WASHINGTON -- The Internal Revenue Service inspector general found in a May 14 report on the agency's targeting of conservative groups seeking tax exemption that the regulations for determining eligibility for exemption lack definition and that the IRS provides no "specific guidance" on how to apply them.
Confusion over the rules, among both the applicants and the reviewers in the IRS' Cincinnati office, could have caused the lengthy delays faced by most of the targeted groups, the report concludes. There were 160 cases for which the reviews lasted from 206 to 1,138 days.
The lack of regulatory clarity and guidance affected organizations seeking tax exemption under section 501(c)(4) of the tax code, which constituted the majority of the groups swept up for closer scrutiny under IRS criteria deemed to be "inappropriate" in the IG report. Tax-exempt 501(c)(4) groups, known as "social welfare" nonprofits, are permitted to engage in political campaign activities, but must have as their primary purpose a focus on social welfare through public education.
"We believe this [confusion] could be due to the lack of specific guidance on how to determine the 'primary activity' of an I.R.C. 501(c)(4) organization," the report says. "Treasury Regulations state that the I.R.C. 501(c)(4) organizations should have social welfare as their 'primary activity'; however, the regulations do not define how to measure whether social welfare is an organization's 'primary activity.'"
The observation that even IRS officials are confused by tax regulations because there is no clear guidance might surprise the broader public and even members of Congress, but for tax lawyers who have dealt with the IRS nonprofit application process, this is nothing new.
"The standard that the IRS has articulated is very fuzzy," said Elizabeth Kingsley, a lawyer at Harmon, Curran, Spielberg & Eisenberg who represents nonprofits and co-chairs an American Bar Association subcommittee on politics and lobbying activities by tax-exempt organizations.
To determine when allowable political activity by a 501(c)(4) group rises to the level of impermissible campaign intervention, the IRS relies on a "facts and circumstances" test -- which really boils down to, "We'll know it when see it." If the IRS has any clear lines or standards for making that judgment, the lawyers say they are not made known to the general public or to organizations seeking tax-exempt status.
"It's a very subjective standard that these people are trying to apply," Kingsley said.
Ellen Aprill, a tax professor at Loyola Law School in Los Angeles, said that lacking guidance, the IRS and the groups seeking exempt status inevitably reach divergent views on what constitutes political activity.
"On one side, it gives the administrative agencies a lot of authority and a lot of discretion, and it also, on the other side, gives the nonprofit organizations a certain amount of discretion," Aprill said. "I would think that it's only human nature when you see a whole bunch of factors and you don't know what's important, you think the ones that are most important are the ones that favor you."
Congress is set to begin inquiries into the IRS targeting of conservative groups on Friday when the House Ways and Means Committee will hold its first hearing on the matter. If members of Congress choose to look at more than just the political fallout and consider potential policy changes, this lack of regulatory clarity could come up.
The IG report contained three recommendations related to confusion over the tests for political intervention and "primary activity" for social welfare nonprofits.
The report suggests that the IRS "[d]evelop guidance for specialists on how to process requests for tax-exempt status involving potentially significant political campaign intervention. This guidance should also be posted to the Internet to provide transparency to organizations on the application process." This was one of only two recommendations from the entire report that IRS officials have already rejected. The officials proposed that they develop training, but not guidance, on judging inappropriate campaign intervention and rejected the call for online posting of guidance on the issue.
The report also recommended that guidance on how to measure the "primary activity" of 501(c)(4) organizations be "included for consideration in the Department of the Treasury Priority Guidance Plan." This suggestion was accepted by top IRS officials.
The third recommendation related to regulatory confusion urges the IRS to "[d]evelop training or workshops to be held before each election cycle including, but not limited to: a) what constitutes political campaign intervention versus general advocacy (including case examples) and b) the ability to refer for follow-up those organizations that may conduct activities in a future year which may cause them to lose their tax-exempt status."
Beyond the IG report, outside observers and critics of the IRS' role in monitoring groups' political activity have made other suggestions to improve the process. These include limiting the amount of political activity by a 501(c)(4) group to a specific 10 or 20 percent of its total work -- rather than the more ambiguous under-50-percent threshold that is assumed to be used (but not confirmed) by the IRS.
Any change would likely be "very politically fraught," Aprill said. "Ideally, you would come up with these rules in a time when we weren't in a campaign season, but that's almost never now."