05/22/2013 12:02 pm ET Updated May 22, 2013

IRS Reform: Senators Exploring Two Options In Wake Of Scandal

WASHINGTON -- The fallout from the Internal Revenue Service's targeting of tea party groups is not yet complete. But already, a slate of senators are trying to turn the scandal into a launching pad for reforming the laws on political activity by tax-exempt groups.

So far, two clear options for legislative action have emerged. And one clear obstacle stands in their way: other senators who won't sign off on any reform until they feel the IRS has rooted out the problems that allowed the scandal to fester in the first place.

The first hints of the reform push came during a Senate Finance Committee hearing on Tuesday, when Chairman Max Baucus (D-Mont.) homed in on the law that states 501(c)(4) groups must spend their funds "primarily" on social welfare functions -- a vague term that good-government groups argue has been routinely exploited.

"We're going to have to enact some changes in the statute," said Baucus. "I think that some of this confusion, this ambiguity is part of the problem."

In a follow-up statement to The Huffington Post, Sean Neary, a Finance Committee spokesman for Baucus, added that "the issue of 501 c4s will be discussed as part of the [committee's] work on comprehensive tax reform. It will be part of an upcoming options paper."

While Baucus may be eager to plow ahead with IRS reform as part of broader tax reform, his colleagues have looked at other avenues to enact those changes. Sen. Ron Wyden (D-Ore.), another Finance Committee member, has introduced the Follow the Money Act, which would require groups spending $10,000 or more on campaign activity to disclose the names of those contributors giving them more than $1,000. The legislation would also require the IRS and the Federal Election Commission to team up on rules defining what constitutes political activity for outside groups; the two organizations now have different definitions of "campaign communication."

A spokesman for Wyden confirmed to HuffPost that the senator would continue to push for changes through campaign finance legislation. Although that represents a different track than the one contemplated by Baucus, the two can certainly take place simultaneously. Neither, of course, offers much hope for passage in the Senate's current polarized climate. Most political observers would give tax reform a slightly better chance of success than new campaign finance regulation, which failed already when the Democrats had a larger margin.

Still, other Democrats on the Finance Committee seem willing to lend their support to efforts to clarify the limits of political activity for a 501(c)(4) organization. A spokesperson for Sen. Maria Cantwell (D-Wash.) said she was "considering something in that realm." Sen. Michael Bennet (D-Colo.) said at Tuesday's hearing that he believed the regulation written by the Treasury Department for tax-exempt groups 50 years ago was being mangled by 501(c)(4) groups today. "Does anybody here want to defend the way the language is written?" he asked.

Sen. Bill Nelson (D-Fla.), meanwhile, queried how IRS officials could have allowed groups with tax-exempt status to spend heavily "on these political campaign expenditures." His office did not return comment when asked if Nelson would support legislative efforts to stop that from happening again.

For Senate Democrats, the major takeaway from the current IRS scandal is that clearer rules need to be written, not just so that officials no longer target one category of groups for screening but also so that groups that are cleared for tax-exempt status aren't de facto campaign entities. But not everyone in the chamber (or the party for that matter) is ready to make that push now.

A spokesman for Sen. Bob Casey (D-Pa.) said the senator was focused on IRS management issues at this time. Sen. Chuck Grassley (R-Iowa) flatly ruled out adding new laws until the tax agency itself had undergone a thorough cleansing.

"The IRS needs to implement whatever Congress legislates, including regulations for taxpayers and guidance for employees," Grassley said in a statement to HuffPost. "New legislation can't fix IRS management that is lacking, whether it's IRS employees taking inappropriate shortcuts, either because they're managed poorly or because they have political motivations, or both. If legislation ends up being necessary, it's a separate issue from the agency failures that led to the inappropriate targeting of certain groups, and right now the focus needs to be on oversight of IRS implementation of existing law and handling of its responsibilities as a nonpolitical agency."

UPDATE: Jared Leopold, a spokesman for Cantwell, clarified by email that the senator "is looking at legislative options to clarify rules around 501(c)(4)s during the tax reform discussions." This would put her in the Baucus camp as opposed to the Wyden camp in terms of preferred course of action for defining how social welfare groups operate during campaign seasons.



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