly speaking, is to sort these activities into the proper categories of tax exemption, to apply the rules relevant to each category, and to deny exemption entirely if appropriate. These duties inevitably will require subjective decisionmaking by government actors, which even in the best of circumstances will be open to charges of political bias or arbitrary action. Yet the IRS, in carrying out its duties, has historically denied the public access to both the procedures and the methodology by which political activity is judged.
The last time the IRS released material on the political activity of section 501(c)(4) organizations that could be relied on as precedent was in the year 2004. In 2007, it released a revised and expanded version of that guidance describing the political prohibition applicable to section 501(c)(3) organizations. These rulings, while helpful, provided clear guidance only on the margins and left significant issues unresolved.
Since that time, the IRS has released essentially nothing on its own volition that the regulated community could use to determine by what standard a section 501(c)’s political activity should be judged. The Internal Revenue Manual does not address political activity of section 501(c) organizations in any detail. The Exempt Organizations Division in 2004 ceased public distribution of its continuing professional education articles; these articles provided both IRS agents and the public with a good sense of how the IRS viewed complicated tax issues, including the treatment of lobbying and political activity. The IRS has released a series of private letter rulings describing revocations or denials of tax-exempt status under section 501(c)(4) for excessive political activity; those rulings, which are heavily redacted and rely for the most part on rote legal analysis, have only been made public by the IRS because a court ordered it to do so.
Indeed, the IRS has been engaged in litigation on and off for decades to prevent various categories of legal reasoning to be made public. And the IRS has done everything in its power to avoid judicial review of the vagueness of its standards for political activity, even going so far as to refund assessed taxes to moot court challenges.
The almost complete elimination of guidance to tax-exempt organizations on this subject is evident in the TIGTA report, both in its description of the IRS’s process for examining tax-exempt entities engaged in political activity, and in its response to the TIGTA report itself. The report notes that beginning in 2010, the IRS “observed a significant increase in the number of section 501(c)(3) and section 501(c)(4) applications from organizations that appeared to be, or planned to be, engaged in political campaign activity.” Still, the IRS issued no new public guidance on this subject. By May 2012, the IRS developed a neutral description of the types of organizations that would be subject to additional scrutiny: “organizations with indicators of significant amounts of political campaign intervention.” No matter what mistakes were made before this point in developing the list of organizations to be scrutinized, there was no reason at that time that potential applicants could not have been informed that certain categories of applications would take additional time. At that same time, the IRS developed and presented a two-day training to its agents “on what activities are allowable by I.R.C. § 501(c)(4) organizations, including lobbying and political campaign intervention.” Those materials would be invaluable to understand the IRS’s thinking on this subject, yet they were not made public, even though agents were relying on that guidance when making decisions.
At every turn the IRS has chosen to keep secret both its developing procedures for processing applications, and its position on what activities were permissible for tax-exempt organizations, when reviewing political and lobbying activity. This resistance to public disclosure is evident in the IRS’s response to the TIGTA report itself. For instance, the report recommended developing guidance on how to process tax-exempt applications “involving potentially significant political campaign intervention” and that this guidance should be made public for use by the regulated community. Instead, the IRS has proposed to rely on a training program the report also recommended. Neither the report nor the IRS suggested making those training materials public. Finally, while the IRS agreed with the recommendation to develop additional guidance to define the limits of a section 501(c)(4)’s political activity, there was no discussion of the form or the timeline for that guidance.
The Federal Election Commission may be criticized for partisan splits in controversial actions; yet for all of its problems, it operates fully in the public eye, with a wealth of materials made available to inform the actions of the regulated community. Enforcement actions are made public upon their resolution; and advisory opinions issued by the FEC may be relied on by others besides the requestor in similar circumstances. Moreover, where there is a difference of opinion between the commissioners, or between commissioners and staff counsel, the legal reasoning of each is usually made available.
The IRS, by contrast, has publicly produced almost nothing on the subject of political activity of tax-exempt organizations in recent years. This is particularly troubling as there has apparently been a flurry of activity behind the scenes, with specific instructions and detailed training on this issue made available to IRS personnel. That leaves the regulated community in the dark as to the IRS’s position on the law; and it permits disparate treatment among similar cases. The effect was magnified here, as the IRS did not even make final decisions to deny tax-exempt applications in most cases, which would have required highly redacted explanations of those decisions to be placed on the public record. Instead, the IRS sat on the applications for years. Even after the release of the report, we know no more about the IRS’s actual legal position on these matters, or how tax-exempt organizations should structure their activities.
The IRS is subject to extraordinarily strict statutory requirements to keep taxpayer information confidential. That will not change, nor should it. Nor is the IRS likely any time soon to pull the curtain back on any differences of legal opinion in its officers or staff. What the IRS must do, however – and what it can begin doing today – is produce more public guidance, both precedential and otherwise. This would help inform the regulated community where the shifting legal lines might lie; and it would bind the IRS to follow its own public materials. This guidance should, where possible, bear the weight of precedential authority. It should also consist of guidance addressing both the procedures by which the IRS will review tax-exempt applications that are connected to political or lobbying activity and the standards by which that activity will be judged.
On Friday, the Bright Lines Project was released (www.brightlinesproject.org), the work of nine nonprofit tax law experts, myself included. The results are six proposed rules that attempt to capture, in nuanced fashion, what clear standards would look like for a definition of political activity. No doubt that this is just the first of many proposals to come – some simple, some more complex – to address this issue. What they should all have in common is a commitment to the development of law in the public eye, with both definitions and examples set forth in public and legally binding revenue rulings that limit case-by-case discretion by agents. The current IRS troubles do not stem from the exercise of discretion; all agencies do so, including those regulating protected First Amendment activity. The problem, simply put, was that discretion was applied in secret, without any disclosure of the procedural or substantive decisions being made. The result was predictable: decision-making that could not withstand the light of day.
All eyes are upon the IRS at this moment; but with regard to its activities to regulate political and lobbying speech, that should be the norm, not the exception. As an agency, the IRS should become used to that gaze, and offer enough transparency in its actions to provide meaningful assurances of fairness and neutrality.