How to Prevent the IRS From Abusing Its Power Again

Evaluate tax-exempt groups based on behavior rather than speculation, and compensate them for compliance costs.

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Almost everyone agrees that the IRS behaved badly when it singled out conservative activist groups for extra scrutiny. As Ezra Klein put it, "because the Internal Revenue Service holds so much private data, and because it can make people's lives absolutely miserable, it is of paramount importance in our political system that it both is, and is perceived as, an apolitical entity." But Klein also believes that the IRS ought to be scrutinizing all 501(c)4 groups more closely. Kevin Drum agrees. "What's really unfortunate about all this is that it will probably put an end to any scrutiny of 501(c)4 groups, and that's a shame," he writes. "The IRS should be scrutinizing them."

So how can the IRS fulfill its duty to police groups wrongfully claiming tax exempt status without getting abusive?

John Podhoretz suggests the timing of the enforcement matters.

"Didn't the IRS need to ensure that groups applying for non-profit status would conduct themselves properly once they had received it?" he asks. "The answer, actually, is no, not really. The IRS's enforcement power has to do with misconduct following the granting of tax-exempt status. It should not presume lack of good faith on the part of those applying for the status. What it can do to them, fairly and legally, is revoke the status based on the organization's behavior after the exemption is granted--thus effectively crippling and destroying it."

I agree.

Americans intent on starting a new organization shouldn't face upfront compliance costs that can thwart them before they've even begun, as if they're operating under the presumption of guilt. (Dave Weigel points to a liberal group that waited 479 days to get its application approved.) But if the IRS catches an organization with 501(c)4 status electioneering, that's a different story. Penalties and/or revocation of status are appropriate if a group is violating its strictures.

Of course, a problem remains. What if, after a tax-exempt group is up and running, the IRS accuses it of violating the law and forces significant compliance costs, but the IRS turns out to be wrong?

This isn't a trivial concern. As Klein says, the IRS can make life absolutely miserable for the people or groups it investigates. Nor is it a hypothetical concern, as Podhoretz showed in an earlier post:

As it happens, I know something about the chilling effect of an IRS investigation into a non-profit's 501 (c)-3 status because in 2009, COMMENTARY (a non-profit) received a letter from the Internal Revenue Service threatening the revocation of the institution's standing as a non-profit due to a claim that on our website we had crossed the line in the 2008 election from analysis to explicit advocacy of the candidacy of John McCain for president. (Non-profits are not permitted to endorse candidates.) The charge was false--all we had done was reprint a speech delivered at a COMMENTARY event by then-Sen. Joseph Lieberman in which he had endorsed McCain.

Taking away a non-profit's ability to receive tax-exempt charitable contributions is equivalent to a death sentence.

We were told by counsel that, should the IRS rule against us, we would have almost no recourse. You might think free speech rights would trump any such effort, but of course no one is challenging your speech rights, merely finding that what you say runs afoul of laws dealing with non-profits. You have no constitutional right to non-profit status, after all.

Disproving the false charge, which we did eventually in part by literally printing out the 2 million words that had appeared on this site in 2008 and sending them in many boxes to the IRS to show that the words in which Lieberman said he was supporting McCain were essentially a part per million, cost us tens of thousands of dollars and dozens upon dozens of hours of lost work time. The inquiry, which never should have been brought, was closed. But talking to lawyers and strategizing and the like in such a circumstance make the experience an ordeal that leaves you a bit shell-shocked--which is, of course, the point.

It seems unfair to force an organization to spend tens of thousands of dollars and scores of work hours to prove it deserves its status when it does, in fact, desserve its status. So why not go some way toward remedying the injustice. The work hours can't be returned to Commentary. But it would be possible to adopt a policy whereby the IRS reimburses compliance costs for organizations it targets with "status" investigations that turn out to be unfounded.

So how about those two reforms: tax-exempt status can only be reviewed in light of reasonable suspicion that it has already been violated, not preemptively; and organizations forced to spend money proving that they are, in fact, compliant get reimbursed when they're vindicated. That would give the IRS a powerful institutional incentive to conduct oversight judiciously.