POLITICS
06/20/2013 01:23 pm ET Updated Jun 21, 2013

IRS Scandal Predicted In June 2000 Treasury Memo

WASHINGTON -- A top Treasury Department official in the Clinton administration 13 years ago predicted with remarkable accuracy the political scandal currently plaguing the Internal Revenue Service.

In a memo to colleagues on June 13, 2000, Steve Arkin, who worked at both the IRS and Treasury, warned that legislation being considered by Congress would place the agency at the perilous intersection of tax code compliance and campaign politics.

At issue was H.R. 4762, a bill to force 527 organizations to register with the IRS and disclose their contributions and spending. The goal was to make these groups, which were operating as stealth political action committees at the time, be a bit more transparent.

But turning the IRS into a watchdog had the potential to backfire, Arkin warned. When the groups began pushing boundaries -- whether by withholding information or changing their tax status to 501(c)(4) to avoid donor disclosure -- IRS would have to step in. And in doing so, he predicted, it would open itself up to charges of political motivation.

Here is the relevant portion of his memo (emphasis ours):

The proposals to amend the Internal Revenue Code would put the IRS in the position where it, rather than the FEC, must become the "watchdog" of whether we are getting adequate disclosure of contributor names with respect to issue advertisements that are "intended" to influence Federal elections, as distinguished from other advocacy activities (which would not be subject to disclosure) because they are designed or intended to influence opinions on broad policy issues or constitute grass roots lobbying with respect to legislation. Imposition of such a burden on the IRS would be an administrative nightmare for the agency. The IRS does not have adequate resources to take on this difficult and politically sensitive role of regularly monitoring campaign activities and disclosure reports. The IRS would inevitably be subject to claims of discrimination and political bias for actions taken or not taken. Under current law, the IRS must sometimes draw similar distinctions between "electioneering" and "grass roots lobbying" but (as a practical matter) this is done only in extreme cases, and, outside the 501(c)3 context the tax consequences of this distinctions usually are limited to the question of whether an organization owes tax on some of its investment income. In contrast, if the IRS were given responsibility to enforce Tax Code penalties for failure to disclose contributors with respect to electioneering activities, both political parties would be continuously monitoring the advertisements and disclosure reports of the opposing groups and filing enforcement complaints with the IRS (as currently occurs with the FEC, but at least that agency specializes in election law and has a bipartisan panel of commissioners to decide whether any enforcement action is warranted).

And here is the full memo, with names of the recipients and some additional notes redacted per Arkins' request:

irs memo

Sure enough, shortly after the bill passed in June 2000, 527 organizations began reconstituting themselves as 501(c)(4) groups, which Congress had left untouched under pressure from unions and conservative organizations.

Ben Ginsberg, a top GOP lawyer who most recently worked on behalf of Mitt Romney, was quoted by the Washington Post as saying he was "running out of fingers and toes" to count how many clients were converting to nonprofit status. The change allowed them to avoid disclosure rules but required that their primary purpose be issue advocacy, a line that the IRS also had to make sure they didn't cross.

"That probably did spur a new era of enthusiasm for non profits, 501(c)(4)s in particular, to specifically avoid disclosure of donors," said Ken Gross, a longtime campaign finance lawyer. "I think to some extent we are seeing all of that being played out now. The (c)(4) activity intensified after Citizens United [which allowed for unlimited political donations by private sector groups] but it was by no means a new phenomena."

The passage of H.R. 4762 wasn't the only thing that precipitated the IRS scandal that exists today. As ProPublica reported, a restructuring of the agency's Exempt Organizations division in 1998 -- done in response to congressional criticism -– resulted in the reduction in the number of IRS employees and a non-communicative culture between the agency's D.C. office and its other branches.

Current IRS staff isn't blameless either. As transcripts from congressional interviews suggest, agents in the Cincinnati office proactively chose to closely screen Tea Party groups without apparent recognition that it would be politically combustible -- if not unscrupulous -- to do so.

But as Arkin sees it, they shouldn't have been forced to perform functions usually reserved for the FEC to begin with.

"The concern was that groups would jump the gun, switch to 501(c)(4) status, and the IRS would have to figure out if this was true. That started in the year 2000," he told The Huffington Post. "That decision by Congress put the IRS in an untenable position of being an enforcer of campaign finance disclosure rules (having nothing to do with tax liability). The Citizens United decision ten years later only added more fuel (cash) to the fire."

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