The IRS Scandal Isn't About Taxes—It's About Disclosure

Tea party groups could have registered as nonprofit 527 political committees, but they didn't. How the GOP love of secret donations has fueled the growth of 501(c)(4)s.

House Financial Services Chairman Jeb Hensarling, R-Texas, opposes SEC bid to require publicly traded corporations to disclose political donations. (AP Photo/J. Scott Applewhite)

First, let me be clear: There has been political intimidation of the Internal Revenue Service and other government agencies for partisan purposes.

Now that I have your attention, and before I get to the specifics of the opening sentence, let me offer some context. The IRS scandal involves 501(c)(4)s and is not about what most Americans think of as "audits." Nor does it involve what many commentators have referred to as an issue of "freedom." Every organization applying for 501(c)(4) status that wanted to engage in campaign-related activity could have done so without going the 501(c)(4) route. They could instead register under a different section of the IRS code involving nonprofits, Section 527, for politically related organizations--easy and swift.

Why not do so? One reason, one word, the crux of the issue here: DISCLOSURE. This is all about disclosure of donors, and about political actors trying to find ways to avoid disclosure. And we should be clear that the ability to conceal donors, to launch stealth attack ads, or to threaten lawmakers with such ads if they don't support the policy preferences or legislative goals of the donors is something the Supreme Court rejected 8-1 in the famous Citizens United decision.

But political professionals on both sides of the aisle, through their high-priced campaign lawyers, have for many years probed for ways to finesse the law and the norm of disclosure endorsed by the Supreme Court (most eloquently, by the way, by Justice Antonin Scalia). The campaign lawyers have been just as artful and clever as Apple's tax lawyers have been in sheltering billions in income from American taxes. For some years before reform in 2002, the route became those 527s. When the law was changed in 2000 to require 527s to disclose donors, the lawyers turned to 501(c)(4)s. But under the McCain-Feingold campaign finance law, a subset of those groups, ones that accepted union or corporate money, could not use those funds to do direct electioneering through broadcast ads close to an election.

When Citizens United came down, bingo--no more serious restrictions in the 60 days before the election.

However, the 501(c)(4) loophole is not supposed to be as wide and deep as it has become. There are two types of 501(c)(4)s--those that are genuine social-welfare organizations that also do some lobbying or direct policy-advocacy work, and a relatively small group that were set up to subvert or evade disclosure laws and requirements so that donors could pour in money to shape and influence elections anonymously. It is the latter group that the IRS has had trouble with--and that was behind the efforts to single out highly charged categories.

The law says 501(c)(4)s have to be "exclusively" involved in social welfare. Ridiculously, inexplicably, the IRS regulations changed "exclusively" to "primarily," never specifically defined the term, and then passively accepted the rough rule of thumb proposed by pols and lawyers that anything over 50 percent of the money expended would qualify. Into this huge loophole rode Karl Rove, whose American Crossroads, a political organization that required donor disclosure, established in 2010 a sister, Crossroads GPS, a 501(c)(4), explicitly to court donors for political campaigns who did not want their identities disclosed.

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Norm Ornstein is a correspondent for The Atlantic, a contributing editor and columnist for National Journal, and a resident scholar at the American Enterprise Institute for Public Policy Research.  More

Ornstein served as codirector of the AEI-Brookings Election Reform Project and participates in AEI's Election Watch series. He also serves as a senior counselor to the Continuity of Government Commission. Ornstein led a working group of scholars and practitioners that helped shape the law, known as McCain-Feingold, that reformed the campaign financing system. He was elected as a fellow of the American Academy of Arts and Sciences in 2004. His many books include The Permanent Campaign and Its Future; The Broken Branch: How Congress Is Failing America and How to Get It Back on Track, with Thomas E. Mann; and, most recently the New York Times bestseller, It's Even Worse Than It Looks: How the American Constitutional System Collided With the New Politics of Extremism, also with Tom Mann.

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