Outrage continues to escalate over the revelation that Internal Revenue Service employees focused on conservative groups applying for tax-exempt status. The indignation is understandable: political targeting is an abuse of power, and the idea of using the I.R.S. to go after one’s enemies is a classic dirty trick. Unfortunately, the incident provides a new fuel source for the paranoid style in American politics.
The reality is that this is a story of institutional incompetence. And Congress should share the blame.
The root of the problem is poor institutional design, not a political conspiracy. Current law forces the I.R.S. to enforce a vague set of campaign finance laws that have next to nothing to do with raising revenue. The conservative groups at issue were applying for tax-exempt status as “social welfare†organizations rather than Section 527 tax-exempt political organizations. The chief benefit of becoming a social welfare organization is the ability to keep the names of one’s donors private. These social welfare organizations may engage in issue advocacy, and may do some lobbying, but are not supposed to engage in political campaigning. How much political activity is too much? No one really knows.
The I.R.S. is designed to enforce the tax code, not to administer a byzantine campaign finance system. It is good at gathering and processing enormous amounts of data that help us raise revenue. Under current law, however, it has little choice but to exercise discretion in the constitutionally dangerous waters of campaign finance.
As Lloyd Mayer, a law professor at the University of Notre Dame, explained, “because Congress and the Treasury have left both the definition of political activity and, for [social welfare organizations], the amount of permitted political activity uncertain, the I.R.S. is required to make broad inquiries and to use politically sensitive criteria to decide if a given organization qualifies for tax-exempt status.â€
We should not be surprised that things have not worked out well. The I.R.S. does not have the infrastructure to handle that kind of regulatory burden. Donald Tobin, a professor at Ohio State University, has noted that even if these organizations are properly organized as social welfare organizations, “the existing regulatory structure never envisioned the massive use of [social welfare] organizations as a means of avoiding the disclosure of huge donations designed to influence elections.†Professor Tobin added that the recent debacle was the “foreseeable consequence of putting campaign finance in the tax code.â€
The I.R.S. has been subject to attack from both sides. Indeed, as Senator Carl Levin recently noted, the Senate Permanent Subcommittee on Investigations has been investigating the I.R.S.’s failure to enforce the law that requires tax-exempt groups to be engaged exclusively in social-welfare activities, not partisan politics. In stepping up its attention, it is not surprising that some I.R.S. employees bungled their attempt to enforce the law.
Congress should shoulder some of the responsibility for having loaded this weight onto the agency’s shoulders in the first place. To the extent that Congress wants to regulate political activity, Professor Mayer explained, it also should consider whether the I.R.S. is the agency best suited for such activities. “Current events,†he noted dryly, “indicate it is not.â€
For further reading, see Donald B. Tobin, “Campaign Disclosure and Tax-Exempt Entities: A Quick Repair to the Regulatory Plumbing,†10 Election L.J. 427 (2011), Ellen P. Aprill, “Why the I.R.S. Should Want to Develop Rules Regarding Charities and Politics,†62 Case Western Res. L. Rev. 643 (2011), and Brian D. Galle, “Charities in Politics: A Reappraisal†(2012).
Victor Fleischer is a professor at the University of Colorado Law School, where he teaches partnership tax, tax policy and deals. Twitter: @vicfleischer
