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.

The idea that Crossroads GPS, or the American Action Network, or Priorities USA, or a host of other organizations engaged in partisan campaigning on both sides are "social welfare organizations" is nonsense. Bloomberg's Julie Bykowicz recently pointed to another example to show the farce here. Patriot Majority USA, run by a Democratic operative, told the IRS its mission was "to encourage a discussion of economic issues." It spent $7.5 million in ads attacking Republican candidates in 2012--and then virtually disappeared, with Bykowicz unable to reach the group by e-mail or phone. "Social welfare?"

Now back to the opening sentence. For a long time, but especially since the floodgates opened with many applications from groups that were intent on political activity trying to get pre-cleared 501(c)(4) status, the IRS has struggled to find a way to cope, given what was an obvious and in-your-face flouting of the intent of the law and even of the regulations. In 2011, the agency announced it was mulling over charging gift tax on five donors to some of the biggest flouters--an idea, by the way, first proposed for political donations in the Eisenhower administration, and an indirect way of moving these organizations away from aggressive cultivation of big donors for political campaigns.

The IRS commissioner quickly received a letter from six Republican senators, four of them on the Finance Committee that oversees the IRS, slamming the inquiry and demanding a slew of intrusive information, including the names of any officials who had been involved and "any correspondence (including phone logs, e-mails, written notes, or electronic documents)" between IRS employees and anyone else outside the agency.

These senators have enormous power over the IRS, and the implication of the letter was clear: Go any further on this, and there will be hell to pay. Not surprisingly, the IRS backed off and didn't do anything more here, much less anything to investigate further the status of Crossroads GPS or the other sham political organizations masquerading as social-welfare organizations.

Now move to the present day and the Securities and Exchange Commission, which is considering requiring publicly traded corporations to disclose their political contributions--something of vital interest to shareholders. The Republicans on the House Financial Services Committee, including Chairman Jeb Hensarling and Rep. Scott Garrett, chairman of a key subcommittee, last week bludgeoned SEC Chair Mary Jo White to remove the issue from the commission's docket.

These exercises in political intimidation from Congress were all about the reality that today's Republicans--and not a few Democratic operatives--benefit mightily from stealth contributions. What was once the consistent and uniform GOP mantra--all we need in political financing is disclosure, and more disclosure, said Sen. Mitch McConnell, Rep. John Boehner, Sen. John Cornyn, and many others--has now turned into a battle cry that secrecy is key to freedom. It is true that hypocrisy is the coin of the realm in politics, but the switch on disclosure wins the Gold Medal in the Hypocrisy Olympics.

None of this excuses the boneheaded, obtuse, and destructive behavior of some in the IRS, or the fecklessness of the agency for years in avoiding any real resolution of the mess it created with its rules for 501(c)(4)s. There is an easy solution: Reserve 501(c)(4) status for real social-welfare organizations, and require any group doing any electioneering to register as a political committee.